** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

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**FORM 10-Q**

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

 

**For the Quarterly PeriodEnded: March 31, 2006**

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

 

**Commission FileNo: 000-51436**

** **

**ADVANCED LIFE SCIENCES HOLDINGS, INC**.

(Exact name of registrant as specified in its charter)

 

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

 

**1440 Davey RoadWoodridge, IL 60517**

(Address, including zip code of registrants principalexecutive offices)

** **

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

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

Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule 12b-2of the Exchange Act).   Yes o     No x

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

As of May 8, 2006, the registrant had 28,256,763 shares of commonstock, $0.01 par value per share, outstanding.

 

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**ADVANCED LIFE SCIENCES HOLDINGS, INC****INDEX****Form 10-Q**
|                    | ** ** | **PART I —  FINANCIAL INFORMATION (UNAUDITED)**                                                                                                                                 | ** ** |
|--------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Item 1.       |       | Financial  Statements:                                                                                                                                                                         |       |
|               |       | Condensed Consolidated Balance Sheets as of  March 31, 2006 and December 31, 2005                                                                                                    |       |
|               |       | Condensed Consolidated Statements of Operations for  the three months ended March 31, 2006 and 2005 and for the period from  inception (January 1, 1999) through March 31, 2006 |       |
|               |       | Condensed Consolidated Statements of Stockholders’  Equity for period from inception (January 1, 1999) through  March 31, 2006                                                  |       |
|               |       | Condensed Consolidated Statements of Cash Flows for  the three months ended March 31, 2006 and 2005 and for the period from  inception (January 1, 1999) through March 31, 2006 |       |
|               |       | Notes to Condensed 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 6.       |       | Exhibits                                                                                                                                                                                       |       |
| Signatures         |       |                                                                                                                                                                                           |       |
| Exhibit Index |       |                                                                                                                                                                                           |       |

 

1

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**PART I — FINANCIALINFORMATION**

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

**ADVANCEDLIFE SCIENCES HOLDINGS, INC. AND SUBSIDIARY****(A Development Stage Company)**
| **CONDENSED CONSOLIDATED BALANCE SHEETS** | ** ** | ** ** | ** ** | ** ** | ** ** |
|----------------------------------------------------------|------------|------------|------------|------------|------------|
| **(Unaudited)**                                          |

 
| ** **                                                                                                                                                                                    | ** ** | **As of**     | ** ** | **Year ended**   | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                    | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
| ** **                                                                                                                                                                                    | ** ** | **2006**           | ** ** | **2005**              | ** ** |
| ** **                                                                                                                                                                                    |       |               |       |                  |       |
| **ASSETS**                                                                                                                                                                                    | ** ** | ** **         | ** ** | ** **            | ** ** |
| ** **                                                                                                                                                                                    | ** ** | ** **         | ** ** | ** **            | ** ** |
| CURRENT ASSETS:                                                                                                                                                                               |       |               |       |                  |       |
| Cash and cash  equivalents                                                                                                                                                                    |       | $                  | 38,218,131 |                  | $          | 4,749,932 |   |
| Investments -  available for sale                                                                                                                                                             |       | 6,675,000          |       | 10,475,000            |       |
| Accounts  receivable - related party                                                                                                                                                          |       | 5,054              |       | 6,160                 |       |
| Prepaid  insurance                                                                                                                                                                            |       | 217,082            |       | 362,241               |       |
| Prepaid expenses  and other                                                                                                                                                                   |       | 2,095,201          |       | 118,263               |       |
|                                                                                                                                                                                          |       |               |       |                  |       |
| Total current  assets                                                                                                                                                                         |       | 47,210,468         |       | 15,711,596            |       |
|                                                                                                                                                                                          |       |               |       |                  |       |
| FURNITURE AND  EQUIPMENT:                                                                                                                                                                     |       |               |       |                  |       |
| Furniture and  fixtures                                                                                                                                                                       |       | 148,985            |       | 147,275               |       |
| Laboratory  equipment                                                                                                                                                                         |       | 142,928            |       | 142,928               |       |
| Computer software  and equipment                                                                                                                                                              |       | 194,136            |       | 187,771               |       |
| Leasehold  improvements                                                                                                                                                                       |       | 40,646             |       | 40,646                |       |
|                                                                                                                                                                                          |       |               |       |                  |       |
| Total furniture  and equipment—at cost                                                                                                                                                   |       | 526,695            |       | 518,620               |       |
| Less accumulated  depreciation                                                                                                                                                                |       | (290,323           | )          | (267,372              | )          |
|                                                                                                                                                                                          |       |               |       |                  |       |
| Furniture and  equipment—net                                                                                                                                                             |       | 236,372            |       | 251,248               |       |
|                                                                                                                                                                                          |       |               |       |                  |       |
| OTHER LONG-TERM ASSETS:                                                                                                                                                                       |       |               |       |                  |       |
| Deferred  financing costs                                                                                                                                                                     |       | 46,378             |       | 53,004                |       |
| Other assets                                                                                                                                                                                  |       | 6,534              |       | 6,062                 |       |
|                                                                                                                                                                                          |       |               |       |                  |       |
| Total other  long-term assets                                                                                                                                                                 |       | 52,912             |       | 59,066                |       |
|                                                                                                                                                                                          |       |               |       |                  |       |
| TOTAL ASSETS                                                                                                                                                                                  |       | $                  | 47,499,752 |                  | $          | 16,021,910 |   |
|                                                                                                                                                                                          |       |               |       |                  |       |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                                                                                | ** ** | ** **         | ** ** | ** **            | ** ** |
| ** **                                                                                                                                                                                    | ** ** | ** **         | ** ** | ** **            | ** ** |
| CURRENT LIABILITIES:                                                                                                                                                                          |       |               |       |                  |       |
| Accounts payable                                                                                                                                                                              |       | $                  | 337,782    |                  | $          | 294,816 |   |
| Accrued expenses                                                                                                                                                                              |       | 1,371,387          |       | 240,761               |       |
| Accrued interest  payable                                                                                                                                                                     |       | 5,493              |       | 5,334                 |       |
| Short-term lease  payable                                                                                                                                                                     |       | 14,677             |       | 14,114                |       |
|                                                                                                                                                                                          |       |               |       |                  |       |
| Total current  liabilities                                                                                                                                                                    |       | 1,729,339          |       | 555,025               |       |
|                                                                                                                                                                                          |       |               |       |                  |       |
| Long-term lease payable                                                                                                                                                                       |       | 9,277              |       | 13,166                |       |
| Accrued interest  payable - related party                                                                                                                                                     |       | 819,096            |       | 765,514               |       |
| Grant payable                                                                                                                                                                                 |       | 500,000            |       | 500,000               |       |
| Notes payable - net of  $19,716 debt discount March 31, 2006 & $22,532  December 31, 2005                                                                                  |       | 3,895,284          |       | 3,892,468             |       |
| Notes payable - related  party                                                                                                                                                                |       | 2,000,000          |       | 2,000,000             |       |
|                                                                                                                                                                                          |       |               |       |                  |       |
| Total  liabilities                                                                                                                                                                            |       | 8,952,996          |       | 7,726,173             |       |
|                                                                                                                                                                                          |       |               |       |                  |       |
| STOCKHOLDERS’ EQUITY:                                                                                                                                                                    |       |               |       |                  |       |
| Common stock,  $0.01 par value—March 31, 2006: 60,000,000 shares authorized; 28,226,763  issued and outstanding; December 31, 2005: 17,990,322 shares issued and  outstanding; |       | 282,268            |       | 179,903               |       |
| Series A  preferred stock of Advanced Life Sciences Inc., no par value—250,000 shares  authorized, issued and outstanding                                                           |       | —             |       | —                |       |
| Additional  paid-in capital                                                                                                                                                                   |       | 88,221,460         |       | 54,834,373            |       |
| Deficit  accumulated during the development stage                                                                                                                                             |       | (49,956,972        | )          | (46,718,539           | )          |
|                                                                                                                                                                                          |       |               |       |                  |       |
| Total  stockholders’ equity (deficit)                                                                                                                                                    |       | 38,546,756         |       | 8,295,737             |       |
|                                                                                                                                                                                          |       |               |       |                  |       |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                                               |       | $                  | 47,499,752 |                  | $          | 16,021,910 |   |

 

Seenotes to condensed consolidated financial statements.

2

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**ADVANCED LIFE SCIENCES HOLDINGS, INC.AND SUBSIDIARY(A Development Stage Company)**
| **CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

**(unaudited)** |
|------------------------------------------------------------------------------------------|

 
| ** **                                                             | ** ** | ** **                                           | ** ** | ** **  | ** ** | **Period From**            | ** ** |
|------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-------------|------------|---------------------------------|------------|
| ** **                                                             | ** ** | ** **                                           | ** ** | ** **  | ** ** | **Inception**                   | ** ** |
| ** **                                                             | ** ** | ** **                                           | ** ** | ** **  | ** ** | **(January 1, 1999)** | ** ** |
| ** **                                                             | ** ** | **Three months ended March 31,** | ** ** | **Through** | ** ** |
| ** **                                                             | ** ** | **2006**                                             | ** ** | **2005**    | ** ** | **March 31, 2006**    | ** ** |
| Revenue and  income:                                                   |       |                                                 |       |        |       |                            |       |
| Management fees                                                        |       | $                                                    | —     |        | $          | 32,519                          |       | $ | 1,161,180 |   |
| Grant                                                                  |       | 35,127                                               |       | —      |       | 1,030,910                       |       |
| Royalty—related party                                             |       | —                                               |       | —      |       | 45,238                          |       |
|                                                                   |       |                                                 |       |        |       |                            |       |
| Total revenue and income                                               |       | 35,127                                               |       | 32,519      |       | 2,237,328                       |       |
|                                                                   |       |                                                 |       |        |       |                            |       |
| Expenses:                                                              |       |                                                 |       |        |       |                            |       |
| Research and development                                               |       | 2,260,378                                            |       | 317,790     |       | 34,193,614                      |       |
| Contracted research and development—related party                 |       | —                                               |       | —      |       | 7,980,299                       |       |
| Selling, general and administrative                                    |       | 1,149,170                                            |       | 367,744     |       | 8,784,288                       |       |
|                                                                   |       |                                                 |       |        |       |                            |       |
| Total expenses                                                         |       | 3,409,548                                            |       | 685,534     |       | 50,958,201                      |       |
|                                                                   |       |                                                 |       |        |       |                            |       |
| Loss from  operations                                                  |       | (3,374,421                                           | )          | (653,015    | )          | (48,720,873                     | )          |
|                                                                   |       |                                                 |       |        |       |                            |       |
| Other (income)  expense:                                               |       |                                                 |       |        |       |                            |       |
| Interest Income                                                        |       | (280,858                                             | )          | —      |       | (553,074                        | )          |
| Interest expense                                                       |       | 144,870                                              |       | 95,311      |       | 1,789,173                       |       |
|                                                                   |       |                                                 |       |        |       |                            |       |
| Net other (income)  expense                                            |       | (135,988                                             | )          | 95,311      |       | 1,236,099                       |       |
|                                                                   |       |                                                 |       |        |       |                            |       |
| Net loss                                                               |       | (3,238,433                                           | )          | (748,326    | )          | (49,956,972                     | )          |
|                                                                   |       |                                                 |       |        |       |                            |       |
| Less accumulated  preferred dividends for the period                   |       | 43,750                                               |       | 43,750      |       | 1,188,542                       |       |
|                                                                   |       |                                                 |       |        |       |                            |       |
| Net loss  available to common shareholders                             |       | $                                                    | (3,282,183 | )           | $          | (792,076                        | )          | $ | (51,145,514 | ) |
|                                                                   |       |                                                 |       |        |       |                            |       |
| Basic and  diluted net loss per share available to common shareholders |       | $                                                    | (0.15      | )           | $          | (0.07                           | )          |   |   |
|                                                                   |       |                                                 |       |        |       |                            |       |
| Weighted average  number common shares outstanding- basic and diluted  |       | 21,290,153                                           |       | 10,732,978  |       |                            |       |
|                                                                   |       |                                                 |       |        |       |                            |       |

 

Seenotes to condensed consolidated financial statements.

3

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**ADVANCEDLIFE SCIENCES HOLDINGS, INC. AND SUBSIDIARY(A Development Stage Company)**
| **CONDENSED CONSOLIDATED  STATEMENTS OF STOCKHOLDERS’ EQUITY**              |
|----------------------------------------------------------------------------------|
| **FOR THE PERIOD FROM INCEPTION (JANUARY 1, 1999)  THROUGH MARCH 31, 2006** |
| **(Unaudited)**                                                                  |

 
| ** **                                                                                                                           | ** ** | ** **            | ** ** | ** **               | ** ** | ** **  | ** ** | ** **      | ** ** | ** **     | ** ** | **Deficit**         | ** ** | ** **  | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|--------------------------|------------|-------------|------------|-----------------|------------|----------------|------------|---------------------|------------|-------------|------------|
| ** **                                                                                                                           | ** ** | ** **            | ** ** | ** **               | ** ** | ** **  | ** ** | ** **      | ** ** | ** **     | ** ** | **Accumulated**     | ** ** | ** **  | ** ** |
| ** **                                                                                                                           | ** ** | ** **            | ** ** | ** **               | ** ** | ** **  | ** ** | ** **      | ** ** | **Additional** | ** ** | **During the** | ** ** | ** **  | ** ** |
| ** **                                                                                                                           | ** ** | **Common Stock** | ** ** | **Preferred Stock** | ** ** | **Paid-in** | ** ** | **Development** | ** ** | ** **     | ** ** |
| ** **                                                                                                                           | ** ** | **Shares**            | ** ** | **Amount**               | ** ** | **Shares**  | ** ** | **Amount**      | ** ** | **Capital**    | ** ** | **Stage**           | ** ** | **Total**   | ** ** |
|                                                                                                                                 |       |                  |       |                     |       |        |       |            |       |           |       |                |       |        |       |
| BALANCE—January 1,  1999 (inception)                                                                                       |       | —                |       | $                        | —     |        | —     |            | $          | —         |       | $                   | —     |        | $          | — |   | $ | — |   |
|                                                                                                                                 |       |                  |       |                     |       |        |       |            |       |           |       |                |       |        |       |
| Issuance  of common stock in exchange for contributed intellectual property in  January 1999                                    |       | 1,588,000             |       | —                   |       | —      |       | —          |       | —         |       | —              |       | —      |       |
| Exchange  of shares under recapitalization and spin-off from MediChem Life  Sciences, Inc in June 1999, at historical cost |       | (1,588,000            | )          | —                   |       | 250,000     |       | —          |       | —         |       | —              |       | —      |       |
| Issuance  of common stock in June 1999, at $0.157 per share                                                                     |       | 1,588,000             |       | 250,000                  |       | —      |       | —          |       | —         |       | —              |       | 250,000     |       |
| Compensation  expense related to stock options since inception                                                                       |       | —                |       | —                   |       | —      |       | —          |       | 15,097         |       | —              |       | 15,097      |       |
| Conversion  of loans to stockholder into equity, August 2001                                                                    |       | —                |       | —                   |       | —      |       | —          |       | 5,751,753      |       | —              |       | 5,751,753   |       |
| Capital  contributions                                                                                                               |       | —                |       | —                   |       | —      |       | —          |       | 1,165,118      |       | —              |       | 1,165,118   |       |
| Net  loss since inception                                                                                                            |       | —                |       | —                   |       | —      |       | —          |       | —         |       | (9,274,336          | )          | (9,274,336  | )          |
|                                                                                                                                 |       |                  |       |                     |       |        |       |            |       |           |       |                |       |        |       |
| BALANCE—December 31,  2001                                                                                                 |       | 1,588,000             |       | 250,000                  |       | 250,000     |       | —          |       | 6,931,968      |       | (9,274,336          | )          | (2,092,368  | )          |
|                                                                                                                                 |       |                  |       |                     |       |        |       |            |       |           |       |                |       |        |       |
| Capital  contributions                                                                                                               |       | —                |       | —                   |       | —      |       |            |       | 1,161,000      |       | —              |       | 1,161,000   |       |
| Net  loss                                                                                                                            |       | —                |       | —                   |       | —      |       | —          |       | —         |       | (1,261,551          | )          | (1,261,551  | )          |
|                                                                                                                                 |       |                  |       |                     |       |        |       |            |       |           |       |                |       |        |       |
| BALANCE—December 31,  2002                                                                                                 |       | 1,588,000             |       | 250,000                  |       | 250,000     |       | —          |       | 8,092,968      |       | (10,535,887         | )          | (2,192,919  | )          |
|                                                                                                                                 |       |                  |       |                     |       |        |       |            |       |           |       |                |       |        |       |
| Capital  contributions                                                                                                               |       | —                |       | —                   |       | —      |       | —          |       | 2,337,728      |       | —              |       | 2,337,728   |       |
| Net  loss                                                                                                                            |       | —                |       | —                   |       | —      |       | —          |       | —         |       | (2,551,488          | )          | (2,551,488  | )          |
|                                                                                                                                 |       |                  |       |                     |       |        |       |            |       |           |       |                |       |        |       |
| BALANCE—December 31,  2003                                                                                                 |       | 1,588,000             |       | 250,000                  |       | 250,000     |       | —          |       | 10,430,696     |       | (13,087,375         | )          | (2,406,679  | )          |
|                                                                                                                                 |       |                  |       |                     |       |        |       |            |       |           |       |                |       |        |       |
| Issuance  of common stock at $0.157 per share                                                                                        |       | 41,685                |       | 6,563                    |       | —      |       | —          |       | —         |       | —              |       | 6,563       |       |
| Compensation  expense related to stock options                                                                                       |       | —                |       | —                   |       | —      |       | —          |       | 5,604          |       | —              |       | 5,604       |       |
| Exchange  of shares under recapitalization                                                                                           |       | (1,629,685            | )          | (256,563                 | )          | —      |       | —          |       | —         |       | —              |       | (256,563    | )          |
| Issuance  of shares under recapitalization                                                                                           |       | 9,482,015             |       | 94,820                   |       | —      |       | —          |       | 161,743        |       | —              |       | 256,563     |       |
| Capital  contributions                                                                                                               |       | —                |       | —                   |       | —      |       | —          |       | 2,295,731      |       | —              |       | 2,295,731   |       |
| Issuance  of 14,887 warrants                                                                                                         |       | —                |       | —                   |       | —      |       | —          |       | 11,898         |       | —              |       | 11,898      |       |
| Issuance  of common stock in exchange for licenses                                                                                   |       | 1,122,569             |       | 11,226                   |       | —      |       | —          |       | 8,988,774      |       | —              |       | 9,000,000   |       |
| Net  loss                                                                                                                            |       | —                |       | —                   |       | —      |       | —          |       | —         |       | (27,186,918         | )          | (27,186,918 | )          |
|                                                                                                                                 |       |                  |       |                     |       |        |       |            |       |           |       |                |       |        |       |
| BALANCE—December 31,  2004                                                                                                 |       | 10,604,584            |       | 106,046                  |       | 250,000     |       | —          |       | 21,894,446     |       | (40,274,293         | )          | (18,273,801 | )          |
|                                                                                                                                 |       |                  |       |                     |       |        |       |            |       |           |       |                |       |        |       |
| Issuance  of common stock, net of offering costs                                                                                     |       | 6,721,814             |       | 67,218                   |       | —      |       | —          |       | 29,210,558     |       | —              |       | 29,277,776  |       |
| Issuance  of stock related to option exercises                                                                                       |       | 63,924                |       | 639                      |       | —      |       | —          |       | 14,240         |       | —              |       | 14,879      |       |
| Compensation  expense related to stock options                                                                                       |       | —                |       | —                   |       | —      |       | —          |       | 696,204        |       | —              |       | 696,204     |       |
| Issuance  of common stock in exchange for reduction of milestones payable                                                            |       | 600,000               |       | 6,000                    |       | —      |       | —          |       | 3,000,000      |       | —              |       | 3,006,000   |       |
| Modification  of 14,887 warrants                                                                                                     |       | —                |       | —                   |       | —      |       | —          |       | 18,925         |       | —              |       | 18,925      |       |
|                                                                                                                                 |       |                  |       |                     |       |        |       |            |       |           |       |                |       |        |       |
| Net  loss                                                                                                                            |       | —                |       | —                   |       | —      |       | —          |       | —         |       | (6,444,246          | )          | (6,444,246  | )          |
|                                                                                                                                 |       |                  |       |                     |       |        |       |            |       |           |       |                |       |        |       |
| BALANCE—December 31,  2005                                                                                                 |       | 17,990,322            |       | 179,903                  |       | 250,000     |       | —          |       | 54,834,373     |       | (46,718,539         | )          | 8,295,737   |       |
|                                                                                                                                 |       |                  |       |                     |       |        |       |            |       |           |       |                |       |        |       |
| Issuance  of common stock, net of offering costs                                                                                     |       | 10,233,464            |       | 102,335                  |       | —      |       | —          |       | 33,340,827     |       | —              |       | 33,443,162  |       |
| Issuance  of stock related to option exercises                                                                                       |       | 2,977                 |       | 30                       |       | —      |       | —          |       | 437            |       | —              |       | 467         |       |
| Compensation  expense related to stock options                                                                                       |       | —                |       | —                   |       | —      |       | —          |       | 45,823         |       | —              |       | 45,823      |       |
|                                                                                                                                 |       |                  |       |                     |       |        |       |            |       |           |       |                |       |        |       |
| Net  loss                                                                                                                            |       | —                |       | —                   |       | —      |       | —          |       | —         |       | (3,238,433          | )          | (3,238,433  | )          |
|                                                                                                                                 |       |                  |       |                     |       |        |       |            |       |           |       |                |       |        |       |
| BALANCE—March 31, 2006                                                                                                     |       | 28,226,763            |       | $                        | 282,268    |        | 250,000    |            | $          | —         |       | $                   | 88,221,460 |        | $          | (49,956,972 | ) | $ | 38,546,756 |   |

 

See notes to condensed consolidated financial statements.

4

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**ADVANCEDLIFE SCIENCES HOLDINGS, INC. AND SUBSIDIARY(A Development Stage Company)**
| **CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS** |
|------------------------------------------------------------------------------|
| **(unaudited)**                                                              |

 
| ** **                                                                          | ** ** | ** **                       | ** ** | ** **                      | ** ** | **Period From**         | ** ** |
|-------------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|------------------------------|------------|
| ** **                                                                          | ** ** | ** **                       | ** ** | ** **                      | ** ** | **Inception**                | ** ** |
| ** **                                                                          | ** ** | **Three months ended** | ** ** | **(January 1, 1999)** | ** ** |
| ** **                                                                          | ** ** | **March 31,**               | ** ** | **Through**                     | ** ** |
| ** **                                                                          | ** ** | **2006**                         | ** ** | **2005**                        | ** ** | **March 31, 2006** | ** ** |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                              |       |                             |       |                            |       |                         |       |
| Net loss                                                                            |       | $                                | (3,238,433 | )                               | $          | (748,326                     | )          | $ | (49,956,972 | ) |
| Adjustments to  reconcile net loss to net cash flows  used in operating activities: |       |                             |       |                            |       |                         |       |
| Depreciation and  amortization                                                      |       | 22,951                           |       | 18,183                          |       | 307,856                      |       |
| Non-cash  interest expense                                                          |       | 9,442                            |       | 3,360                           |       | 34,729                       |       |
| Stock  compensation expense                                                         |       | 45,823                           |       | 14,904                          |       | 762,728                      |       |
| Non-cash  research and development                                                  |       | —                           |       | —                          |       | 24,466,667                   |       |
| Settlement of  milestone payment                                                    |       | —                           |       | —                          |       | 6,000                        |       |
| Loss on disposal                                                                    |       | —                           |       | —                          |       | 11,533                       |       |
| Changes in  operating assets and liabilities:                                       |       |                             |       |                            |       |                         |       |
| Clinical  supplies                                                                  |       | —                           |       | —                          |       | 533,333                      |       |
| Accounts  receivable                                                                |       | 1,106                            |       | 24,868                          |       | (5,054                       | )          |
| Prepaid expenses                                                                    |       | (1,831,779                       | )          | (294,081                        | )          | (2,312,283                   | )          |
| Other assets                                                                        |       | (472                             | )          | (1,110                          | )          | (6,534                       | )          |
| Accounts payable                                                                    |       | 51,505                           |       | 134,415                         |       | 317,078                      |       |
| Accrued expenses                                                                    |       | 983,783                          |       | 209,281                         |       | 1,224,544                    |       |
| Licenses payable                                                                    |       | —                           |       | —                          |       | (11,000,000                  | )          |
| Accrued interest  on debt                                                           |       | 53,741                           |       | 47,184                          |       | 1,402,652                    |       |
|                                                                                |       |                             |       |                            |       |                         |       |
| Net cash flows  used in operating activities                                        |       | (3,902,333                       | )          | (591,322                        | )          | (34,213,723                  | )          |
|                                                                                |       |                             |       |                            |       |                         |       |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                              |       |                             |       |                            |       |                         |       |
| Capital  expenditures                                                               |       | (16,614                          | )          | (4,163                          | )          | (400,499                     | )          |
| Proceeds from  the sales of securities                                              |       | 8,132,158                        |       | —                          |       | 24,882,158                   |       |
| Purchase of  securities                                                             |       | (4,332,158                       | )          | —                          |       | (31,557,158                  | )          |
|                                                                                |       |                             |       |                            |       |                         |       |
| Net cash flows  (used in) provided by investing activities                          |       | 3,783,386                        |       | (4,163                          | )          | (7,075,499                   | )          |
|                                                                                |       |                             |       |                            |       |                         |       |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                              |       |                             |       |                            |       |                         |       |
| Proceeds from  issuance of common stock and capital contributions                   |       | 33,590,005                       |       | 563,660                         |       | 70,077,356                   |       |
| Proceeds from  issuance of notes payable                                            |       | —                           |       | —                          |       | 9,018,691                    |       |
| Proceeds from  grants                                                               |       | —                           |       | —                          |       | 500,000                      |       |
| Proceeds from  stock options exercised                                              |       | 467                              |       | 63                              |       | 21,909                       |       |
| Payments on  capital leases                                                         |       | (3,326                           | )          | (2,842                          | )          | (110,603                     | )          |
|                                                                                |       |                             |       |                            |       |                         |       |
| Net cash flows  provided by financing activities                                    |       | 33,587,146                       |       | 560,881                         |       | 79,507,353                   |       |
|                                                                                |       |                             |       |                            |       |                         |       |
| NET INCREASE IN CASH                                                                |       | 33,468,199                       |       | (34,604                         | )          | 38,218,131                   |       |
|                                                                                |       |                             |       |                            |       |                         |       |
| CASH—Beginning of  period                                                      |       | 4,749,932                        |       | 194,555                         |       | —                       |       |
|                                                                                |       |                             |       |                            |       |                         |       |
| CASH—End of period                                                             |       | $                                | 38,218,131 |                            | $          | 159,951                      |       | $ | 38,218,131 |   |
|                                                                                |       |                             |       |                            |       |                         |       |
| SUPPLEMENTAL DISCLOSURE  OF CASH FLOW INFORMATION:                                  |       |                             |       |                            |       |                         |       |
| Cash paid during  the period for interest                                           |       | $                                | 81,802     |                            | $          | 44,263                       |       | $ | 345,374 |   |
|                                                                                |       |                             |       |                            |       |                         |       |
| SUPPLEMENTAL DISCLOSURE  OF NONCASH TRANSACTIONS:                                   |       |                             |       |                            |       |                         |       |
| Noncash  investment activity—purchases of fixed assets under capital leases    |       | $                                | —     |                            | $          | 41,438                       |       | $ | 134,556 |   |
| Capital expenses  included in accounts payable                                      |       | 20,704                           |       | —                          |       | 20,704                       |       |
| Noncash  financing activity—issuance of common stock for licenses              |       | —                           |       | 9,000,000                       |       | 9,000,000                    |       |
| Issuance of  common shares for reduction of milestone payment                       |       | —                           |       |                            |       | 3,000,000                    |       |
| Clinical supplies                                                                   |       | —                           |       | 750,000                         |       | —                       |       |
| Cost of proceeds                                                                    |       | 146,843                          |       | —                          |       | 146,843                      |       |
| Debt discount                                                                       |       | —                           |       | —                          |       | 30,823                       |       |
| Deferred financing  costs                                                           |       | $                                | —     |                            | $          | —                       |       | $ | 30,000 |   |

 

See notes to condensedconsolidated financial statements.

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**ADVANCED LIFE SCIENCES HOLDINGS, INC****( A DEVELOPMENT STAGE COMPANY)****NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

**1. Summary of Significant Accounting Policies**

      ***Nature of Business***—Advanced Life Sciences Holdings, Inc.(the “Company”) conducts new drug research and development in the fields ofinfectious disease, oncology and inflammation. Since inception, the Company hasdevoted substantially all of its efforts to activities such as financialplanning, capital raising and product development, and has not derivedsignificant revenues from its primary business activity. Accordingly, theCompany is in the development stage, as defined by Statement of FinancialAccounting Standards (“SFAS”) No. 7, *Accounting and Reportingby Development Stage Enterprises*.

      ***Basis of Presentation***—The accompanying unaudited condensedconsolidated financial statements of the Company and subsidiary have beenprepared in accordance with accounting principles generally accepted in theUnited States of America and with the instructions to Form 10-Q and Article 10of Regulation S-X. Accordingly, they do not include all of the informationand footnotes required by accounting principles generally accepted in theUnited States of America for complete financial statements.  However, in the opinion of management, alladjustments, consisting only of normal recurring adjustments, unless otherwisenoted herein, necessary to present fairly the results of operations, financialposition and cash flows have been made. Therefore, these condensed consolidatedfinancial statements should be read in conjunction with the Company’s mostrecent audited financial statements and notes thereto. The condensedconsolidated financial statements include the accounts of the Company and itswholly-owned subsidiary Advanced Life Sciences, Inc. (“ALS Inc.”)  All significant intercompany balances andtransactions have been eliminated. Theresults of operations for any interim period are not necessarily indicative ofthe results of operations expected for the full year.

      ***Cash and Cash Equivalents***—TheCompany considers all highly liquid investments with original maturities ofthree months or less when purchased to be cash equivalents.

      ***Investments***—The Company has marketable debtsecurities which are classified as available-for-sale, the fair value of whichis determined using currently available market prices. The Company reviews thecarrying value of investments each quarter to determine whether an other thantemporary decline in market value exists. If such a decline is deemed to haveoccurred, the investment is written-down with a charge to other (income)expense, net.  Available-for-salesecurities are carried at fair value, with the unrealized gains and losses, netof tax, reported as a component of stockholders’ equity in accumulated othercomprehensive loss.  Marketablesecurities available for current operations are classified in the balance sheetas current assets; marketable securities held for long-term purposes areclassified as noncurrent assets. Interest income and realized gains and losseson securities are included in “Interest income” in the statements of operations.At March 31, 2006, the Company’s investments consist of auction rate debtsecurities. As of March 31, 2006 no unrealized holding gains or losseswere recognized in the statements of operations and stockholders equity.

      ***Revenue and Income Recognition***—SmallBusiness Innovation Research grant revenue is recorded as expenses are incurredand services performed in accordance with the terms of the grant agreements. Royaltyrevenue is earned from a license of the Company’s chemical process technology. Underthe license, revenue is earned based upon a percentage of reported net salesfrom a subsidiary of deCODE Genetics, Inc. (“deCODE”), for services thatincorporate the licensed technology (see Note 4). Revenue earned through ourmanagement agreement with Flavin Ventures is recorded as expenses are incurredand services performed. Management fees, which are generated from a sharedservices agreement with Sarawak MediChem Pharmaceuticals, Inc. (“SMP”),are recognized on the cash basis as the collectibility of such fees is notreasonably assured.

      ***Research and Development Expenses***—Researchand development expenses consist of internal research costs and fees paid forcontract research in conjunction with the research and development of theCompany’s proprietary product portfolio. All such costs are expensed. Clinicaltrial costs incurred by third parties are expensed as the contracted work isperformed. The Company estimates both the total cost and time period of thetrials and the percent completed as of that accounting date. Research anddevelopment expenses resulting from contracts that require payments based uponthe progress towards completion of certain milestones are estimated based uponthe percentage of completion method. The Company believes that the estimatesmade as of March 31, 2006 are reflective of the actual expenses incurredas of that date.

The company recognizes in-processresearch and development in accordance with FASB Interpretation No. 4, *Applicability of FASB Statement No. 2 toBusiness Combinations Accounted for by the Purchase Method*and the**AICPATechnical Practice Aid, *Assets Acquired in aBusiness Combination to be used in Research and Development Activities:  A Focus on Software, Electronic Devices, andPharmaceutical  Industries.*Assets to be used in research and developmentactivities, specifically, compounds that have yet to receive new drug approvalfrom the FDA and would have no alternative use should approval not 

6

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be given, are immediately chargedto expense when acquired.

      ***Stock-Based Compensation***—In December 2004,the FASB issued Statement of FinancialAccounting Standards (“SFAS”) No. 123(R) *Accounting for Stock-Based Compensation*that will require compensation cost relatedto share-based payment transactions to be recognized in the financialstatements. Compensation cost will be measured based on the grant-date fairvalue of the equity or liability instruments issued. Compensation expense willbe recognized over the period that an employee provides service in exchange forthe award.

Effective January 2004, the Company adopted the fair value method ascontained in SFAS No. 123, *Accounting for Stock-BasedCompensation*. Effective December 2004, the Company adopted SFASNo. 123(R)*.*As prescribed in SFAS No. 123(R) the Company elected touse the ‘‘prospective method.’’ The prospective method requires expense to be recognized for all awards granted,modified or settled in the year of adoption. Historically, the Company appliedthe intrinsic method as provided in Accounting Principles Board Opinion No. 25,*Accounting for Stock Issued to Employees,*and related interpretations and accordingly, no compensation cost had beenrecognized for stock options issued to employees in prior years. As a result ofadopting the fair value method for stock compensation, all future awards willbe expensed over the stock options vesting period. The Company utilized theBlack-Scholes option pricing model to estimate the fair value of options.

***Variable Interest Entities***—The Company**determines consolidation ofvariable interest entities in accordance with FASB Interpretation 46(R),*Consolidationof Variable Interest Entities*. Our50/50 joint venture, Sarawak MediChem Pharmaceuticals,has notbeen included in our consolidated financial statements because the majority ofits financial support in the form ofcontributed capital and debt has been funded by our joint venture partner.

      ***Use of Estimates***—Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements. Estimates also affect the reported amounts ofrevenues and expenses during the reporting period. Actual results could differfrom those estimates.

**2. Private Placement**

      InMarch 2006, the Company completed the private placement of 10,233,464shares of its common stock to a group of institutional investors at $3.53 pershare, resulting in gross proceeds of $36.1 million. In addition to the sharessold, the Company issued warrants to purchase 5,116,732 shares of its commonstock at a price of $3.81 per share. The warrants became exercisable uponissuance and will expire five years from the date of grant. The warrantscontain the right, at the discretion of the purchaser, to convert into commonstock through a net exercise provision. The Company has recorded the issuanceof the warrants as a permanent component of equity. In connection with theoffering, the Company paid approximately $2.5 million in underwriting discountsand incurred other offering expenses of approximately $152,000, of which $5,000was paid through March 31, 2006. The net cash proceeds from the offeringwere approximately $33.6 million as of March 31, 2006.

**3. Joint Venture**

      SMP is a joint venture between the State Government ofSarawak, Malaysia (“Sarawak Government”) and the Company. Sarawak, throughCraun Sdn Bhd, and ALS Inc. each maintain a 50% share in SMP.

Under the jointventure agreement (the “Agreement”), Sarawak Government has contributed $9.0million to SMP through stock subscription payments based on the attainment ofcertain milestone achievements outlined in the Agreement. The Company hascontributed certain intellectual property and has committed to make scientistsavailable to undertake the research and clinical trials, to train scientistsnominated by the Sarawak Government and to permit such scientists toparticipate in the clinical trials, manufacture, marketing and distribution ofany commercial product resulting from the research and development effort. Additionally,the Sarawak Government has provided long-term loans to SMP of $12.0 millionthrough March 31, 2006. The Sarawak Government also provided approximately$22,000 in short-term loans during 2005 that was used for patent protection andclinical trial insurance expenses. Accrued interest on all such loans wasapproximately $6.3 million and $5.0 million as of March 31, 2006 and 2005,respectively.

The Companyaccounts for its investment in SMP under the modified equity method ofaccounting, which provides that the Company record its proportional share ofearnings once the accumulated deficit incurred by SMP has been recovered. Accordingly,as of March 31, 2006 and 2005, the Company’s investment in SMP had acarrying value of zero.

According to theterms of the loan agreement with the Sarawak Government, $12.0 million ofSMP’s debt is past due. As a result of this default in payment by SMP, theSarawak Government has the option under the loan agreement to take over thecontrol and management of the Calanolide A project or the affairs of thejoint venture until such time as the loan is repaid in full. To date, theSarawak Government has not pursued collection of this debt or sought to controlor manage the Calanolide A project.  In July 2005,

7

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the Sarawak Governmentexercised certain of its contractual rights by notifying SMP of its intentionto appoint its representative as an officer of SMP for purposes of assumingcontrol of the affairs and management of SMP. In December 2005, theSarawak Government nominated and the Board of Directors of SMP approved theappointment of Mr. Jumastapha bin Lamat as the controlling officer of SMP.Since that time the Company has been transitioning access to the joint venture’saccounting, financial and corporate records to representatives of Mr. Lamat.The Sarawak Government expressly reserved all contractual and legal remediesavailable in light of the default and indicated its intent to fully exerciseits rights as a creditor of the joint venture. Ultimately, the Company believesthat in order for the joint venture to continue, the terms of the debt must beamended to extend its maturity to a date after commercialization ofCalanolide A.

The Companypreviously commenced discussions with the Sarawak Government to restructure andextend the $12.0 million debt and determine the source of financing forPhase IIa clinical trials of Calanolide A. The Company does notintend to expend any meaningful funds advancing the development ofCalanolide A unless and until the joint venture’s debt is restructured andthe Company reaches a satisfactory agreement with the Sarawak Government toamend the joint venture relationship and establish the parties’ respectiveobligations regarding the future funding of the next phase of developingCalanolide A. As a result, the Company is unable to predict when, or if atall, the Company will proceed with its plans to commence Phase IIaclinical trials for Calanolide A.

If the Company isable to restructure its joint venture relationship and determine to proceedwith the Phase IIa clinical trial for Calanolide A, upon completion of thistrial the Company will evaluate its strategic alternatives for the jointventure relationship and the future advancement of Calanolide A. The Companymay determine to continue the program through its joint venture, independentlyor under a new joint venture arrangement. It is also possible that the Companywill elect to transfer its rights in the compound to its current joint venturepartner or an independent third party. Factors that the Company will considerin making this decision include the success of the Phase IIa clinical trial,the relative financial obligations of the Company and its joint venture partnerand the Company’s capabilities at such time to continue developmentindependently.

The term of thejoint venture agreement continues indefinitely unless terminated by the writtenagreement of both parties not to proceed further with the development ofCalanolide A. In the event only one of the parties wishes to discontinuedevelopment of Calanolide A, the other party has the right, but not theobligation, to purchase the discontinuing party’s equity interest in the jointventure for $9.0 million. If the other party does not choose to exerciseits purchase right within six months of receiving written notice from thediscontinuing party, then the joint venture is deemed mutually terminated. Uponsuch mutual termination, the joint venture agreement provides that any liabilitiesof the joint venture will be settled by the parties equally and all patents orlicenses of the joint venture shall be reassigned back to the Company,including rights to clinical trials. The Company believes that the equalsettlement of liabilities provision in the joint venture agreement was intendedto recognize the 50/50 equity ownership of the joint venture and does notconstitute the Company’s guaranty of the joint venture’s indebtedness to theSarawak Government. Consequently, if the joint venture is mutually terminated,the joint venture partners would work together to monetize the joint venture’sassets for the purpose of satisfying its liabilities, which currently aresolely comprised of indebtedness to a 50% partner, the Sarawak Government. Inthe event the joint venture’s assets are insufficient to settle itsliabilities, the Company does not believe that the equal settlement ofliabilities provision obligates it to contribute funds to the joint venture.

**4. Related Party Transactions**

      In2001, the Company initiated a management services agreement with SMP wherebythe Company provides administrative management services to SMP. In return, theCompany charges SMP a flat monthly service fee. During 2003, management deemedthat the collectibility of the monthly management fee was not reasonablyassured. Consequently, management concluded that fee revenue will be recognizedon a cash basis.  There were nomanagement fees recognized as revenue under this agreement for the three monthsended March 31, 2006 and 2005. On a cumulative basis, billed andunrecognized fees as of March 31, 2006 and 2005 totaled approximately$615,000 and $549,000, respectively.

      TheCompany’s Chief Executive Officer, Michael T. Flavin, has loaned to the Company$2.0 million (see Note 5).

      TheCompany’s line of credit has been guaranteed by Flavin Ventures, the Company’sChief Executive Officer and his wife and the Company’s President (seeNotes 5 and 8).

      TheCompany leases facilities from the BioStart Property Group (“BioStart”), awholly-owned subsidiary of Flavin Ventures. Lease costs were approximately$64,000 and $62,000 for the three months ended March 31, 2006 and 2005,respectively.

      TheSeries A preferred stock of the Company’s wholly-owned subsidiary, ALS, Inc.,is held by deCODE as a result of ALS Inc.’s spin-off from MediChem LifeSciences in January 1999, and MediChem’s subsequent acquisition by deCODEin March 2002. deCODE provides analytical services to the Company on an asneeded basis. Analytical related charges totaled approximately $200 and $1,500for the three months ended March 31, 2006 and 2005, respectively.

8

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**5. Long Term Obligations**

      In September 2001, the Company entered into a$2.0 million promissory note with the Chief Executive Officer of the Companywhich bears interest at 7.75%. Accrued but unpaid interest is added to theoutstanding principal annually. Principal plus accrued interest is due in alump sum on December 31, 2007. As of March 31, 2006 and 2005, theCompany had approximately $2.8 million and $2.6 million, respectively,outstanding under the note.

The Company has a$4.0 million line of credit with a local financial institution. As of March 31,2006, $3.0 million of the line of credit accrued interest based on theprime rate plus 0.75%, and $915,000 million accrued interest based on the primerate plus 1%. Interest under the line is payable monthly, and matures on December 31,2007. The line of credit is secured by the assets of the Company, approximately1.8 million shares of stock held by Flavin Ventures and is guaranteed by FlavinVentures, Dr. Michael Flavin and his wife, and John L. Flavin. The Companyand the financial institution restructured the line of credit in April 2006(see Note 8).

      Inconnection with the line of credit, the financial institution received awarrant entitling it to purchase 14,887 shares of the Company’s common stock atan exercise price of $5.00 per share, subject to certain adjustments.  The warrant is immediately exercisable andwill terminate, if not exercised, on December 21, 2009. At the time ofissue the warrant was valued, using the Black-Scholes option pricing model, atapproximately $11,900. The amount was recorded as a discount to the relateddebt and is being amortized to interest expense over the term of the debt. As aresult of a decrease in exercise price under the terms of the warrant inconnection with the Company’s initial public offering, the warrant was revaluedat approximately $27,000. The difference between the carrying value and fairvalue was recorded as a discount to long-term obligations and is beingamortized to interest expense over the remaining term of the line of credit.

**6. Stock Option Grants**

In March 2006,the Company granted stock options to purchase up to 233,500 shares of commonstock to certain employees and scientific advisory board members. The exerciseprice of the options is the fair market price of the Company’s stock on thedate of grant.  As a result, the Companyrecognized compensation expense totaling approximately $46,000 and $15,000 forthe three months ended March 31, 2006 and 2005, respectively, inaccordance with SFAS No. 123 (R), *Sharebased Payment*.

**7. Earnings Per Share**

Basicearnings per share are computed by dividing net income by the number ofweighted average common shares outstanding during the reporting period. Dilutedearnings per share are calculated to give effect to all potentially dilutivecommon shares that were outstanding during the reporting period. Thecomputation of weighted average common shares outstanding for the three monthsended March 31, 2005 gives effect to a 3.97-for-one stock splitauthorized by the Board in June 2005. The computation of diluted sharesoutstanding for the periods ended March 31, 2006 and 2005 excludesincremental shares of 6,297,976 and 701,729, related to employee stock optionsand warrants. These shares are excluded due to their anti-dilutive effect as aresult of the Company’s losses for the periods ended March 31, 2006 and2005.

**8. Subsequent Events**

In April 2006, the Company restructured its$4.0 million line of credit (see Note 5). The new line of credit provides for afixed interest rate of 6.75% per annum and a maturity date of January 1,2008. The line of credit is secured by substantially all of the Company’sassets, except that the collateral specifically excludes any rights that theCompany may have a result of its license agreement with Abbott Laboratories forcethromycin, and approximately 2.5 million shares of the Company’s common stockheld by ALS Ventures, LLC. In connection with the restructuring of the line ofcredit, the bank also released guarantees of Flavin Ventures, LLC, Dr. MichaelFlavin and his wife, and John L. Flavin.

In April 2006,the Company amended its lease agreement with BioStart (see Note 4). Under theterms of the amendment, the Company may reduce its required rental payments toBioStart to offset for any shared expenses between the Company and othertenants in the building.

In May 2006,the Company’s Board of Directors authorized the payment of accumulated intereston the loan with our Chief Executive Officer, totaling approximately $800,000(see Notes 4 and 5). The Board also authorized the making of currentmonthly payments of accrued interest until the loan matures on December 31,2007.

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**Item 2.* Management’s Discussion and Analysis ofFinancial Condition and Results of Operations***

*Youshould read the following discussion of our financial condition and results ofoperations in conjunction with our condensed consolidated financial statementsand the related notes included elsewhere in this quarterly report. Thisdiscussion contains forward-looking statements that involve risks anduncertainties. Our actual results may differ materially from those anticipated inthese forward-looking statements.*

**Overview**

Weare a biopharmaceutical company focused on the discovery, development andcommercialization of novel drugs in the areas of infectious disease, oncologyand inflammation. Using our internal discovery capabilities and our network ofpharmaceutical and academic partners, we have assembled a promising pipeline ofclinical and preclinical product candidates. Our most advanced productcandidate, cethromycin, is a novel ketolide antibiotic in Phase III clinical developmentfor the treatment of respiratory tract infections. We also have productcandidates in earlier stages of development for the treatment of indicationsincluding HIV, inflammation-related tissue damage and malignant melanoma.

Noneof our product candidates have been approved by the FDA or any comparableforeign agencies, and we have not generated any significant revenues to date.Our ability to generate revenues in the future will depend on our ability tomeet development or regulatory milestones under any license agreements thattrigger payments to us, to enter into new license agreements for other productsor territories and to receive regulatory approvals for, and successfullycommercialize, our product candidates either directly or through commercialpartners.

Sinceour inception we have incurred net losses each year. Our net losses for thethree months ended March 31, 2006 and 2005 were $3.3 million and $800,000,respectively. As of March 31, 2006, we had an accumulated deficit of$50.0 million. Our operations to date have been funded principally throughproceeds from our initial public offering in August 2005 (“the IPO”), ourprivate placement in March 2006 (“private placement”), debt and capitalcontributions made by our Chief Executive Officer and borrowings under our bankline of credit.

Weexpect to significantly increase the rate of our research and developmentexpenditures as we accelerate our development of cethromycin. Accordingly, ourtotal expenses and net losses will similarly increase. If the clinical testingfor our product candidates is delayed, we could incur increased developmentcosts and a delay in our ability to generate revenues.

In December 2005,we initiated Phase III clinical trials for cethromycin. Our Phase III trialscompare cethromycin with standard of care therapies for community acquiredpneumonia in the United States, Canada, Europe, Central and South America,South Africa, Australia and New Zealand. The objective is to establishstatistical non-inferiority against comparators.  The trials are designed to demonstrate aclinical cure rate non-inferiority endpoint using a 95% confidence interval. Weexpect to have preliminary data from these trials in the fourth quarter of2006.

Ifcethromycin is approved for marketing by the FDA, we plan to sell cethromycinusing a commercial partner 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.

**Results of Operations**

*Three months ended March 31, 2006 compared tothree months ended March 31, 2005*

*Revenue and income.  *Totalrevenue and income increased by approximately $3,000 to $35,000 for the threemonths ended March 31, 2006 compared to the three months ended March 31,2005. Revenue derived from our management agreement with Flavin Ventureswherein we provided management and administrative services to a series ofcompanies jointly owned by Flavin Ventures decreased to $0 for the three monthsended March 31, 2006 compared to approximately $33,000 for the threemonths ended March 31, 2005. We were notified by Flavin Ventures in December of2005 that the management services provided would no longer be needed.

Revenuederived from Small Business Innovative Research (“SBIR”) grants was approximately $35,000 compared to $0 for the threemonths ended March 31, 2006 and 2005, respectively, resulting from thecompletion of a phase I grant awarded during the third quarter of 2005. Althoughwe regularly submit grants to the National Institutes for Health, no additionalawards have been made to date and we do not expect to recognize additionalrevenue for the remainder of 2006.

*Research and development expense.  *Totalresearch and development expense increased approximately $1.9 million to $2.3million for the three months ended March 31, 2006 compared toapproximately $318,000 for the three months ended March 31, 2005. 

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The increase isattributable to our cethromycin development program. Our development strategyto date has been focused on ensuring the availability of clinical supplies ofcethromycin and its comparator as well as the initiation of the clinical sites.The sites initiated to date are in the United States and Canada. In the secondquarter of 2006 we will work to initiate clinical sites in South Africa andSouth America, coinciding with the beginning of the community acquiredpneumonia season in both locations. Throughout 2006, as our clinical trialsprogress, we expect research and development expenditures to increasesubstantially. The largest component of our development expense is the cost toconduct our clinical trials. Since our clinical trial contracts are largelymilestone based, dependent on clinical site initiation and patient enrollment,research and development expense will vary based upon the progress of thetrials.

*General and administrative expense.*   Generaland administrative expense increased approximately $781,000 to $1.1 million forthe three months ended March 31, 2006 compared to approximately $368,000for the three months ended March 31, 2005. Approximately one-half or$379,000 of this increase is attributable to expenses incurred as a result ofoperating as a public company. The remainder, approximately $402,000, primarilyrepresents increased compensation and related expenses for our seniormanagement staff as well as potential bonuses that can be earned if certaindevelopment objectives are obtained by the end of the year. These programs wereinitiated by our board during the first quarter of 2006 to adjust compensationto current market levels and provide incentives for key personnel to achievecethromycin development goals.

*Interest income.  *Interestincome increased approximately $281,000 for the three months ended March 31,2006 from $0 for the three months ended March 31, 2005. Interest income isderived through the investment of our IPO and private placement proceeds inmarketable debt securities and money market funds.

*Interest expense.  *Interestexpense increased approximately $50,000 to $145,000 for the three months ended March 31,2006 from $95,000 for the three months ended March 31, 2005. Interestexpense increased due to a 2.0% increase in the prime rate between March 31,2005 and 2006 as well as incremental borrowings on our line of credit totaling$915,000 for the same period.

**Liquidity and Capital Resources**

Wehave devoted substantially all of our cash resources to research anddevelopment and general and administrative expenses. To date, we have notgenerated any revenues from the sale of products, and we do not expect togenerate any such revenues for a number of years, if at all. As a result, wehave incurred an accumulated deficit of $50.0 million and$46.7 million as of March 31, 2006 and December 31, 2005,respectively, and we expect to incur significant and increasing operatinglosses for the foreseeable future. Our working capital as of March 31,2006 amounted to $45.5 million. Cash, cash equivalents and investments was$44.9 million as of March 31, 2006. Since our inception in 1999 to August 2005,we financed our operations primarily through debt and capital contributionsfrom our founder and controlling stockholder and borrowings under our bank lineof credit. In August 2005 we completed our initial public offering inwhich we raised $28.7 million, net of underwriters discount and offering costs.In March 2006 we completed a private placement in which we raised $33.6million, net of underwriters discount and offering costs.

In September 2001,our Chief Executive Officer made a $2.0 million loan to us. The loanaccrues interest at the rate of 7.75%, compounded annually, and is due andpayable on December 31, 2007.  Thebalance of the loan and accrued interest was approximately $2.8 million as of March 31,2006. In May 2006 our board authorized us to pay the accumulated intereston the loan with our Chief Executive Officer, totaling approximately $800,000.The Board also authorized the making of current monthly payments of accruedinterest until the loan matures on December 31, 2007, which totalsapproximately $39,000 on a quarterly basis.

Wehave a $4.0 million line of credit with a local financial institution. As of March 31,2006, the line of credit had an outstanding balance of $3.9 million. Interestis payable monthly, and matures on December 31, 2007. In April 2006, the Company restructured its$4.0 million line of credit (see Note 5). The new line of credit provides for afixed interest rate of 6.75% per annum and a maturity date of January 1,2008. The line of credit is secured by substantially all of the Company’sassets, except that the collateral specifically excludes any rights that theCompany may have a result of its license agreement with Abbott Laboratories forcethromycin, and approximately 2.5 million shares of the Company’s common stockheld by ALS Ventures, LLC. 

Duringthe three months ended March 31, 2006, cash used in operating activitiestotaled $3.9 million. Approximately $3.3 million was used for thedevelopment of cethromycin, $22,000 for research activities related to ourproprietary portfolio of compounds, net of $35,000 received from SBIR grantfunding and approximately $800,000 for general operations which was offset by$200,000 of net interest income. Cash provided by investing activities totaled$3.8 million during the three months ended March 31, 2006 and related toinvestments sold that had reached maturity and were not immediately reinvested.Cash provided from financing activities totaled approximately$33.6 million during the three months ended March 31, 2006 related tothe sale of our common stock through the completion of our private placement.

*Contractual Obligations*

Asof  March 31, 2006, the annualamounts of future minimum payments under debt obligations, interest, leaseobligations and other long term liabilities consisting of research, developmentand license agreements including the potential product based milestones whichcould be due to Abbott, are as follows:

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| ** **                     | ** ** | **Payments Due by December 31,** | ** ** |
|--------------------------------|------------|------------------------------------------------------|------------|
| ** **                     | ** ** | **2006**                                             | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
| Long-term debt                 |       | $                                                    | —     |   | $ | 5,915,000 |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | 5,915,000 |   |
| Interest                       |       | 249,581                                              |       | 1,543,554 |   | — |   | — |   | — |   | — |   | 1,793,135 |   |
| Abbott license  payments       |       | —                                               |       | 10,000,000 |   | 30,000,000 |   | — |   | — |   | — |   | 40,000,000 |   |
| Cethromycin  development costs |       | 14,000,000                                           |       | 4,072,000 |   | 8,000 |   | — |   | — |   | — |   | 18,080,000 |   |
| Operating leases               |       | 170,062                                              |       | 234,789 |   | 160,645 |   | — |   | — |   | — |   | 565,496 |   |
| Capital leases                 |       | 13,066                                               |       | 14,110 |   | — |   | — |   | — |   | — |   | 27,176 |   |
| Total                          |       | $                                                    | 14,432,709 |   | $ | 21,779,453 |   | $ | 30,168,645 |   | $ | — |   | $ | — |   | $ | — |   | $ | 66,380,807 |   |

 

Inthe first quarter of 2006 we executed contracts totaling approximately $20.5million related to our clinical development of cethromycin. Of this amount,approximately $19.0 million represents the costs we will incur to complete thePhase III pivotal clinical trials. The remainder, approximately $1.5 million,relates to cardiac safety studies, clinical laboratory support for the trials,and the manufacture and analysis of clinical supplies for the trials. Paymentsdue under these contracts occur primarily over the next twelve months. Themajority of these payments are milestone based and the periods in whichmilestone obligations become payable are only estimates due to uncertainties inpatient enrollment.

Wewill owe Abbott $10.0 million if we submit an NDA for cethromycin and $30.0million if and when the FDA approves the NDA, which we estimate will occur in2007 and 2008, respectively. Thereafter, we would owe Abbott an additional $2.5million upon reaching $200 million in aggregate net sales of cethromycin and$5.0 million upon reaching $400 million in aggregate net sales. The periods inwhich milestone obligations become payable are only estimates due touncertainties in the regulatory approval process.

Ourlong-term commitments under operating leases shown above consist of paymentsrelating to our facility lease in Woodridge, Illinois, which expires in September of2008.

**CriticalAccounting Policies and Estimates**

Ourdiscussion and analysis of our financial condition and results of operationsare based on our financial statements, which have been prepared in accordancewith accounting principles generally accepted in the United States. Thepreparation of these financial statements requires us to make estimates andjudgments that affect the reported amounts of assets, liabilities and expensesand related disclosure of contingent assets and liabilities. We review ourestimates on an ongoing basis. We base our estimates on historical experienceand on various other assumptions that we believe to be reasonable under thecircumstances. Actual results may differ from these estimates under differentassumptions 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 our financialstatements.

*In-Process Research and Development*

We recognize in-process research and development inaccordance with FASB Interpretation No. 4, *Applicability of FASB Statement No. 2 toBusiness Combinations Accounted for by the Purchase Method*and the * *AICPA Technical Practice Aid, *Assets Acquired in a Business Combination to be usedin Research and Development Activities: A Focus on Software, Electronic Devices, and Pharmaceutical  Industries.*Assets to be used in research and developmentactivities, specifically, compounds that have yet to receive new drug approvalfrom the FDA and would have no alternative use should approval not be given,are immediately charged to income when acquired.

In December 2004, we incurred $24.5 million ofin-process research and development expense as a result of entering into ourexclusive license with Abbott Laboratories for cethromycin. We determined toimmediately expense the purchased in-process research and development costsbecause the ultimate outcome of clinical trials for cethromycin is unknown and,therefore, FDA approval is uncertain. As part of the consideration for thecethromycin license, we issued to Abbott shares of our common stock. In orderto determine the value of the common stock issued to Abbott, we relied on thearms-length nature of the transaction, precedent market data and severalinternal valuation models and studies. An independent appraisal was alsoobtained to provide additional support for the valuation methodologiesutilized. By their nature, valuations involve judgments of management that relyon estimates regarding the timing and amount of cash flows and discount ratesthat, if changed, could significantly affect the conclusions as to value.

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*Research and Development*

Researchand development expenses consist of internal research costs and fees paid forcontract research in conjunction with the research and development of theCompany’s proprietary product portfolio. All such costs are expensed asincurred. Clinical trial costs incurred by third parties are expensed as thecontracted work is performed. The Company estimates both the total cost andtime period of the trials and the percent completed as of that accounting date.Research and development expenses resulting from contracts that requirepayments based upon the achievement of certain milestones are estimated basedupon progress towards completion.  TheCompany believes that the estimates made as of March 31, 2006 arereflective of the actual expenses incurred as of that date.

*Variable Interest Entities*

We determine consolidation of variable interest entitiesin accordance with FASB Interpretation 46(R),*Consolidation of VariableInterest Entities*. Our 50/50 jointventure, Sarawak MediChem Pharmaceuticals,has not been included in our consolidatedfinancial statements because the majority of its financial support in the form of contributed capital and debt hasbeen funded by our joint venture partner.

*Stock-based Compensation*

Effective January 2004, we adopted the fair valuemethod as contained in Statement of Financial Accounting Standards No. 123*Accounting for Stock-Based Compensation*.Effective December 2004, we adopted SFAS No. 123(R) *Share-Based Payment.*As prescribed in SFAS No. 123(R) we elected to use the ‘‘prospectivemethod.’’ The prospective methodrequires expense to be recognized for all awards granted, modified or settledin the year of adoption. Historically, we applied the intrinsic method asprovided in Accounting Principles Board Opinion No. 25, *Accounting for Stock Issued to Employees* and relatedinterpretations and accordingly, no compensation cost had been recognized forstock options issued to employees in prior years. As a result of adopting thefair value method for stock compensation, all future awards will be expensedover the stock options vesting period. We used the Black-Scholes option pricingmodel to estimate the fair value of options granted.

**Forward-LookingStatements and Risk Factors**

ThisQuarterly Report on Form 10-Q, including Management’s Discussion andAnalysis of Financial Condition and Results of Operations, containsforward-looking statements within the meaning of the Private SecuritiesLitigation Reform Act of 1995. Forward-looking statements often are proceededby words such as “believes,” “expects,” “may,” “anticipates,” “plans,” “intends,”“assumes,” “will” or similar expressions. Forward-looking statements reflectmanagement’s current expectations, as of the date of this report, and involvecertain risks and uncertainties. Our actual results could differ materiallyfrom those anticipated in these forward-looking statements as a result ofvarious factors. Some of the factors that could cause future results tomaterially differ from the recent results or those projected in forward-lookingstatements include the “Risk Factors” described in our Registration Statementon Form S-1 (Reg. No 333-132900).

**Item 3.* Quantitative and Qualitative Disclosures AboutMarket Risk***

Ourexposure to market risk is currently confined to our cash and cash equivalentsand investments that have maturities of less than one year. We currently do nothedge interest rate exposure. We have not used derivative financial instrumentsfor speculation or trading purposes. Because of the short-term maturities ofour cash, cash equivalents and investments, we do not believe that an increasein market rates would have any significant impact on the realized value of ourinvestments, but may increase the interest expense associated with our debt.

Ourmost liquid assets are cash, cash equivalents and investments. Because of theirliquidity, these assets are not directly affected by inflation. We also believethat we have intangible assets in the value of our intellectual property. Inaccordance with generally accepted accounting principles, we have notcapitalized the value of this intellectual property on our balance sheet. Dueto the nature of this intellectual property, we believe that these intangibleassets are not affected by inflation. Because we intend to retain and continueto use our equipment, furniture and fixtures and leasehold improvements, webelieve that the incremental inflation related to replacement costs of suchitems will not materially affect our operations. However, the rate of inflationaffects our expenses, such as those for employee compensation and contractservices, which could increase our level of expenses and the rate at which weuse our resources.

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

Ourmanagement, under the supervision and with the participation of our ChiefExecutive Officer (“CEO”) and Chief Financial Officer (“CFO”), has evaluatedthe effectiveness of our disclosure controls and procedures as defined in SEC Rules 13a-15(e) and15d-15(e) as of the end of the period covered by this report. Basedupon that evaluation, management has concluded that our disclosure controls andprocedures are effectively designed to ensure that information we are requiredto disclose in reports that we file or submit under the Securities Exchange Actof 1934 is communicated to management, including the CEO and CFO, 

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as appropriate to allowtimely decisions regarding required disclosure and is recorded, processed,summarized and reported within the time periods specified in the SEC’s rules andforms.

**Changes in Internal Control**

During the period coveredby this report, there have been no significant changes in our internal controlover financial reporting that have materially affected, or are reasonablylikely to materially affect, our internal control over financial reporting.

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**PART II — OTHER INFORMATION**

**Item 6.* Exhibits***

The following is a listof exhibits filed as part of this Form 10-Q:
| Number | ** ** | **Description**                                                                                                                                                |
|--------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |       |                                                                                                                                                           |
| 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. |

 

**SIGNATURES**

     Pursuant to the requirements of the Securities Exchange Act of 1934, TheRegistrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

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

 

Dated: May 11, 2006

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**EXHIBIT INDEX**
| Number | ** ** | **Description**                                                                                                                                                |
|--------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |       |                                                                                                                                                           |
| 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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