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 13OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934**

 

**For the Quarterly Period Ended: June 30, 2010**

 

**o  TRANSITION REPORT PURSUANT TO SECTION 13OR 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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Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.  Yes  x  No  o

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (232.405 ofthis chapter) during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post suchfiles).  Yes  o  No  o

 

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

 

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

 

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

 

Asof  August 9, 2010, the registranthad 196,804,914 shares of common stock, $0.01 par value per share, outstanding.

 

 

 

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Table of Contents

 

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

 
| **PART I —  FINANCIAL INFORMATION (UNAUDITED)** |
|----------------------------------------------------------------|
| Item 1.                                                   | Consolidated Financial  Statements: |
|                                                           | Consolidated  Balance Sheets as of June 30, 2010 and December 31, 2009 |
|                                                           | Consolidated  Statements of Operations for the three and six months ended June 30,  2010 and 2009 and for the period from inception (January 1, 1999)  through June 30, 2010 |
|                                                           | Consolidated  Statements of Total Equity (Deficit) for period from inception  (January 1, 1999) through June 30, 2010 |
|                                                           | Consolidated  Statements of Cash Flows for the six months ended June 30, 2010 and 2009  and for the period from inception (January 1, 1999) through  June 30, 2010 |
|                                                           | Notes to Consolidated Financial Statements |
| Item 2.                                                   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |
| Item 3.                                                   | Quantitative  and Qualitative Disclosures About Market Risk |
| Item 4.                                                   | Controls and  Procedures |
| ** **                                                     | ** ** |
| **PART II —  OTHER INFORMATION**                |
| Item  1A.                                                      | Risk Factors |
| Item  5.                                                       | Other Information |
| Item 6.                                                   | Exhibits |
| Signatures                                                     |   |
| Exhibit Index                                             |

 

1

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Table of Contents

 

**PART I — FINANCIALINFORMATION**

** **

**Item 1.*  ConsolidatedFinancial Statements (Unaudited)***

 

**ADVANCED LIFE SCIENCES HOLDINGS, INC. ANDSUBSIDIARY**

**(A Development Stage Company)**

** **

**CONSOLIDATED BALANCE SHEETS**

**(Unaudited)**

 
| ** **                                                                                                                                                                                       | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                       | ** ** | **2010**          | ** ** | **2009**              | ** ** |
|                                                                                                                                                                                             |       |              |       |                  |       |
| **ASSETS**                                                                                                                                                                                       | ** ** | ** **        | ** ** | ** **            | ** ** |
| ** **                                                                                                                                                                                       | ** ** | ** **        | ** ** | ** **            | ** ** |
| CURRENT ASSETS:                                                                                                                                                                                  |       |              |       |                  |       |
| Cash and cash equivalents                                                                                                                                                                        |       | $                 | 85,284     |                  | $          | 2,841,801 |   |
| Grant receivable                                                                                                                                                                                 |       | 44,889            |       | 530,219               |       |
| Prepaid insurance                                                                                                                                                                                |       | 50,730            |       | 111,761               |       |
| Other prepaid expenses                                                                                                                                                                           |       | 14,969            |       | 88,535                |       |
|                                                                                                                                                                                             |       |              |       |                  |       |
| Total current assets                                                                                                                                                                             |       | 195,872           |       | 3,572,316             |       |
|                                                                                                                                                                                             |       |              |       |                  |       |
| PROPERTY AND EQUIPMENT:                                                                                                                                                                          |       |              |       |                  |       |
| Furniture and fixtures                                                                                                                                                                           |       | 214,380           |       | 244,072               |       |
| Computer software and equipment                                                                                                                                                                  |       | 258,786           |       | 258,786               |       |
| Leasehold improvements                                                                                                                                                                           |       | 177,253           |       | 177,253               |       |
|                                                                                                                                                                                             |       |              |       |                  |       |
| Total property and equipment—at cost                                                                                                                                                        |       | 650,419           |       | 680,111               |       |
| Less accumulated depreciation                                                                                                                                                                    |       | (613,512          | )          | (624,158              | )          |
|                                                                                                                                                                                             |       |              |       |                  |       |
| Property and equipment—net                                                                                                                                                                  |       | 36,907            |       | 55,953                |       |
|                                                                                                                                                                                             |       |              |       |                  |       |
| OTHER ASSETS:                                                                                                                                                                                    |       |              |       |                  |       |
| Commercial launch materials                                                                                                                                                                      |       | 2,760,936         |       | 2,760,936             |       |
| Deferred offering and financing costs                                                                                                                                                            |       | 512,364           |       | 13,566                |       |
| Other long-term assets                                                                                                                                                                           |       | 25,000            |       | 25,000                |       |
|                                                                                                                                                                                             |       |              |       |                  |       |
| Total other assets                                                                                                                                                                               |       | 3,298,300         |       | 2,799,502             |       |
|                                                                                                                                                                                             |       |              |       |                  |       |
| TOTAL ASSETS                                                                                                                                                                                     |       | $                 | 3,531,079  |                  | $          | 6,427,771 |   |
|                                                                                                                                                                                             |       |              |       |                  |       |
| **LIABILITIES AND EQUITY (DEFICIT)**                                                                                                                                                             |       |              |       |                  |       |
|                                                                                                                                                                                             |       |              |       |                  |       |
| CURRENT LIABILITIES:                                                                                                                                                                             |       |              |       |                  |       |
| Accounts payable                                                                                                                                                                                 |       | $                 | 951,876    |                  | $          | 604,334 |   |
| Accrued payroll                                                                                                                                                                                  |       | 474,334           |       | 664,436               |       |
| Other accrued expenses                                                                                                                                                                           |       | 675,769           |       | 661,504               |       |
| Accrued interest payable                                                                                                                                                                         |       | 120,563           |       | 73,194                |       |
| Short-term lease payable                                                                                                                                                                         |       | —            |       | 4,350                 |       |
| Line of credit                                                                                                                                                                                   |       | 2,500,000         |       | —                |       |
| Short-term grant payable                                                                                                                                                                         |       | 500,000           |       | —                |       |
|                                                                                                                                                                                             |       |              |       |                  |       |
| Total current liabilities                                                                                                                                                                        |       | 5,222,542         |       | 2,007,818             |       |
|                                                                                                                                                                                             |       |              |       |                  |       |
| Long-term grant payable                                                                                                                                                                          |       | —            |       | 500,000               |       |
| Long-term notes payable - related party                                                                                                                                                          |       | 2,000,000         |       | 2,000,000             |       |
| Line of credit                                                                                                                                                                                   |       | 6,000,000         |       | 10,000,000            |       |
|                                                                                                                                                                                             |       |              |       |                  |       |
| Total liabilities                                                                                                                                                                                |       | 13,222,542        |       | 14,507,818            |       |
|                                                                                                                                                                                             |       |              |       |                  |       |
| COMMITMENTS AND CONTINGENCIES                                                                                                                                                                    |       |              |       |                  |       |
|                                                                                                                                                                                             |       |              |       |                  |       |
| EQUITY (DEFICIT):                                                                                                                                                                                |       |              |       |                  |       |
| Common stock, $0.01 par value—620,000,000 shares  authorized; 100,372,067 issued and outstanding at June 30, 2010;  84,925,010 shares issued and outstanding at December 31, 2009 |       | 1,003,721         |       | 849,250               |       |
| Additional paid-in capital                                                                                                                                                                       |       | 124,859,190       |       | 122,621,392           |       |
| Deficit accumulated during the development stage                                                                                                                                                 |       | (135,554,374      | )          | (131,550,689          | )          |
| Noncontrolling interest in subsidiary                                                                                                                                                            |       | —            |       | —                |       |
|                                                                                                                                                                                             |       |              |       |                  |       |
| Total equity (deficit)                                                                                                                                                                           |       | (9,691,463        | )          | (8,080,047            | )          |
|                                                                                                                                                                                             |       |              |       |                  |       |
| TOTAL LIABILITIES AND EQUITY (DEFICIT)                                                                                                                                                           |       | $                 | 3,531,079  |                  | $          | 6,427,771 |   |

 

See notes to unaudited consolidated financial statements.

 

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**ADVANCED LIFE SCIENCES HOLDINGS, INC. ANDSUBSIDIARY**

**(A Development Stage Company)**

 

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**(Unaudited)**

 
| ** **                                                                  | ** ** | ** **                           | ** ** | ** **                         | ** ** | ** **  | ** ** | ** ** | ** ** | **Period From**            | ** ** |
|-----------------------------------------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|-------------|------------|------------|------------|----------------------------|------------|
| ** **                                                                  | ** ** | ** **                           | ** ** | ** **                         | ** ** | ** **  | ** ** | ** ** | ** ** | **Inception**              | ** ** |
| ** **                                                                  | ** ** | ** **                           | ** ** | ** **                         | ** ** | ** **  | ** ** | ** ** | ** ** | **(January 1, 1999)** | ** ** |
| ** **                                                                  | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** | **Through** | ** ** |
| ** **                                                                  | ** ** | **2010**                             | ** ** | **2009**                           | ** ** | **2010**    | ** ** | **2009**   | ** ** | **June 30, 2010**     | ** ** |
| Revenue:                                                                    |       |                                 |       |                               |       |        |       |       |       |                       |       |
| Management fees                                                             |       | $                                    | —     |                               | $          | —      |       | $          | —     |                       | $          | — |   | $ | 1,161,180 |   |
| Grants                                                                      |       | 273,029                              |       | 706,814                            |       | 752,853     |       | 1,118,299  |       | 4,822,445                  |       |
| Royalty—related party                                                  |       | —                               |       | —                             |       | —      |       | —     |       | 45,238                     |       |
|                                                                        |       |                                 |       |                               |       |        |       |       |       |                       |       |
| Total revenue                                                               |       | 273,029                              |       | 706,814                            |       | 752,853     |       | 1,118,299  |       | 6,028,863                  |       |
|                                                                        |       |                                 |       |                               |       |        |       |       |       |                       |       |
| Expenses:                                                                   |       |                                 |       |                               |       |        |       |       |       |                       |       |
| Research and development                                                    |       | 753,988                              |       | 1,309,050                          |       | 1,618,192   |       | 2,243,819  |       | 96,660,874                 |       |
| Contracted research and development— related party                     |       | —                               |       | —                             |       | —      |       | —     |       | 7,980,299                  |       |
| Selling, general and administrative                                         |       | 1,293,758                            |       | 1,690,505                          |       | 2,635,588   |       | 3,199,458  |       | 36,007,074                 |       |
|                                                                        |       |                                 |       |                               |       |        |       |       |       |                       |       |
| Total expenses                                                              |       | 2,047,746                            |       | 2,999,555                          |       | 4,253,780   |       | 5,443,277  |       | 140,648,247                |       |
|                                                                        |       |                                 |       |                               |       |        |       |       |       |                       |       |
| Loss from operations                                                        |       | (1,774,717                           | )          | (2,292,741                         | )          | (3,500,927  | )          | (4,324,978 | )          | (134,619,384               | )          |
|                                                                        |       |                                 |       |                               |       |        |       |       |       |                       |       |
| Net other (income) expense:                                                 |       |                                 |       |                               |       |        |       |       |       |                       |       |
| Interest income                                                             |       | (1,128                               | )          | (1,739                             | )          | (6,563      | )          | (3,471     | )          | (2,966,986                 | )          |
| Interest expense                                                            |       | 253,332                              |       | 258,211                            |       | 509,321     |       | 510,929    |       | 4,694,936                  |       |
| Other (income) expense, net                                                 |       | —                               |       | 19,595                             |       | —      |       | 19,595     |       | 146,092                    |       |
| Gain on sale of interest in Sarawak Medichem  Pharmaceuticals joint venture |       | —                               |       | —                             |       | —      |       | —     |       | (939,052                   | )          |
|                                                                        |       |                                 |       |                               |       |        |       |       |       |                       |       |
| Net other (income) expense                                                  |       | 252,204                              |       | 276,067                            |       | 502,758     |       | 527,053    |       | 934,990                    |       |
|                                                                        |       |                                 |       |                               |       |        |       |       |       |                       |       |
| Net loss                                                                    |       | (2,026,921                           | )          | (2,568,808                         | )          | (4,003,685  | )          | (4,852,031 | )          | (135,554,374               | )          |
|                                                                        |       |                                 |       |                               |       |        |       |       |       |                       |       |
| Less net loss attributable to the noncontrolling  interest in subsidiary    |       | —                               |       | —                             |       | —      |       | —     |       | —                     |       |
|                                                                        |       |                                 |       |                               |       |        |       |       |       |                       |       |
| Net loss attributable to Advanced Life Sciences  Holdings, Inc.        |       | (2,026,921                           | )          | (2,568,808                         | )          | (4,003,685  | )          | (4,852,031 | )          | (135,554,374               | )          |
|                                                                        |       |                                 |       |                               |       |        |       |       |       |                       |       |
| Less accumulated preferred stock dividends of  subsidiary for the period    |       | 43,750                               |       | 43,750                             |       | 87,500      |       | 87,500     |       | 1,932,292                  |       |
|                                                                        |       |                                 |       |                               |       |        |       |       |       |                       |       |
| Net loss available to common shareholders                                   |       | $                                    | (2,070,671 | )                                  | $          | (2,612,558  | )          | $          | (4,091,185 | )                          | $          | (4,939,531 | ) | $ | (137,486,666 | ) |
|                                                                        |       |                                 |       |                               |       |        |       |       |       |                       |       |
| Net loss per share available to common  shareholders - basic and diluted    |       | $                                    | (0.02      | )                                  | $          | (0.06       | )          | $          | (0.04      | )                          | $          | (0.11 | ) |   |   |
|                                                                        |       |                                 |       |                               |       |        |       |       |       |                       |       |
| Weighted average shares outstanding - basic and  diluted                    |       | 100,372,067                          |       | 47,077,869                         |       | 96,528,479  |       | 44,443,387 |       |                       |       |

 

See notes to unaudited consolidated financial statements.

 

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**ADVANCED LIFE SCIENCES HOLDINGS, INC. ANDSUBSIDIARY**

**(A Development Stage Company)**

 

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

**(Unaudited)**

 
| ** **                                                                                            | ** ** | ** **        | ** ** | ** **  | ** ** | ** **      | ** ** | **Deficit**     | ** ** | ** **         | ** **   | ** **   | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-------------|------------|-----------------|------------|-----------------|------------|--------------------|--------------|--------------|------------|
| ** **                                                                                            | ** ** | ** **        | ** ** | ** **  | ** ** | ** **      | ** ** | **Accumulated** | ** ** | ** **         | ** **   | ** **   | ** ** |
| ** **                                                                                            | ** ** | ** **        | ** ** | ** **  | ** ** | **Additional**  | ** ** | **During  the** | ** ** | **Noncontrolling** | ** **   | ** **   | ** ** |
| ** **                                                                                            | ** ** | **Common  Stock** | ** ** | **Paid-in** | ** ** | **Development** | ** ** | **Interest**    | ** ** | ** **         | ** **   |
| ** **                                                                                            | ** ** | **Shares**        | ** ** | **Amount**  | ** ** | **Capital**     | ** ** | **Stage**       | ** ** | **in  Subsidiary** | ** **   | **Total**    | ** ** |
|                                                                                                  |       |              |       |        |       |            |       |            |       |               |         |         |       |
| BALANCE—January 1,  1999 (inception)                                                        |       | —            |       | $           | —     |            | $          | —          |       | $                  | —       |         | $          | — |   | $ | — |   |
|                                                                                                  |       |              |       |        |       |            |       |            |       |               |         |         |       |
| Issuance  of stock (at inception)                                                                     |       | 1,588,000         |       | 250,000     |       | —          |       | —          |       | —             |         | 250,000      |       |
| Issuance  of common stock, net of offering costs (August 2005)                                   |       | 6,721,814         |       | 67,218      |       | 29,210,558      |       | —          |       | —             |         | 29,277,776   |       |
| Issuance  of common stock, net of offering costs (March 2006)                                    |       | 10,233,464        |       | 102,335     |       | 33,266,653      |       | —          |       | —             |         | 33,368,988   |       |
| Issuance  of common stock, net of offering costs (December 2007)                                 |       | 10,191,083        |       | 101,911     |       | 17,700,186      |       | —          |       | —             |         | 17,802,097   |       |
| Issuance  of common stock, net of offering costs (September 2008)                                |       | 1,888,606         |       | 18,886      |       | 1,634,193       |       | —          |       | —             |         | 1,653,079    |       |
|                                                                                                  |       |              |       |        |       |            |       |            |       |               |         |         |       |
| Exchange  of shares under recapitalization (December 2004)                                       |       | (1,629,685        | )          | (256,563    | )          | —          |       | —          |       | —             |         | (256,563     | )          |
| Issuance  of shares under recapitalization (December 2004)                                       |       | 9,482,015         |       | 94,820      |       | 161,743         |       | —          |       | —             |         | 256,563      |       |
| Capital  contributions (December 2004)                                                           |       | —            |       | —      |       | 12,711,330      |       | —          |       | —             |         | 12,711,330   |       |
| Issuance  of 14,887 warrants (December 2004)                                                     |       | —            |       | —      |       | 11,898          |       | —          |       | —             |         | 11,898       |       |
| Issuance  of common stock in exchange for licenses (December 2004)                               |       | 1,122,569         |       | 11,226      |       | 8,988,774       |       | —          |       | —             |         | 9,000,000    |       |
| Issuance  of common stock in exchange for reduction of milestones payable  (August 2005)         |       | 600,000           |       | 6,000       |       | 3,000,000       |       | —          |       | —             |         | 3,006,000    |       |
| Modification  of 14,887 warrants (August 2005)                                                   |       | —            |       | —      |       | 18,925          |       | —          |       | —             |         | 18,925       |       |
| Issuance  of common stock as payment for commitment fees (September 2008)                        |       | 393,339           |       | 3,933       |       | 296,067         |       | —          |       | —             |         | 300,000      |       |
| Issuance  of 65,000 warrants (October 2008)                                                      |       | —            |       | —      |       | 7,445           |       | —          |       | —             |         | 7,445        |       |
| Issuance  of common stock under standby equity distribution agreements, net of offering  costs (2009) |       | 43,986,137        |       | 439,862     |       | 12,475,173      |       | —          |       | —             |         | 12,915,035   |       |
|                                                                                                  |       |              |       |        |       |            |       |            |       |               |         |         |       |
| Issuance  of stock related to option exercises (since inception)                                      |       | 347,668           |       | 9,622       |       | 49,869          |       | —          |       | —             |         | 59,491       |       |
|                                                                                                  |       |              |       |        |       |            |       |            |       |               |         |         |       |
| Compensation  expense related to stock options (since inception)                                      |       | —            |       | —      |       | 3,088,578       |       | —          |       | —             |         | 3,088,578    |       |
|                                                                                                  |       |              |       |        |       |            |       |            |       |               |         |         |       |
| Net  loss (since inception)                                                                           |       | —            |       | —      |       | —          |       | (131,550,689    | )          | —             |         | (131,550,689 | )          |
|                                                                                                  |       |              |       |        |       |            |       |            |       |               |         |         |       |
| BALANCE—December 31,  2009                                                                  |       | 84,925,010        |       | 849,250     |       | 122,621,392     |       | (131,550,689    | )          | —             |         | (8,080,047   | )          |
|                                                                                                  |       |              |       |        |       |            |       |            |       |               |         |         |       |
| Issuance  of common stock under standby equity distribution agreements, net of offering  costs        |       | 15,447,057        |       | 154,471     |       | 2,092,529       |       | —          |       | —             |         | 2,247,000    |       |
| Compensation  expense related to stock options                                                        |       | —            |       | —      |       | 145,269         |       | —          |       | —             |         | 145,269      |       |
|                                                                                                  |       |              |       |        |       |            |       |            |       |               |         |         |       |
| Net  loss                                                                                             |       | —            |       | —      |       | —          |       | (4,003,685      | )          | —             |         | (4,003,685   | )          |
|                                                                                                  |       |              |       |        |       |            |       |            |       |               |         |         |       |
| BALANCE—June 30,  2010                                                                      |       | 100,372,067       |       | $           | 1,003,721  |            | $          | 124,859,190     |       | $                  | (135,554,374 | )            | $          | — |   | $ | (9,691,463 | ) |

 

See notes tounaudited consolidated financial statements.

 

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Table ofContents

 

**ADVANCED LIFE SCIENCES HOLDINGS, INC. ANDSUBSIDIARY**

**(A Development Stage Company)**

 

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)**

 
| ** **                                                                         | ** ** | ** **                         | ** ** | ** **  | ** ** | **Inception**              | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------------------|------------|-------------|------------|----------------------------|------------|
| ** **                                                                         | ** ** | ** **                         | ** ** | ** **  | ** ** | **(January 1, 1999)** | ** ** |
| ** **                                                                         | ** ** | **Six months ended June 30,** | ** ** | **Through** | ** ** |
| ** **                                                                         | ** ** | **2010**                           | ** ** | **2009**    | ** ** | **June 30, 2010**     | ** ** |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                              |       |                               |       |        |       |                       |       |
| Net loss                                                                           |       | $                                  | (4,003,685 | )           | $          | (4,852,031                 | )          | $ | (135,554,374 | ) |
| Adjustments to reconcile net loss to net cash  flows used in operating activities: |       |                               |       |        |       |                       |       |
| Depreciation and amortization                                                      |       | 17,678                             |       | 65,907      |       | 966,155                    |       |
| Non-cash interest expense                                                          |       | 8,852                              |       | 7,084       |       | 131,592                    |       |
| Stock compensation expense                                                         |       | 145,269                            |       | 352,547     |       | 3,233,847                  |       |
| Non-cash research and development                                                  |       | —                             |       | —      |       | 24,466,667                 |       |
| Non-cash settlement of milestone payment                                           |       | —                             |       | —      |       | 6,000                      |       |
| Gain on sale of interest in Sarawak Medichem  Pharmaceuticals (SMP)                |       | —                             |       | —      |       | (939,052                   | )          |
| (Gain) loss on disposal                                                            |       | (1,435                             | )          | 10,493      |       | 256,553                    |       |
| Changes in operating assets and liabilities:                                       |       |                               |       |        |       |                       |       |
| Clinical supplies                                                                  |       | —                             |       | —      |       | 533,333                    |       |
| Accounts receivable                                                                |       | 485,330                            |       | (523,376    | )          | (44,889                    | )          |
| Prepaid expenses                                                                   |       | 134,597                            |       | 287,908     |       | (74,247                    | )          |
| Commercial launch materials                                                        |       | —                             |       | —      |       | (2,760,936                 | )          |
| Other assets                                                                       |       | —                             |       | (2,785,941  | )          | (16,452                    | )          |
| Accounts payable                                                                   |       | 210,659                            |       | 3,166,748   |       | 814,993                    |       |
| Accrued expenses                                                                   |       | (477,393                           | )          | (165,535    | )          | 848,549                    |       |
| Licenses payable                                                                   |       | —                             |       | —      |       | (11,000,000                | )          |
| Accrued interest on debt                                                           |       | 47,369                             |       | 63,684      |       | 698,626                    |       |
|                                                                               |       |                               |       |        |       |                       |       |
| Net cash flows from operating activities                                           |       | (3,432,759                         | )          | (4,372,512  | )          | (118,433,635               | )          |
|                                                                               |       |                               |       |        |       |                       |       |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                              |       |                               |       |        |       |                       |       |
| Purchase of property and equipment                                                 |       | —                             |       | (5,466      | )          | (1,098,167                 | )          |
| Proceeds from the sale of SMP                                                      |       | —                             |       | —      |       | 939,052                    |       |
| Proceeds from the sales of investments                                             |       | —                             |       | —      |       | 31,557,158                 |       |
| Purchase of investments                                                            |       | —                             |       | —      |       | (31,557,158                | )          |
|                                                                               |       |                               |       |        |       |                       |       |
| Net cash flows from investing activities                                           |       | —                             |       | (5,466      | )          | (159,115                   | )          |
|                                                                               |       |                               |       |        |       |                       |       |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                              |       |                               |       |        |       |                       |       |
| Proceeds from issuance of common stock and capital  contributions                  |       | 2,177,789                          |       | 3,804,259   |       | 104,729,338                |       |
| 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         |       | 59,491                     |       |
| Payments for financing fees                                                        |       | —                             |       | (36,039     | )          | (53,039                    | )          |
| Payments of debt                                                                   |       | (1,500,000                         | )          | —      |       | (1,500,000                 | )          |
| Payments on capital leases                                                         |       | (1,547                             | )          | (4,066      | )          | (161,447                   | )          |
|                                                                               |       |                               |       |        |       |                       |       |
| Net cash flows from financing activities                                           |       | 676,242                            |       | 3,849,782   |       | 118,678,034                |       |
|                                                                               |       |                               |       |        |       |                       |       |
| NET (DECREASE) INCREASE IN CASH                                                    |       | (2,756,517                         | )          | (528,196    | )          | 85,284                     |       |
|                                                                               |       |                               |       |        |       |                       |       |
| CASH—Beginning of period                                                      |       | 2,841,801                          |       | 1,527,108   |       | —                     |       |
|                                                                               |       |                               |       |        |       |                       |       |
| CASH—End of period                                                            |       | $                                  | 85,284     |        | $          | 998,912                    |       | $ | 85,284 |   |
|                                                                               |       |                               |       |        |       |                       |       |
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                                  |       |                               |       |        |       |                       |       |
| Cash paid during the period for interest                                           |       | $                                  | 448,341    |        | $          | 441,512                    |       | $ | 3,862,512 |   |
|                                                                               |       |                               |       |        |       |                       |       |
| SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS                                    |       |                               |       |        |       |                       |       |
| Noncash investment activity:                                                       |       |                               |       |        |       |                       |       |
| Purchase of property and equipment under capital  leases                           |       | —                             |       | —      |       | 164,249                    |       |
| Noncash financing activity:                                                        |       |                               |       |        |       |                       |       |
| Issuance of common shares for licenses                                             |       | —                             |       | —      |       | 9,000,000                  |       |
| Issuance of common shares for reduction of  milestone payment                      |       | —                             |       | —      |       | 3,000,000                  |       |
| Debt discount                                                                      |       | —                             |       | —      |       | 30,823                     |       |
| Offering Costs                                                                     |       | 438,439                            |       | —      |       | 438,439                    |       |
| SEDA and financing related costs                                                   |       | —                             |       | —      |       | 337,445                    |       |

 

See notes to unaudited consolidated financial statements.

 

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

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**JUNE 30,2010**

**(UNAUDITED)**

 

**1.      Summary of SignificantAccounting Policies**

 

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

 

***Basis of Presentation-***Theaccompanying unaudited consolidated financial statements of the Company havebeen prepared in accordance with GAAP and with the rules and regulationsof the Securities and Exchange Commission (“SEC”). Accordingly, they do notinclude all of the information and footnotes required by GAAP for completefinancial statements.  However, in theopinion of management, all adjustments, consisting only of normal recurringadjustments, unless otherwise noted herein, necessary to present fairly theresults of operations, financial position and cash flows have been made.  Therefore, these consolidated financialstatements should be read in conjunction with the Company’s most recent auditedfinancial statements for the year ended December 31, 2009 and notesthereto. The consolidated financial statements include the accounts of theAdvanced Life Sciences Holdings, Inc. and its wholly-owned subsidiaryAdvanced Life Sciences, Inc. (“ALS Inc.”)  All intercompany balances and transactionshave been eliminated.  The results ofoperations for any interim period are not necessarily indicative of the resultsof operations expected for the full year.

 

The consolidated financial statements have been prepared on a goingconcern basis, which contemplates continuity of operations and the realizationof assets and liquidation of liabilities in the ordinary course of business.  However, as a result of the Company’scontinued losses and current cash and financing position, such realization ofassets or liquidation of liabilities without substantial adjustments isuncertain.  Given this uncertainty, thereis substantial doubt as to the Company’s ability to continue as a goingconcern.

 

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

 

TheCompany has incurred losses since its incorporation in January 1999 andhas funded its operations to date primarily from debt financings and capitalcontributions from its founder and Chief Executive Officer, proceeds from theinitial public offering and secondary public offering, and private placements,including issuances of common stock under two Standby Equity DistributionAgreements.

 

Inorder to continue its business activities during 2010, the Company intends toraise additional capital by issuing additional common shares, continuing itsefforts in applying for grant awards through various agencies and by licensingits lead compound, cethromycin (RestanzaTM), to commercial partners.  The Company believes, based upon currentmarket conditions, commercial partnership agreements would include a series ofmilestone payments, including up-front milestones that would fund the Company’scontinued operations.  Althoughmanagement believes the Company could secure commercial partnerships, there canbe no assurances that such partnerships will be available at terms acceptableto the Company, if at all.

 

**2.      Equity Transactions**

 

InMarch 2010, the Company and YA Global Master SPV Ltd. (“YA SPV”), anaffiliate of Yorkville Advisors, agreed to terminate the Standby EquityDistribution Agreement dated June 19, 2009 (the “SEDA”).  The Companyhad sold to YA SPV 49,549,200 shares of its common stock and raisedapproximately $11.7 million under the SEDA prior to its termination.

 

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Sharesof common stock sold under the SEDA in excess of $9.0 million were sold withthe consent of the Company’s lender under the Company’s credit facility.

 

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

 

On July 7, 2010, theCompany closed a registered public offering of units.  As part of theclosing, the Company issued 379,188 units at a public offering price of $4.20per unit, raising approximately $1.6 million in gross offering proceeds andapproximately $1.0 million in net proceeds to the Company after deducting placementagent fees and offering expenses payable by the Company.  The Companyintends to use the net proceeds from the offering for working capital purposesas it continues to work with the U.S. Food and Drug Administration (“FDA”)toward the completion of the protocol design for the additional clinical dataneeded for regulatory approval of cethromycin in the treatment of communityacquired bacterial pneumonia (“CABP”) under a Special Protocol Assessment (“SPA”).

 

Each unit sold in theoffering consists of (i) 100 shares of the Company’s common stock,(ii) 100 stock warrants to purchase shares of common stock at an exerciseprice of $0.042 per share and (iii) one warrant to purchase an additionalunit, consisting of 100 shares of common stock and 100 stock warrants, at anexercise price of $4.20 per additional unit.  The stock warrants may beexercised at any time during the period commencing six months after the closingdate and ending on the fifth anniversary of the closing date.  The unitwarrants may be exercised at any time during the period commencing on theclosing date and ending on the earlier of: (i) the date that is 45 daysafter the Company’s first public announcement that the FDA has accepted theCompany’s SPA relating to the additional clinical data needed for regulatoryapproval of cethromycin in the treatment of CABP and(ii) December 31, 2010.

 

Dawson JamesSecurities, Inc. (“Dawson James”) acted as the placement agent for theoffering.  In addition to cash placement agent fees, the Company issued toDawson James a compensation warrant to purchase 1,516,752 shares of commonstock at an exercise price of $0.0672 per share.

 

Subsequent to the July 7,2010 offering closing and through August 9, 2010, investors exercised 108,950unit warrants consisting of 100 shares of common stock and 100 stock warrants,at an exercise price of $4.20 per unit. The Company received gross proceeds of approximately $458,000 relatingto these unit warrant exercises.

 

**3.      Related Party Transactions**

 

The Company’s Chief Executive Officer, Michael T. Flavin Ph.D., loaned$2.0 million to the Company in 2001 (see Note 4).  Interest expense of approximately $78,000 wasrecorded related to the loan for the six months ended June 30, 2010 and2009.  As of June 30, 2010, $39,000of interest payments were deferred and are expected to be paid later in theyear.  In May 2010, Michael T.Flavin Ph.D. agreed to exchange this outstanding indebtedness for newly-issuedunits, at the same price per unit as those sold in the proposed offering of commonstock and warrants.  The promissory notewould be cancelled and retired upon effectiveness of the exchange.

 

OnJuly 22, 2010,  the Company, acting through the independent auditcommittee of the Company’s board of directors, entered into an agreement (the “AmendedExchange Agreement”) with Dr. Flavin, amending and restating the Amendedand Restated Debt Exchange Agreement dated as of June 15, 2010 (the “PriorExchange Agreement”).  The Amended Exchange Agreement provides that theCompany’s $2.0 million promissory note with Dr. Flavin will be exchangedfor 47,619,047 shares of the Company’s common stock.  The price of $0.042per share used in the exchange was the same price per share used in the Company’srecently completed public equity offering.  As a result of the exchange,the promissory note was cancelled and retired.

 

ThePrior Exchange Agreement provided that Dr. Flavin would exchange thepromissory note for units at the same price per unit as those sold in theCompany’s proposed registered public offering.  Under the terms of thePrior Exchange Agreement, Dr. Flavin would have received 47,619,047 sharesof common stock, 47,619,047 stock warrants and 476,190 unit warrants.  Inthe Amended Exchange Agreement, Dr. Flavin agreed with the Company to completethe proposed exchange without receiving any stock warrants or unit warrants.

 

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In May 2010, the Company amended its loan agreement with afinancial institution.  As part of theamendment, the Company’s Chief Executive Officer provided a $1.5 millionpersonal guarantee to the loan facility and will be released of his guaranteeupon receipt of a $1.5 million payment from the Company to the lender by July 1,2010. In June 2010, the lender agreed to extend the July 1, 2010payment date until October 1, 2010 (see Note 4).

 

The Company leases facilities from the BioStart Property Group, LLC (“BioStart”),a wholly-owned subsidiary of Flavin Ventures, LLC, which is owned by theCompany’s Chief Executive Officer.  Thelease, which commenced on October 1, 2009, is for a term of three yearsand provides the Company with 9,440 square feet of space at an annual rentalrate of $10.50 per square foot.  Therental rate increases by 2.5% for the second year and by 3.0% in the final yearof the lease term. The lease has a provision allowing the Company to negotiatean amendment to lease additional laboratory and office space should the needarise.  Lease obligations totaledapproximately $72,000 and $152,000 for the six months ended June 30, 2010and 2009, respectively.

 

**4.      Debt Obligations**

 

In September 2001, the Company incurred indebtedness under a $2.0million promissory note with the Chief Executive Officer of the Company, whichbears interest at 7.75%.  On January 4,2010, the note was extended to January 5, 2012 and all other termsremained unchanged and in effect. Interest expense of $78,000 was recorded forthe six months ended June 30, 2010. As of June 30, 2010 and December 31, 2009, the Company had$2.0 million outstanding under the note In July 2010, the $2.0 millionpromissory note was exchanged for 47,619,047 shares of the Company’s stock andas a result of the exchange, the promissory note was cancelled and retired (seeNote 3).

 

The Company has a revolving line of credit with a financial institutionunder which the Company had $8.5 million and $10.0 million outstanding as of June 30,2010 and December 31, 2009, respectively. In May 2010, the Companyentered into a letter agreement to extend the loan maturity by one year to January 1,2012.  Under the terms of the agreement,the Company repaid $1.5 million of the outstanding loan balance and is requiredto further reduce the balance by an additional $1.5 million by July 1,2010 and $1.0 million by April 1, 2011. In June 2010, the lender agreed to extend the July 1, 2010payment date until October 1, 2010. The Company’s Chief Executive Officer, Michael T. Flavin, Ph.D.,provided a personal guarantee to the loan facility and will be released of hisguarantee upon receipt of a $1.5 million payment from the Company to the lenderby October 1, 2010.  As a result ofthe amended loan agreement, $2.5 million of the outstanding loan balance isclassified as a current liability and $6.0 million a long-term liability on theJune 30, 2010 balance sheet.  Inaddition, the interest rate on the outstanding loan balance increased from 8.5%to 10.0%. The Company will also issue 500,000 warrants priced upon closing ofthe loan documents and an additional 500,000 warrants will be issued and pricedone year after the closing.  The Companyalso agreed that the line of credit is secured by substantially all of itsassets.  All other terms of the loanremained unchanged.

 

**5.      Fair Value of FinancialInstruments**

 

The carrying values of certain of the Company’s financial instruments,including cash equivalents and accounts payable, approximate fair value due totheir short maturities.  The fair valuesof the Company’s long-term obligations (see Note 4) are based on assumptionsconcerning the amount and timing of estimated future cash flows and assumeddiscount rates reflecting varying degrees of risk.  As of June 30, 2010, the Companyestimates that the fair value of its $8.5 million (carrying value) revolvingline of credit is approximately $8.4 million and that the fair value of its$2.0 million (carrying value) promissory note is approximately $1.9 million.

 

**6.      Commitments**

 

***Vendor Contracts-***The Companyadministers its cethromycin program largely under contracts with thirdparties.  Through June 30, 2010,contracts totaling $47.2 million have been executed related to the cethromycinprogram, which includes the development, commercialization, regulatory reviewand pre-launch activities associated with cethromycin as well asanthrax-related studies.  To date theCompany has paid $47.0 million under these contracts and the remaining balanceof $0.2 million is expected to be paid by the end of the year.  Subcontractor arrangements in connection withthe Defense Threat Reduction Agency (“DTRA”) award grant are expected to beapproximately $2.8 million over a two-year period which began in August 2008.  Through June 30, 2010 the Company haspaid $2.6 million related to these agreements. The commencement of clinical trials to study ALS-357 as a topicaltreatment for patients with metastatic melanoma has been delayed and as suchthe Company has terminated a $0.9 million contract with a University to study ALS-357.  Through June 30, 2010 the Company haspaid $0.3 million in other contracts related to the ALS-357 program. In July 2010,the Company

 

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enteredinto a sponsored research and option agreement with The University of BritishColumbia (“UBC”) to develop several antimicrobial peptides. Under the terms ofthe agreement with UBC, the Company paid an option fee upon execution of theagreement and will make additional payments based on the completion of specificmilestones. In return, UBC granted the Company the exclusive option to evaluatethe technology and obtain a worldwide, exclusive license to manufacture, distributeand market products emanating from the program.

 

***Grant Payable-*** In April 2005, theCompany was awarded a $500,000 grant from the State of Illinois to fundexpansion of its corporate headquarters in Woodridge, Illinois.  Under the terms of the grant, the Company isto create 100 full-time jobs at its corporate headquarters between January 31,2005 and December 31, 2010 (“Grant Period”).  Under the current terms of the agreement, ifthe Company does not create the specified number of full-time jobs, it isrequired to repay the grant proceeds on a pro-rata basis of actual jobs createdcompared to the total defined in the grant within 45 days of the expiration ortermination of the agreement.  The entiregrant has been spent and therefore the $500,000 has been classified as acurrent liability as the Company must create and maintain positions createdduring the Grant Period through December 31, 2010.  Through June 30, 2010, five new jobshave been created and retained since the grant was awarded.

 

**7.      Stock Option Grants**

 

The Company did not grantstock options during the six months ended June 30, 2010.  For the six months ended June 30, 2009,the Company granted stock options to purchase up to 673,200 shares of commonstock to certain employees and directors. The exercise price of the options was the market price of the Company’scommon stock on the date of grant.  TheCompany recognized compensation expense totaling approximately $145,000 and$353,000 for the six months ended June 30, 2010 and 2009, respectively.

 

**8.     Net Loss Per Share**

 

Basic loss per share is computed by dividing net loss by the number ofweighted average common shares outstanding during the reporting period.  Diluted loss per share is calculated to giveeffect to all potentially dilutive common shares that were outstanding duringthe reporting period.  The computation ofdiluted shares outstanding for the periods ended June 30, 2010 and 2009excludes incremental shares of 13,560,550 and 14,016,924 respectively, relatedto outstanding employee stock options and warrants.  These shares are excluded due to theiranti-dilutive effect as a result of the Company’s net losses for the periodsended June 30, 2010 and 2009.

 

**9.     Recent AccountingPronouncements**

 

In April 2010, the FASB issued ASU 2010-17, which establishes arevenue recognition model for contingent consideration that is payable upon theachievement of an uncertain future event, referred to as a milestone.  The scope of this guidance is limited to researchor development arrangements and requires an entity to record the milestonepayment in its entirety in the period received if the milestone meets all thenecessary criteria to be considered substantive.  An entity would not be precluded from making anaccounting policy election to apply another appropriate accounting policy thatresults in the deferral of some portion of the arrangement consideration.  The statement is effective for fiscal years(and interim periods within those fiscal years) beginning on or after June 15,2010.  The Company does not expect theadoption of ASU 2010-17 will have a material impact on its statements offinancial position, results of operations and cash flows.

 

In January 2010, the FASB issued updated accounting guidancerelated to the accounting for fair value measurements and disclosures, whichare included in ASC Update No. 2010-06, “Improving Disclosures About FairValue Measurements”.  The update requiresnew disclosures and clarifies existing disclosure requirements about fair valuemeasurement as set forth in ASC 820. The objective is to improve thesedisclosures and, thus, increase the transparency in financial reporting. Thestatement is effective for interim and annual reporting periods beginning afterDecember 15, 2009. The adoption of the provisions did not have a materialimpact on the Company’s statements of financial position, results of operationsand cash flows.

 

**10.  Subsequent Events**

 

On August 6, 2010, the Company and Pfizer, through its subsidiary WyethLLC (formerly Wyeth), terminated the Development and CommercializationAgreement for cethromycin dated as of September 29, 2008 (the “Agreement”)between the Company and Wyeth LLC. The Agreement covered the Asia Pacificregion excluding Japan.  Followingdiscussions, both parties have concluded that it is in the strategic bestinterest of the parties to mutually terminate the Agreement. As a result of themutual termination, the Company regained all of its rights to develop andcommercialize cethromycin in the Asia Pacific region of the world, exceptJapan. As of the date of the termination, Pfizer owned 1,888,606 shares ofcommon stock in the Company.

 

On August 10, 2010 the Company announced that the unit warrants sold inthe July 2010 public equity offering will expire and cease to be exercisable onSeptember 24, 2010. This date is set by the terms of the unit warrant, whichstate that the unit warrants will expire 45 days after the Company’s publicannouncement that the FDA has accepted the Company’s SPA. Accordingly, as aresult of the announcement made on August 10 that the FDA had accepted theCompany’s SPA, the unit warrants will expire and cease to be exercisable at4:00 p.m. EDT on Friday, September 24, 2010.

 

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**Item 2. *Management’s Discussionand Analysis of Financial Condition and Results of Operations***

 

*You should read the following discussion of our financialcondition and results of operations in conjunction with our consolidatedfinancial statements and the related notes included elsewhere in this quarterlyreport. This discussion contains forward-looking statements that involve risksand uncertainties. Our actual results may differ materially from thoseanticipated in these forward-looking statements.*

 

**Overview**

 

We are a biopharmaceutical company focused on the discovery,development and commercialization of novel drugs in the areas of infectiousdisease, oncology and respiratory disease. Using our internal discoverycapabilities and our network of pharmaceutical and academic partners, we haveassembled a promising pipeline of clinical and preclinical productcandidates.  Our most advanced productcandidate, cethromycin (RestanzaTM), is a novel once-a-day oral antibiotic thatcompleted two pivotal Phase III clinical trials in community acquired bacterialpneumonia (“CABP”).  We have an exclusiveworldwide license (excluding Japan) from Abbott Laboratories to develop andcommercialize cethromycin. Cethromycin is also being developed as a biodefenseagent for use in the treatment of anthrax, plague and tularemia.  We also have product candidates in earlierstages of development for the treatment of indications including malignantmelanoma and respiratory distress caused by inflammation-related tissue damage.

 

None of our product candidates have been approved by the U.S. Food andDrug Administration (“FDA”) or any comparable foreign agencies, and we have notgenerated any significant revenues to date. Our ability to generate revenues inthe future will depend on our ability to meet development or regulatorymilestones under any license agreements that trigger payments to us, to enterinto new license agreements for other products or territories and to receiveregulatory approvals for, and successfully commercialize, our productcandidates either directly or through commercial partners.

 

**DevelopmentUpdate — Cethromycin CABP Program**

 

In late June 2010 we submitted a final Special Protocol Assessment(“SPA”) with the FDA for the proposed Phase III clinical program of cethromycinin the treatment of patients with CABP. We have been engaged in the SPA processwith the FDA over the last year and just recently met with officials from theFDA to establish the clinical trial design needed to gain approval inCABP.  As filed, the SPA incorporateswritten and oral comments from the FDA’s Division of Anti-Infective andOphthalmology Products. 

 

An SPA is a written agreement between the FDA and a drug sponsorconcerning the clinical trial design, clinical endpoints and other clinicaltrial issues that can be used to support regulatory approval of a drugcandidate. The process is intended to provide assurance that if the agreed uponclinical trial protocols are followed, the clinical trial endpoints areachieved and there is a favorable risk benefit profile, the data may serve asthe primary basis of an efficacy claim in support of a New Drug Application (“NDA”).

 

In August 2010 we reached an agreement with the FDA, under the SPAprocess, on the design of our planned Phase III study of cethromycin to treatCABP.  The trial is the firstprospectively designed superiority study to be conducted in CABP. 

 

The double-blind pivotal superiority study will compare the efficacyand safety of once-daily oral administration of 300 milligrams ofcethromycin over seven days of treatment to azithromycin. The primary efficacyendpoint will be the clinical cure rate in a macrolide-resistant Streptococcuspneumoniae population. The protocol also includes several unique features, suchas the inclusion of patient-reported outcome measures, which have the potentialto generate a more robust demonstration of effectiveness and establishcethromycin as a new standard of care in treating pneumonia.

 

With reported resistance rates as high as 40 percent tostandard-of-care macrolide antibiotics in the U.S., there is a pressing medicalneed for new drugs to treat CABP. Based on the data we have accumulated in ourextensive pre-clinical and clinical program to date, coupled with a thoroughreview of published literature on the clinical relevance of macrolideresistance, we believe that cethromycin has the potential to show a superiorefficacy advantage in patients who are resistant to marketed macrolide drugs.

 

*Background*

 

We submitted the cethromycin NDA in September, 2008 based on theresults of 53 clinical studies including 2 pivotal Phase III studies whereincethromycin demonstrated non-inferiority to Biaxin® inmild-to-moderate CABP.

 

On June 2, 2009, the FDA AIDAC reviewed the cethromycin NDA. TheAIDAC voted that cethromycin demonstrated safety for the outpatient treatmentof adults with mild-to-moderate CABP, but voted that cethromycin did notdemonstrate efficacy in the treatment of CABP in light of the new FDA draftCABP guidance which was published in March of 2009.

 

On July 31, 2009 the FDA provided a complete response letter to usindicating that further clinical work would be required for the approval of cethromycinin CABP. Our pivotal Phase III program was designed and conducted under priorFDA guidance and before the new draft guidance document was released.

 

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Over the past two years, the FDA has been conducting public workshopsand advisory panels to discuss clinical trial design issues in CABP culminatingin a draft guidance document published in March of 2009. Public commentswere received in response to the draft guidance and an AIDAC meeting was heldin December of 2009 to further discuss and resolve the CABP clinicaldesign issues.

 

In March 2010, we met with officials from the FDA’sAnti-Infectives Division to gain clarity on the registration pathway forcethromycin. This meeting followed the December 9, 2009 FDA Anti-InfectiveDrugs Advisory Committee (“AIDAC”) meeting which discussed clinical trialdesign issues for CABP relative to the earlier, March 2009, FDA CABPguidance document. In the meeting, the FDA guided that, to assess theapprovability for cethromycin to treat CABP, we should establish a SPA using asuperiority clinical trial design comparing cethromycin to a marketed macrolideantibiotic in two clinical trials. In light of this guidance, we continued towork with the FDA to finalize a SPA using a superiority design for theoutpatient CABP indication.

 

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. Discussions with potential commercial partners focused ongeographical markets such as the European Union and the United States areongoing.

 

**DevelopmentUpdate — Cethromycin Biodefense Program**

 

In April 2010, we announced positive results from an in vitrostudy assessing the efficacy of cethromycin against 30 strains of *Burkholderia pseudomallei* (melioidosis), a serious,life-threatening bacterial pathogen. Cethromycin showed significant in vitroactivity against clinical and environmental strains of B. pseudomallei asmeasured by minimal inhibitory concentration (“MIC”), the lowest concentrationof an antimicrobial that will inhibit the visible growth of a microorganismafter 24 hours of incubation. Cethromycin demonstrated antibacterial activitywith MIC values ranging from 0.5—8 ug/ml and MIC90 of 4 ug/ml. Most notably,cethromycin also demonstrated positive activity against strains that wereresistant to a commonly used antibiotic, azithromycin, for which MIC valueswere all greater than 64 ug/ml. In a separate study, cethromycin alsodemonstrated in vitro activity against 30 strains of Burkholderia mallei withMIC values ranging from 0.06—1 ug/ml and MIC90 of 0.5 ug/ml, which arecomparable to azithromycin.

 

In March 2010, we announced that we received notice from theBiomedical Advanced Research and Development Authority (“BARDA”) of the U.S.Department of Health and Human Services that it has completed its initialtechnical evaluation of our funding proposal for advanced development ofcethromycin as a biodefense countermeasure and identified it as a scientificallyand technically sound proposal important to program goals and objectives thatmay require further development and may be recommended for acceptance subjectto funds availability. We were invited to submit additional information toallow BARDA to make a final determination on the appropriateness of theproposal to enter into contract negotiations. The Company is engaged in ongoingdiscussions with BARDA in light of recent amendements to the Broad AgencyAnouncement that would fund the development of cethromycin, if awarded.

 

Related to this development, we also gained clarity from the FDA on thebiodefense regulatory package required for submission in light of recent AIDACmeetings discussing the use of the FDA’s Animal Rule for approval ofbiodefense therapeutics. As anticipated, the FDA recommended that, in parallelwith pivotal animal studies demonstrating efficacy under FDA’s Animal Rule, weshould complete the CABP clinical program and submit a complete response to theCABP NDA prior to submitting an amended NDA for the biodefense indications.

 

**Development Update — IV Formulation Program**

 

In July 2010 we announced positive results from preclinicaltoxicology and pharmacokinetic studies of an intravenous (“IV”) formulation forcethromycin that support its use in a hospital setting. Cethromycin IV wasadministered as a single

 

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doseup to 60 mg/kg/day, the highest dose tested. Results demonstrated cethromycinIV was well tolerated and generated 10-fold greater plasma exposure compared tooral administration. The studies were conducted in rats in accordance with goodlaboratory practices. The increased bioavailability of cethromycin IV may allowfor the treatment of serious hospital infections as well as the treatment ofbioterror pathogens, such as anthrax, plague and tularemia after signs andsymptoms are present.

 

**FinancialUpdate**

 

Since our inception, we have incurred net losses each year. Our netloss for the six months ended June 30, 2010 was $3.9 million.  As of June 30, 2010, we had anaccumulated deficit of $135.5 million. We have funded operations to dateprimarily from debt financings and capital contributions from our founder andChief Executive Officer, proceeds from an initial public offering, andsubsequent private placements, including issuances of common stock under twoStandby Equity Distribution Agreements.

 

On July 7, 2010, weclosed a registered public offering of units.  As part of the closing, weissued 379,188 units at a public offering price of $4.20 per unit, raisingapproximately $1.6 million in gross offering proceeds and approximately $1.0million in net proceeds after deducting placement agent fees and offeringexpenses payable by us.  We intend to use the net proceeds from theoffering for working capital purposes as we continue to work with the FDAtoward the completion of the protocol design for the additional clinical dataneeded for regulatory approval of cethromycin in the treatment of CABP under aSPA.

 

Each unit sold in theoffering consists of (i) 100 shares of our common stock, (ii) 100stock warrants to purchase shares of common stock at an exercise price of$0.042 per share and (iii) one warrant to purchase an additional unit,consisting of 100 shares of common stock and 100 stock warrants, at an exerciseprice of $4.20 per additional unit.  The stock warrants may be exercisedat any time during the period commencing six months after the closing date andending on the fifth anniversary of the closing date.  The unit warrantsmay be exercised at any time during the period commencing on the closing dateand ending on the earlier of: (i) the date that is 45 days after our firstpublic announcement that the FDA has accepted our SPA relating to theadditional clinical data needed for regulatory approval of cethromycin in thetreatment of CABP and (ii) December 31, 2010.

 

Dawson JamesSecurities, Inc. (“Dawson James”) acted as the placement agent for theoffering.  In addition to cash placement agent fees, we issued to DawsonJames a compensation warrant to purchase 1,516,752 shares of common stock at anexercise price of $0.0672 per share.

 

InMay 2010, we entered into a letter agreement with our lender to extend theloan maturity by one year to January 1, 2012.  Under the terms of the agreement, we repaid$1.5 million of the outstanding loan balance and are required to further reducethe balance by an additional $1.5 million by July 1, 2010 and $1.0 millionby April 1, 2011.  In June 2010,the lender agreed to extend the July 1, 2010 payment date untilOctober 1, 2010.  Our ChiefExecutive Officer, Michael T. Flavin, Ph.D., provided a personal guarantee tothe loan facility and will be released of his guarantee upon receipt of a $1.5million payment from us to the lender by October 1, 2010.  As a result of the amended loan agreement,$2.5 million of the outstanding loan balance is classified as a currentliability and $6.0 million a long-term liability on the June 30, 2010balance sheet.  In addition, the interestrate on the outstanding loan balance increased from 8.5% to 10.0%. We will alsoissue 500,000 warrants priced upon closing of the loan documents and anadditional 500,000 warrants will be issued and priced one year after theclosing.  We have also agreed that theline of credit is secured by substantially all of our assets.  All other terms of the loan remainedunchanged.

 

In May 2010, Michael T. Flavin Ph.D. agreed to exchange thisoutstanding indebtedness for newly-issued units, at the same price per unit asthose sold in the proposed offering of common stock and warrants.  On July 22, 2010,  the Company,acting through the independent audit committee of our board of directors, enteredinto an agreement (the “Amended Exchange Agreement”) with Dr. Flavin,amending and restating the Amended and Restated Debt Exchange Agreement datedas of June 15, 2010 (the “Prior Exchange Agreement”).  The AmendedExchange Agreement provides that our $2.0 million promissory note withDr. Flavin will be exchanged for 47,619,047 shares of our commonstock.  The price of $0.042 per share used in the exchange was the sameprice per share used in our recently completed public equity offering.  Asa result of the exchange, the promissory note was cancelled and retired.

 

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In April 2010, our shareholders approved an amendment to ourarticles of incorporation to increase the number of authorized shares from125,000,000 to 625,000,000 including an increase in the number of authorizedshares of common stock from 120,000,000 to 620,000,000.  As of June 30, 2010, 100,372,067 sharesof common stock were issued and outstanding and 16,556,577 shares are reservedfor issuance under options and warrants. Accordingly, out of the 620,000,000 shares of common stock authorized,503,071,356 remained available for future issuance as of June 30, 2010.

 

InMarch 2010, the Company and YA Global Master SPV Ltd. (“YA SPV”), anaffiliate of Yorkville Advisors, agreed to terminate the Standby EquityDistribution Agreement dated as of June 19, 2009 (the “SEDA”).  Wesold to YA SPV 49,549,200 shares of our common stock and raised approximately$11.7 million under the SEDA prior to its termination.  Shares of common stock sold under the SEDA inexcess of $9.0 million were sold with the consent of our lender under ourcredit facility.

 

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

 

Adiscussion of our ability to continue as a going concern can be found in Note 1to the consolidated financial statements and in the liquidity and capitalresources section of this management discussion and analysis.

 

**Resultsof Operations**

 

*Three months ended June 30, 2010 compared to three months ended June 30,2009*

 

*Revenue.*** We reported revenue of $273,000 for the threemonths ended June 30, 2010 compared to $707,000 for the three months endedJune 30, 2009.  Revenue was derivedfrom a grant awarded by the Defense Threat Reduction Agency (“DTRA”) of theU.S. Department of Defense (“DoD”).  Thecontract award of $3.8 million is over a two year period which began in August 2008.  The revenue from this grant has been fullyrecognized through the six months ended June 30, 2010.

 

*Research and development expense.* Research and development expensedecreased $0.6 million to $0.8 million for the three months ended June 30,2010.  In conjunction with work performedunder the grant awarded by DTRA, costs incurred decreased $0.4 million in thequarter ended June 30, 2010 and was partially offset by $1.0 million ofexpenses for IV formulation studies in the three months ended June 30,2010. In 2009, expenses related to the June 2, 2009 AIDAC meeting were$0.3 million in the second quarter.

 

*General and administrative expense.*** General and administrative expenses were $1.2million for the three months ended June 30, 2010, a decrease of $0.5million compared to the second quarter last year.  This result reflects a decrease in legal andother professional services of $0.2 million and facility and otheradministrative expenses of $0.2 million for the three months ended June 30,2010 compared to the same period last year. In addition, salary, benefit and incentive compensation costs were lowerby $0.1 million in the second quarter of 2010 compared to the same quarter lastyear.

 

*Interest income.* Interest income decreased $1,000 to $1,000 forthe three months ended June 30, 2010 as compared to the same period lastyear.

 

*Interest expense.* Interest expense of $253,000 decreased $5,000in the three months ended June 30, 2010 as compared to the same periodlast year.

 

*Other (income) expense, net. *For the threemonths ended June 30, 2009 we recorded a $20,000 currency transaction lossrelated to the procurement of commercial launch materials.

 

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*Six months ended June 30, 2010 compared to six months ended June 30,2009*

 

*Revenue.*** We reported revenue of $753,000 for the sixmonths ended June 30, 2010 compared to $1.1 million for the six monthsended June 30, 2009.  Revenue wasderived from a grant awarded by the Defense Threat Reduction Agency of the U.S.Department of Defense.  The contractaward of $3.8 million is over a two year period which began in August 2008.  The revenue from this grant has been fullyrecognized through the three months ended June 30, 2010.

 

*Research and development expense.* Research and development expensedecreased $0.6 million to $1.6 million for the six months ended June 30,2010.  In conjunction with work performedunder the grant awarded by DTRA, costs incurred decreased $0.3 million in thesix months ended June 30, 2010. Expenses incurred for IV formulationstudies of $0.2 million were offset by lower salary, benefit and incentivecompensation costs of approximately $0.2 million in the six months ended June 30,2010.  Research and development expensesrelated to the FDA review of cethromycin including the June 2, 2009 AIDACmeeting, were $0.3 million for the six months ended June 30, 2009.

 

*General and administrative expense.*** General and administrative expenses were $2.6million for the six months ended June 30, 2010, a decrease of $0.6 millioncompared to the same period last year. This result reflects lower salary, benefit and incentive compensationcosts of $0.3 million and decreased facility expenses of $0.1 million as aresult of renewing our lease agreement at a lower rate per square foot andreduced amount of space.  In addition,legal services and other administrative costs were approximately $0.2 millionlower for the six months ended June 30, 2010 compared to the same periodprevious year.

 

*Interest income.* Interest income increased $3,000 to $7,000 forthe six months ended June 30, 2010 as compared to the same period lastyear.

 

*Interest expense.* Interest expense of $509,000 decreased $2,000for the six months ended June 30, 2010 as compared to the same period lastyear.

 

*Other (income) expense, net. *For the sixmonths ended June 30, 2009 we recorded a $20,000 currency transaction lossrelated to the procurement of commercial launch materials.

 

**Liquidity and Capital Resources**

 

Wehave devoted substantially all of our cash resources to research anddevelopment and general and administrative expenses.  To date, we have not generated any revenuesfrom the sale of products, and we do not expect to generate any such revenuesin the near term, if at all.  As aresult, we have incurred an accumulated deficit of $135.5 million as of June 30,2010 and we expect to incur significant operating losses for the foreseeablefuture.  As of June 30, 2010 we hadnegative working capital of $5.0 million and cash and cash equivalents were$0.1 million.  Since our inception in1999 to August 2005, we financed our operations primarily through debt andcapital contributions from our founder and controlling stockholder andborrowings under our bank line of credit. In August 2005 we completed our initial public offering in which weraised $28.7 million, net of underwriters discount and offering costs.  Since that time, we have completed threeprivate placements in which we raised $52.8 million, net of underwriters’discounts and offering costs and raised additional debt financing through our$10.0 million bank line of credit. Between January 2009 and March 2010 we raised $15.6 millionunder two Standby Equity Distribution Agreements.  And in July 2010 we completed asecondary public offering and raised approximately $1.0 million, net ofplacement agent fees and offering expenses payable by us.

 

In September 2001, we incurred indebtedness under a $2.0 millionpromissory note with the Chief Executive Officer of the Company, which bearsinterest at 7.75%.  On January 4,2010, the note was extended to January 5, 2012, all other terms remainedunchanged and in effect.  In May 2010, Michael T. Flavin Ph.D. agreedto exchange this outstanding indebtedness for newly-issued units, at the sameprice per unit as those sold in the proposed offering of common stock andwarrants.  On July 22, 2010, the Company, acting through the independent audit committee of our board ofdirectors, entered into the Amended Exchange Agreement with Dr. Flavin,amending and restating the Prior Exchange Agreement.  The Amended ExchangeAgreement provides that our $2.0 million promissory note with Dr. Flavinwill be exchanged for 47,619,047 shares of our common stock.  The price of$0.042 per share used in the exchange was the same price per share used in ourrecently completed public equity offering.  As a result of the exchange,the promissory note was cancelled and retired.

 

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Wehave a revolving line of credit with a financial institution under which we had$8.5 million and $10.0 million outstanding as of June 30, 2010 and December 31,2009, respectively.  In May 2010, weentered into a letter agreement with our lender to extend the loan maturity byone year to January 1, 2012. Under the terms of the agreement, we repaid$1.5 million of the outstanding loan balance and are required to further reducethe balance by an additional $1.5 million by July 1, 2010 and $1.0 millionby April 1, 2011.  In June 2010,the lender agreed to extend the July 1, 2010 payment date untilOctober 1, 2010.  Our ChiefExecutive Officer, Michael T. Flavin, Ph.D., provided a personal guarantee tothe loan facility and will be released of his guarantee upon receipt of a $1.5million payment from us to the lender by October 1, 2010.  As a result of the amended loan agreement,$2.5 million of the outstanding loan balance is classified as a currentliability and $6.0 million a long-term liability on the June 30, 2010balance sheet.  In addition, the interestrate on the outstanding loan balance increased from 8.5% to 10.0%. We will alsoissue 500,000 warrants priced upon closing of the loan documents and anadditional 500,000 warrants will be issued and priced one year after theclosing.  We have also agreed that theline of credit is secured by substantially all of our assets.  All other terms of the loan remainedunchanged.

 

Netcash used in operating activities was $3.4 million for the six months ended June 30,2010 compared to $4.4 million for the six months ended June 30, 2009.  Approximately $0.8 million of cash was usedin our cethromycin programs in the six months ended June 30, 2010,compared to $1.6 million in the same period last year.  These amounts are net of DTRA grant awardfunds, which reimburse us for certain research and development expensesassociated with the grant.  Cash used forgeneral corporate purposes was $2.7 million in the six months ended June 30,2010 compared to $2.8 million for the six months ended June 30, 2009.

 

Cashprovided from financing activities was $0.7 million for six months ended June 30,2010 compared to $3.8 million in 2009. For the six months ended June 30, 2010, we received approximately$2.2 million, net of offering expenses, for the sale of 15,447,057 shares underthe SEDA facility compared to $3.8 million for the sale of 9,883,994 shares forthe six months ended June 30, 2009. Additionally, under the terms of the new loan agreement, we repaid $1.5million of our outstanding loan balance in the second quarter of 2010.

 

*ContractualObligations*

 

Asof June 30, 2010, the annual amounts of future minimum payments under debtobligations, interest, lease obligations and other long term liabilitiesconsisting of executed research and development, and license agreements are asfollows:

 
| ** **                            | ** ** | **Payments Due by December 31,** | ** ** | ** ** | ** ** |
|---------------------------------------|------------|---------------------------------------|------------|------------|------------|
| ** **                            | ** ** | **2010**                              | ** ** | **2011**   | ** ** | **2012** | ** ** | **2013** | ** ** | **2014** | ** ** | **Total** | ** ** |
| Notes payable and bank line of credit |       | $                                     | 1,500,000  |       | $          | 1,000,000 |   | $ | 8,000,000 |   | $ | — |   | $ | — |   | $ | 10,500,000 |   |
| Interest                              |       | 503,750                               |       | 780,000    |       | 1,722 |   | — |   | — |   | 1,285,472 |   |
| CABP program related costs            |       | 242,618                               |       | —     |       | — |   | — |   | — |   | 242,618 |   |
| ALS-357 clinical program              |       | 35,630                                |       | —     |       | — |   | — |   | — |   | 35,630 |   |
| Biodefense program related costs      |       | 213,504                               |       | —     |       | — |   | — |   | — |   | 213,504 |   |
| Grant payable                         |       | —                                |       | 500,000    |       | — |   | — |   | — |   | 500,000 |   |
| Operating leases                      |       | 54,920                                |       | 111,840    |       | 87,965 |   | 9,480 |   | 2,370 |   | 266,575 |   |
|                                  |       |                                  |       |       |       |   |   |   |   |   |   |   |   |
| Total                                 |       | $                                     | 2,550,422  |       | $          | 2,391,840 |   | $ | 8,089,687 |   | $ | 9,480 |   | $ | 2,370 |   | $ | 13,043,799 |   |

 

Theabove table does not include the potential $30.0 million product basedmilestone payment under our license agreement with Abbott which we will oweAbbott if cethromycin is approved for marketing by the FDA.  Under the terms of the amended licenseagreement, $20.0 million is payable within 20 business days after receipt ofU.S. regulatory approval, $5.0 million is payable within 6 months of U.S.regulatory approval and $5.0 million is payable within 12 months of U.S.regulatory approval.  Thereafter, wewould owe Abbott an additional $2.5 million upon reaching $200.0 million inaggregate net sales of cethromycin and $5.0 million upon reaching $400.0million in aggregate net sales.  Theperiods in which milestone obligations become payable, if at all, are onlyestimates due to uncertainties associated with the completion or achievement ofthe milestone.

 

Inthe third quarter of 2008, we signed a letter of intent with DSM to procure rawmaterials to be used to 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, 2010 the cost of rawmaterials actually purchased was approximately $2.8 million.  The agreement allows for us to purchaseadditional raw materials at a later time.

 

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InAugust 2008, the DTRA of the DoD awarded us a two-year contract worth upto $3.8 million to further study cethromycin as a potential broad-spectrummedical countermeasure. In conjunction with the grant awarded by the DTRA, weentered into subcontractor arrangements to further study cethromycin as apotential broad-spectrum medical countermeasure.  The subcontractors’ costs are expected to beapproximately $2.8 million over a two-year period which began in August 2008.

 

Ourcommitments under operating leases consist of payments made to a related partyrelating to our facilities lease in Woodridge, Illinois, which expires on October 1,2012.  Additionally, we rent certainoffice equipment under operating leases.

 

Wewill not be generating any product-based revenues or realizing cash flows fromoperations in the near term, if at all. We may not have sufficient cash or other funding available to completeour anticipated business activities for the remainder of 2010.  In order to continue our business activitiesduring 2010, we intend to raise additional capital through the issuance ofequity securities, continuing our efforts in applying for grant awards throughvarious agencies and by licensing our lead compound, cethromycin, to commercialpartners.  We believe, based upon currentmarket conditions, commercial partnership agreements would include a series ofmilestone payments, including up-front milestones that would fund our continuedoperations.  Although management believeswe could secure commercial partnerships, there can be no assurances that suchpartnerships will be available at terms acceptable to us, if at all. On July 7,2010, we closed our previously announced registered public offering ofunits.  The unit offering was structured such that in addition to commonstock, the investor received warrants and unit warrants that if exercised allowfor the investor to purchase additional shares of common stock within aspecified period (see Note 2 to the consolidated financial statements).  If we raise additional capital by issuingequity securities, our shareholders could experience substantial dilution.  As a result of the uncertainty in our abilityto obtain needed financing through equity offerings, commercial partnershipsand grant awards or other means, there is substantial doubt about our abilityto continue as a going concern.

 

Our future capital uses and requirements depend on numerousforward-looking factors.  These factorsinclude, but are not limited to, the following:

 

·                                          progress in ourclinical development programs, as well as the magnitude of these programs;

 

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

 

·                                          our ability toraise additional debt or equity financing or the receipt of milestone paymentsthat would be paid to us as a result of our entering into a commercialpartnership for cethromycin, or a combination of both;

 

·                                          our ability toestablish and maintain additional collaborative arrangements;

 

·                                          the resources,time and costs required to successfully initiate and complete our preclinicaland clinical trials, obtain regulatory approvals, protect our intellectualproperty and 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, our prospects for financing our clinical developmentprograms are limited, we may decide to reduce research and development expensesby delaying or discontinuing certain programs.

 

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**Critical Accounting Policies and Estimates**

 

Our discussion and analysis of our financial condition and results ofoperations are based on our financial statements, which have been prepared inaccordance with accounting principles generally accepted in the United Statesof America.  The preparation of thesefinancial statements requires us to make estimates and judgments that affectthe reported amounts of assets, liabilities and expenses and related disclosureof contingent assets and liabilities.  Wereview our estimates on an ongoing basis. We base our estimates on historical experience and on various otherassumptions that we believe to be reasonable under the circumstances.  Actual results may differ from theseestimates under different assumptions or conditions.  While our significant accounting policies aredescribed in more detail in the notes to our financial statements included inthis quarterly report, we believe the following accounting policies to becritical to the judgments and estimates used in the preparation of ourfinancial statements.

 

*Stock-based Compensation*

 

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

 

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**Forward-Looking Statements 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. *Quantitativeand Qualitative Disclosures About Market Risk***

 

Our exposure to market risk is currently confined to our cash, cashequivalents, line of credit and certain contract manufacturing agreements. Wecurrently do not hedge interest rate exposure. We have not used derivativefinancial instruments for speculation or trading purposes. Because of theshort-term maturities of our cash and cash equivalents, we do not believe thatan increase in market rates would have any significant impact on their realizedvalue.

 

We are subject to foreign currency exchange rate risk on certaincontract manufacturing agreements.  Forthe six months ended June 30, 2010, we did not incur any exchange lossesand have no outstanding obligations or commitments denominated in foreigncurrencies.  To date, we have not enteredinto any foreign currency forward exchange contracts or other derivativefinancial instruments to hedge the effects of fluctuations in foreign currencyexchange rates.

 

**Item 4. *Controls andProcedures***

 

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.

 

**Changesin 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 —OTHER INFORMATION**

 

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

 

Ourbusiness, financial condition, operating results and cash flows may be impactedby a number of factors, including those set forth in Item 1A of Part I ofour Annual Report on Form 10-K for the fiscal year ended December 31,2009.  Set forth below are materialchanges in our risk factors since the 2009 Form 10-K.  The information presented below updates, andshould be read in conjunction with, the risk factors and other informationdisclosed in our 2009 Form 10-K and this Quarterly Report on Form 10-Q.

 

***We may not be able to continue as a going concern or fund our existingcapital needs.***

 

Ourindependent registered public accounting firm included an explanatory paragraphin the report on our 2009 financial statements related to the uncertainty inour ability to continue as a going concern. The paragraph stated that we do nothave sufficient cash on-hand or other funding available to meet our obligationsand sustain our operations, which raises substantial doubt about our ability tocontinue as a going concern. We will not be generating any product-basedrevenues or realizing cash flows from operations in the near term, if at all.We may not have sufficient cash or other funding available to complete ouranticipated business activities for the remainder of 2010. In order to address ourworking capital shortfall we intend to raise additional capital by accessingthe capital markets and by licensing our lead product candidate, cethromycin,to commercial partners. There can be no assurances that we will be successfulin accessing the capital markets on terms acceptable to us, if at all, or thatsuch partnerships will be available on terms acceptable to us, if at all.

 

**Item 5. *Other Information***

 

Inlieu of a Form 8-K that would require disclosure under items 1.02 and 3.03respectivey, the Company reports the following:

 

OnAugust 6, 2010, the Company and Pfizer, through its subsidiary Wyeth LLC(formerly Wyeth), terminated the Development and Commercialization Agreementfor cethromycin dated as of September 29, 2008 (the “Agreement”) between theCompany and Wyeth LLC.  The Agreementcovered the Asia Pacific region excluding Japan.  Following discussions, both parties haveconcluded that it is in the strategic best interest of the parties to mutuallyterminate the Agreement.  As a result ofthe mutual termination, the Company regained all of its rights to develop andcommercialize cethromycin in the Asia Pacific region of the world, except Japan.  As of the date of the termination, Pfizerowned 1,888,606 shares of common stock in the Company.

 

OnAugust 10, 2010 the Company announced that the unit warrants sold in the July2010 public equity offering will expire and cease to be exercisable onSeptember 24, 2010.   This date is set bythe terms of the unit warrant, which state that the unit warrants will expire45 days after the Company’s public announcement that the FDA has accepted theCompany’s Special Protocol Assessment (“SPA”). Accordingly, as a result of the announcement made on August 10 that theFDA had accepted the Company’s SPA, the unit warrants will expire and cease tobe exercisable at 4:00 p.m. EDT on Friday, September 24, 2010.

 

 

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**Item 6. *Exhibits***

 

Thefollowing is a list of exhibits filed as part of this Form 10-Q:

 
| **Number** | ** ** | **Description**                                                                                                                                                                                   |
|------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |       |                                                                                                                                                                                              |
| 3.1        |       | Third  Amended and Restated Certificate of Incorporation of Advanced Life Sciences  Holdings, Inc. (as filed in our Quarterly Report on Form 10-Q as  exhibit 3.1 on May 10, 2010) |
|       |       |                                                                                                                                                                                              |
| 10.1       |       | Amended  2005 Stock Incentive Plan of Advanced Life Sciences Holdings, Inc. (as  filed in our Current Report on Form 8-K as exhibit 10.1 on  April 13, 2010)                       |
|       |       |                                                                                                                                                                                              |
| 31.1*      |       | Certification  of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002.                                                                                        |
|       |       |                                                                                                                                                                                              |
| 31.2*      |       | Certification  of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002.                                                                                        |
|       |       |                                                                                                                                                                                              |
| 32.1*      |       | Certification  of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                    |
|       |       |                                                                                                                                                                                              |
| 32.2*      |       | Certification  of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                    |

 

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*  Filed herewith.

 

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**SIGNATURES**

 

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, 2010

 

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**EXHIBIT INDEX**

 
| **Number** | ** ** | **Description**                                                                                                                                                                                   |
|------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |       |                                                                                                                                                                                              |
| 3.1        |       | Third  Amended and Restated Certificate of Incorporation of Advanced Life Sciences  Holdings, Inc. (as filed in our Quarterly Report on Form 10-Q as  exhibit 3.1 on May 10, 2010) |
|       |       |                                                                                                                                                                                              |
| 10.1       |       | Amended  2005 Stock Incentive Plan of Advanced Life Sciences Holdings, Inc. (as  filed in our Current Report on Form 8-K as exhibit 10.1 on  April 13, 2010)                       |
|       |       |                                                                                                                                                                                              |
| 31.1*      |       | Certification  of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002.                                                                                        |
|       |       |                                                                                                                                                                                              |
| 31.2*      |       | Certification  of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002.                                                                                        |
|       |       |                                                                                                                                                                                              |
| 32.1*      |       | Certification  of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                    |
|       |       |                                                                                                                                                                                              |
| 32.2*      |       | Certification  of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                    |

 

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*  Filed herewith.

 

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