UNITED
STATES SECURITIES AND EXCHANGE COMMISSION





WASHINGTON,
D.C. 20549





FORM
10-Q





(Mark
One)





þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE


SECURITIES
EXCHANGE ACT OF 1934





For the
quarterly period ended September 30, 2010





OR





 ̈
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE


SECURITIES
EXCHANGE ACT OF 1934





For the
transition period from ____ to ____





Commission
file number 001-32954





CLEVELAND BIOLABS,
INC.


(Exact
name of registrant as specified in its charter)





DELAWARE
                      
                      20-0077155(State
      or other jurisdiction of incorporation or organization)
                      
                      (I.R.S.
      Employer Identification No.)73
      High Street, Buffalo, New York
                      
                      14203(Address
      of principal executive offices)
                      
                      (Zip
      Code)





(Registrant’s
telephone number, including area code)(716)
849-6810








if
changed since last report)





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





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).  Yes ̈
  No ̈





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





Large
      accelerated filer  ̈
              Accelerated
      filer  ̈Non-accelerated
      filer  ̈
              Smaller
      reporting company þ





Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes ̈
Nox





As of
November 10, 2010, there were 27,451,840shares outstanding of
registrant's common stock, par value $0.005 per share.





CLEVELAND
BIOLABS INC. AND SUBSIDIARY


10-Q


11/15/2010





TABLE OF
CONTENTS




PAGEPART
      I - FINANCIAL INFORMATIONITEM
      1:
              Consolidated
      Financial StatementsConsolidated
      Balance Sheets as of September 30, 2010 and December 31,
    2009
              3Consolidated
      Statements of Operations For Three and Nine Months Ended September 30,
      2010 and 2009
              5Consolidated
      Statements of Cash Flows For None Months Ended September 30, 2010 and
      2009
              6Consolidated
      Statement of Stockholders' Equity from January 1, 2009 to December 31,
      2009 and to September 30, 2010
              9Consolidated
      Statement of Comprehensive Income for the Three and Nine Months Ended
      September 30, 2010 and 2009
              10Consolidated
      Notes to Financial Statements
              12ITEM
      2:
              Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations
              27ITEM
      3:
              Quantitative
      and Qualitative Disclosures About Market Risk
              47ITEM
      4T:
              Controls
      and Procedures
              47PART
      II - OTHER INFORMATIONITEM
      1:
              Legal
      Proceedings
              48ITEM
      2:
              Unregistered
      Sales of Equity Securities and Use of Proceeds
              48ITEM
      3:
              Defaults
      Upon Senior Securities
              48ITEM
      4:
              Removed
      and Reserved
              48ITEM
      5:
              Other
      Information
              48ITEM
      6:
              Exhibits
              48Signatures
              
              49




In this
report, except as otherwise stated or the context otherwise requires, the
terms “Cleveland BioLabs” and “CBLI” refer to Cleveland BioLabs, Inc., but not
its consolidated subsidiary and ‘the Company,” “we,” “us” and “our” refer to
Cleveland BioLabs, Inc. together with its consolidated subsidiary. Our common
stock, par value $0.005 per share is referred to as “common
stock.”


2


CLEVELAND
BIOLABS, INC. AND SUBSIDIARY
 
 CONSOLIDATED
BALANCE SHEETS
  September 30, 2010 (unaudited) and December 31, 2009
 September 302010
                            
                            
                            December 31(unaudited)
                            
                            
                            2009ASSETSCURRENT
      ASSETSCash
      and equivalents
                            
                            $
                            6,411,805
                            
                            
                            $
                            963,100Accounts
      receivable:
                            
                            
                            2,955,238
                            
                            
                            
                            3,391,347Interest
      receivable
                            
                            
                            33,062
                            
                            
                            
                            -Other
      current assets
                            
                            
                            473,574
                            
                            
                            
                            381,030Total
      current assets
                            
                            
                            9,873,679
                            
                            
                            
                            4,735,477EQUIPMENTComputer
      equipment
                            
                            
                            368,013
                            
                            
                            
                            323,961Lab
      equipment
                            
                            
                            1,488,827
                            
                            
                            
                            1,159,478Furniture
                            
                            
                            387,905
                            
                            
                            
                            376,8822,244,745
                            
                            
                            
                            1,860,321Less
      accumulated depreciation
                            
                            
                            1,285,834
                            
                            
                            
                            995,408958,911
                            
                            
                            
                            864,913OTHER
      ASSETSIntellectual
      property
                            
                            
                            1,045,495
                            
                            
                            
                            929,976Deposits
                            
                            
                            32,129
                            
                            
                            
                            23,4821,077,624
                            
                            
                            
                            953,458TOTAL
      ASSETS
                            
                            $
                            11,910,214
                            
                            
                            $
                            6,553,848
 3
  CLEVELAND
BIOLABS, INC. AND SUBSIDIARY
 
 CONSOLIDATED
BALANCE SHEETS
  September 30, 2010 (unaudited) and December 31, 2009
 September
      302010
                
                
                December
      31(unaudited)
                
                
                2009LIABILITIES AND
      STOCKHOLDERS' EQUITYCURRENT
      LIABILITIESAccounts
      payable
                
                $
                325,492
                
                
                $
                1,208,632Deferred
      revenue
                
                
                16,852
                
                
                
                2,329,616Accrued
      expenses
                
                
                400,318
                
                
                
                1,405,715Accrued
      warrant liability
                
                
                18,837,766
                
                
                
                8,410,379Total
      current liabilities
                
                
                19,580,428
                
                
                
                13,354,342LONG
      TERM LIABILITIESDeferred
      revenue
                
                
                2,300,194
                
                
                
                -Total
      long term liabilities
                
                
                2,300,194
                
                
                
                -STOCKHOLDERS'
      EQUITYPreferred
      stock, $.005 par valueAuthorized
      - 10,000,000 shares at September 30, 2010and
      December 31, 2009Series
      D convertible preferred stock,Issued
      and outstanding 0 and 466.85shares
      at September 30, 2010 and December 31, 2009, respectively
                
                
                -
                
                
                
                2Common
      stock, $.005 par valueAuthorized
      - 80,000,000 shares at September 30, 2010 andDecember
      31, 2009, respectivelyIssued
      and outstanding 27,101,386 and 20,203,508shares
      at September 30, 2010 and December 31, 2009, respectively
                
                
                135,507
                
                
                
                101,018Additional
      paid-in capital
                
                
                69,274,716
                
                
                
                62,786,418Accumulated
      other comprehensive loss
                
                
                (19,827
                )
                
                
                -Accumulated
      deficit
                
                
                (82,694,896
                )
                
                
                (69,687,932
                )Total
      Cleveland BioLabs, Inc. stockholders' equity
                
                
                (13,304,500
                )
                
                
                (6,800,494
                )Noncontrolling
      Interest in stockholders' equity
                
                
                3,334,092
                
                
                
                -Total
      stockholders' equity
                
                
                (9,970,408
                )
                
                
                (6,800,494
                )TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY
                
                $
                11,910,214
                
                
                $
                6,553,848
 4
 CLEVELAND
BIOLABS, INC. AND SUBSIDIARY
 
 CONSOLIDATED
STATEMENT OF OPERATIONS
 
 Three and
Nine Months Ending September 30, 2010 and 2009 (unaudited)
  Three Months Ended
                        
                        
                        Nine Months EndedSeptember 30
                        
                        
                        September 30
                        
                        
                        September 30
                        
                        
                        September 302010
                        
                        
                        2009
                        
                        
                        2010
                        
                        
                        2009(unaudited)
                        
                        
                        (unaudited)
                        
                        
                        (unaudited)
                        
                        
                        (unaudited)REVENUESGrant
      and contract
                        
                        $
                        3,189,488
                        
                        
                        $
                        3,223,094
                        
                        
                        $
                        11,570,599
                        
                        
                        $
                        9,717,8033,189,488
                        
                        
                        
                        3,223,094
                        
                        
                        
                        11,570,599
                        
                        
                        
                        9,717,803OPERATING
      EXPENSESResearch
      and development
                        
                        
                        3,083,665
                        
                        
                        
                        3,327,609
                        
                        
                        
                        10,951,560
                        
                        
                        
                        10,602,591Selling,
      general and administrative
                        
                        
                        1,073,528
                        
                        
                        
                        986,569
                        
                        
                        
                        5,664,229
                        
                        
                        
                        3,945,595Total
      operating expenses
                        
                        
                        4,157,193
                        
                        
                        
                        4,314,178
                        
                        
                        
                        16,615,789
                        
                        
                        
                        14,548,186LOSS
      FROM OPERATIONS
                        
                        
                        (967,705
                        )
                        
                        
                        (1,091,084
                        )
                        
                        
                        (5,045,190
                        )
                        
                        
                        (4,830,383
                        )OTHER
      INCOMEInterest
      income
                        
                        
                        49,448
                        
                        
                        
                        2,046
                        
                        
                        
                        62,860
                        
                        
                        
                        19,303Sublease
      revenue
                        
                        
                        42,305
                        
                        
                        
                        11,337
                        
                        
                        
                        142,735
                        
                        
                        
                        20,348Total
      other income
                        
                        
                        91,753
                        
                        
                        
                        13,383
                        
                        
                        
                        205,595
                        
                        
                        
                        39,651OTHER
      EXPENSEWarrant
      issuance costs
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        231,980
                        
                        
                        
                        266,970Interest
      expense
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        1,960Foreign
      exchange loss
                        
                        
                        1,339
                        
                        
                        
                        -
                        
                        
                        
                        1,339
                        
                        
                        
                        -Change
      in value of warrant liability
                        
                        
                        6,408,248
                        
                        
                        
                        4,111,578
                        
                        
                        
                        8,105,544
                        
                        
                        
                        9,565,276Total
      other expense
                        
                        
                        6,409,587
                        
                        
                        
                        4,111,578
                        
                        
                        
                        8,338,863
                        
                        
                        
                        9,834,206NET
      LOSS
                        
                        $
                        (7,285,539
                        )
                        
                        $
                        (5,189,279
                        )
                        
                        $
                        (13,178,458
                        )
                        
                        $
                        (14,624,938
                        )LESS:
      (INCOME)/LOSS ATTRIBUTABLE TO NONCONTROLLING INTERESTS
                        
                        
                        82,246
                        
                        
                        
                        -
                        
                        
                        
                        171,494
                        
                        
                        
                        -NET
      LOSS ATTRIBUTABLE TO CLEVELAND BIOLABS, INC.
                        
                        $
                        (7,203,293
                        )
                        
                        $
                        (5,189,279
                        )
                        
                        $
                        (13,006,964
                        )
                        
                        $
                        (14,624,938
                        )DIVIDENDS
      ON CONVERTIBLE PREFERRED STOCK
                        
                        
                        -
                        
                        
                        
                        (123,900
                        )
                        
                        
                        -
                        
                        
                        
                        (615,352
                        )NET
      LOSS AVAILABLE TO COMMON STOCKHOLDERS
                        
                        
                        (7,203,293
                        )
                        
                        
                        (5,313,179
                        )
                        
                        
                        (13,006,964
                        )
                        
                        
                        (15,240,290
                        )NET
      LOSS AVAILABLE TO COMMON SHAREHOLDERS PER SHARE OF COMMON STOCK - BASIC
      AND DILUTED
                        
                        $
                        (0.27
                        )
                        
                        $
                        (0.33
                        )
                        
                        $
                        (0.51
                        )
                        
                        $
                        (1.00
                        )WEIGHTED
      AVERAGE NUMBER OF SHARES USED IN CALCULATING NET LOSS PER SHARE, BASIC AND
      DILUTED
                        
                        
                        26,984,059
                        
                        
                        
                        15,878,331
                        
                        
                        
                        25,756,300
                        
                        
                        
                        15,184,785
  5
  CLEVELAND
BIOLABS, INC.  AND SUBSIDIARY
 
 CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY
 
 Period
From January 1, 2009 to December 31, 2009 and to
 September
30, 2010 (unaudited)
  Stockholders'
      EquityCommon
      StockShares
                
                
                AmountBalance
      at January 1, 2009
                
                
                13,775,805
                
                
                $
                68,879Issuance
      of options
                
                
                -
                
                
                
                -Issuance
      of restricted shares
                
                
                291,532
                
                
                
                1,458Recapture
      of expense for nonvested options forfeited
                
                
                -
                
                
                
                -Restricted
      stock awards
                
                
                
                
                
                
                -Exercise
      of options
                
                
                194,675
                
                
                
                973Conversion
      of Series B Preferred Shares to Common
                
                
                4,693,530
                
                
                
                23,468Dividends
      on Series B Preferred Shares
                
                
                -
                
                
                
                -Issuance
      of shares - Series D financing
                
                
                -
                
                
                
                -Allocation
      of financing proceeds to fair value of Series D warrants
                
                
                -
                
                
                
                -Fees
      associated with Series D Preferred offering
                
                
                -
                
                
                
                -Conversion
      of Series D Preferred Shares to Common
                
                
                572,353
                
                
                
                2,862Exercise
      of warrants
                
                
                675,613
                
                
                
                3,378Net
      Loss
                
                
                -
                
                
                
                -Balance
      at December 31, 2009
                
                
                20,203,508
                
                
                $
                101,018Issuance
      of options
                
                
                -
                
                
                
                -Issuance
      of shares
                
                
                415,919
                
                
                
                2,080Recapture
      of expense for nonvested options forfeited
                
                
                -
                
                
                
                -Restricted
      stock awards
                
                
                -
                
                
                
                -Exercise
      of options
                
                
                143,648
                
                
                
                718Issuance
      of shares - 2010 common stock equity offering
                
                
                1,538,462
                
                
                
                7,692Allocation
      of financing proceeds to fair value of warrants
                
                
                -
                
                
                
                -Fees
      associated with 2010 common stock equity offering
                
                
                -
                
                
                
                -Conversion
      of Series D Preferred Shares to Common
                
                
                4,576,979
                
                
                
                22,885Exercise
      of warrants
                
                
                222,870
                
                
                
                1,114Noncontrolling
      interest capital contribution to Incuron, LLC
                
                
                -
                
                
                
                -Net
      Loss
                
                
                -
                
                
                
                -Other
      comprehensive incomeForeign
      currency translation adjustment
                
                
                -
                
                
                
                -Balance
      at September 30, 2010
                
                
                27,101,386
                
                
                $
                135,507
 6
 CLEVELAND
BIOLABS, INC.  AND SUBSIDIARY
 
 CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY
 
 Period
From January 1, 2009 to December 31, 2009 and to
 September
30, 2010 (unaudited)
  Stockholders'
      EquityPreferred
      StockSeries
      B
                    
                    
                    Amount
                    
                    
                    Series
      D
                    
                    
                    AmountBalance
      at January 1, 2009
                    
                    
                    3,160,974
                    
                    
                    $
                    15,805
                    
                    
                    
                    -
                    
                    
                    $
                    -Issuance
      of options
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Issuance
      of restricted shares
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Recapture
      of expense for nonvested options forfeited
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Restricted
      stock awards
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Exercise
      of options
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Conversion
      of Series B Preferred Shares to Common
                    
                    
                    (3,160,974
                    )
                    
                    
                    (15,805
                    )
                    
                    
                    -
                    
                    
                    
                    -Dividends
      on Series B Preferred Shares
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Issuance
      of shares - Series D financing
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    543
                    
                    
                    
                    3Allocation
      of financing proceeds to fair value of Series D warrants
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Fees
      associated with Series D Preferred offering
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Conversion
      of Series D Preferred Shares to Common
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (76
                    )
                    
                    
                    (1
                    )Exercise
      of warrants
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Net
      Loss
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Balance
      at December 31, 2009
                    
                    
                    -
                    
                    
                    $
                    -
                    
                    
                    
                    467
                    
                    
                    $
                    2Issuance
      of options
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Issuance
      of shares
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Recapture
      of expense for nonvested options forfeited
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Restricted
      stock awards
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Exercise
      of options
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Issuance
      of shares - 2010 common stock equity offering
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Allocation
      of financing proceeds to fair value of warrants
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Fees
      associated with 2010 common stock equity offering
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Conversion
      of Series D Preferred Shares to Common
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (467
                    )
                    
                    
                    (2
                    )Exercise
      of warrants
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Noncontrolling
      interest capital contribution to Incuron, LLC
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Net
      Loss
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Other
      comprehensive incomeForeign
      currency translation adjustment
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Balance
      at September 30, 2010
                    
                    
                    -
                    
                    
                    $
                    -
                    
                    
                    
                    -
                    
                    
                    $
                    -
 7
 CLEVELAND
BIOLABS, INC.  AND SUBSIDIARY
 
 CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY
 
 Period
From January 1, 2009 to December 31, 2009 and to
 September
30, 2010 (unaudited)
 Stockholders' EquityAdditional
                    
                    
                    OtherPaid-in
                    
                    
                    Comprehensive
                    
                    
                    Accumulated
                    
                    
                    NoncontrollingCapital
                    
                    
                    Income/(Loss)
                    
                    
                    Deficit
                    
                    
                    Interests
                    
                    
                    TotalBalance
      at January 1, 2009
                    
                    $
                    56,699,750
                    
                    
                    $
                    -
                    
                    
                    $
                    (56,246,172
                    )
                    
                    $
                    -
                    
                    
                    $
                    538,261Issuance
      of options
                    
                    
                    1,784,240
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1,784,240Issuance
      of restricted shares
                    
                    
                    991,612
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    993,070Recapture
      of expense for nonvested options forfeited
                    
                    
                    (50,197
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (50,197
                    )Restricted
      stock awards
                    
                    
                    33,333
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    33,333Exercise
      of options
                    
                    
                    361,884
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    362,857Conversion
      of Series B Preferred Shares to Common
                    
                    
                    (7,663
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Dividends
      on Series B Preferred Shares
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (615,351
                    )
                    
                    
                    -
                    
                    
                    
                    (615,351
                    )Issuance
      of shares - Series D financing
                    
                    
                    5,428,304
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    5,428,307Allocation
      of financing proceeds to fair value of Series D warrants
                    
                    
                    (3,016,834
                    )
                    
                    
                    
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (3,016,834
                    )Fees
      associated with Series D Preferred offering
                    
                    
                    (720,175
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (720,175
                    )Conversion
      of Series D Preferred Shares to Common
                    
                    
                    (2,861
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Exercise
      of warrants
                    
                    
                    1,285,026
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1,288,404Net
      Loss
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (12,826,409
                    )
                    
                    
                    -
                    
                    
                    
                    (12,826,409
                    )Balance
      at December 31, 2009
                    
                    $
                    62,786,418
                    
                    
                    $
                    -
                    
                    
                    $
                    (69,687,932
                    )
                    
                    $
                    -
                    
                    
                    $
                    (6,800,494
                    )Issuance
      of options
                    
                    
                    2,340,457
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    2,340,457Issuance
      of shares
                    
                    
                    1,440,135
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1,442,215Recapture
      of expense for nonvested options forfeited
                    
                    
                    (39,483
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (39,483
                    )Restricted
      stock awards
                    
                    
                    9,963
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    9,963Exercise
      of options
                    
                    
                    263,361
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    264,079Issuance
      of shares - 2010 common stock equity offering
                    
                    
                    4,992,310
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    5,000,002Allocation
      of financing proceeds to fair value of warrants
                    
                    
                    (2,629,847
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (2,629,847
                    )Fees
      associated with 2010 common stock equity offering
                    
                    
                    (578,118
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (578,118
                    )Conversion
      of Series D Preferred Shares to Common
                    
                    
                    (22,883
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Exercise
      of warrants
                    
                    
                    712,403
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    713,517Noncontrolling
      interest capital contribution to Incuron, LLC
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    3,509,402
                    
                    
                    
                    3,509,402Net
      Loss
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (13,006,964
                    )
                    
                    
                    (171,494
                    )
                    
                    
                    (13,178,458
                    )Other
      comprehensive incomeForeign
      currency translation adjustment
                    
                    
                    -
                    
                    
                    
                    (19,827
                    )
                    
                    
                    -
                    
                    
                    
                    (3,816
                    )
                    
                    
                    (23,643
                    )Balance
      at September 30, 2010
                    
                    $
                    69,274,716
                    
                    
                    $
                    (19,827
                    )
                    
                    $
                    (82,694,896
                    )
                    
                    $
                    3,334,092
                    
                    
                    $
                    (9,970,408
                    )
 8
 CLEVELAND
BIOLABS, INC. AND SUBSIDIARY
 
 CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME
 
 Three and
Nine Months Ended September 30, 2010 and 2009 (unaudited)
 
 Three Months Ended
                      
                      
                      Nine Months EndedSeptember 30
                      
                      
                      September 30
                      
                      
                      September 30
                      
                      
                      September 302010
                      
                      
                      2009
                      
                      
                      2010
                      
                      
                      2009(unaudited)
                      
                      
                      (unaudited)
                      
                      
                      (unaudited)
                      
                      
                      (unaudited)Net
      loss including noncontrolling interests
                      
                      $
                      (7,285,539
                      )
                      
                      $
                      (5,189,279
                      )
                      
                      $
                      (13,178,458
                      )
                      
                      $
                      (14,624,938
                      )Other
      comprehensive income (loss) (net of income taxes)Foreign
      currency translation adjustment
                      
                      
                      95,947
                      
                      
                      
                      -
                      
                      
                      
                      (23,643
                      )
                      
                      
                      -Comprehensive
      income including noncontrolling interests
                      
                      
                      (7,189,592
                      )
                      
                      
                      (5,189,279
                      )
                      
                      
                      (13,202,101
                      )
                      
                      
                      (14,624,938
                      )Comprehensive
      (income)/loss attributable to noncontrolling interests
                      
                      
                      66,759
                      
                      
                      
                      -
                      
                      
                      
                      175,310
                      
                      
                      
                      -Comprehensive
      Income (Loss) attributable to Cleveland BioLabs, Inc.
                      
                      $
                      (7,122,833
                      )
                      
                      $
                      (5,189,279
                      )
                      
                      $
                      (13,026,791
                      )
                      
                      $
                      (14,624,938
                      )
  9
  CLEVELAND
BIOLABS, INC. AND SUBSIDIARY
 
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 
 For the
Nine Months Ended September 30, 2010 and 2009 (unaudited)
 
 September 30
                    
                    
                    September 302010
                    
                    
                    2009(unaudited)
                    
                    
                    (unaudited)CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      loss
                    
                    $
                    (13,178,458
                    )
                    
                    $
                    (14,624,938
                    )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
                    
                    
                    290,426
                    
                    
                    
                    268,074Amortization
                    
                    
                    10,801
                    
                    
                    
                    -Noncash
      salaries and consulting expense
                    
                    
                    3,753,152
                    
                    
                    
                    2,113,965Warrant
      issuance costs
                    
                    
                    231,980
                    
                    
                    
                    266,970Change
      in value of warrant liability
                    
                    
                    8,105,544
                    
                    
                    
                    9,565,276Loss
      on abandoned patents
                    
                    
                    -
                    
                    
                    
                    23,984Changes
      in operating assets and liabilities:Accounts
      receivable - trade
                    
                    
                    436,109
                    
                    
                    
                    (1,679,406
                    )Interest
      receivable
                    
                    
                    (33,225
                    )
                    
                    
                    9,488Other
      current assets
                    
                    
                    (93,147
                    )
                    
                    
                    90,423Deposits
                    
                    
                    (8,689
                    )
                    
                    
                    -Accounts
      payable
                    
                    
                    (882,961
                    )
                    
                    
                    176,326Deferred
      revenue
                    
                    
                    (12,570
                    )
                    
                    
                    967,983Accrued
      expenses
                    
                    
                    (1,005,220
                    )
                    
                    
                    (270,717
                    )Total
      adjustments
                    
                    
                    10,792,200
                    
                    
                    
                    11,532,366Net
      cash used in operating activities
                    
                    
                    (2,386,259
                    )
                    
                    
                    (3,092,572
                    )CASH
      FLOWS FROM INVESTING ACTIVITIESSale
      of short-term investments
                    
                    
                    -
                    
                    
                    
                    1,000,000Purchase
      of equipment
                    
                    
                    (384,424
                    )
                    
                    
                    (48,393
                    )Costs
      of patents pending
                    
                    
                    (127,074
                    )
                    
                    
                    (151,555
                    )Net
      cash (used in) provided by investing activities
                    
                    
                    (511,499
                    )
                    
                    
                    800,052CASH
      FLOWS FROM FINANCING ACTIVITIESIssuance
      of preferred stock
                    
                    
                    -
                    
                    
                    
                    5,428,307Financing
      costs on preferred stock
                    
                    
                    -
                    
                    
                    
                    (720,175
                    )Issuance
      of common stock
                    
                    
                    5,000,002
                    
                    
                    
                    -Noncontrolling
      interest capital contribution to Incuron, LLC
                    
                    
                    3,509,402
                    
                    
                    
                    -Financing
      costs on common stock offering
                    
                    
                    (350,632
                    )
                    
                    
                    -Warrant
      issuance costs
                    
                    
                    (140,697
                    )
                    
                    
                    (266,970
                    )Dividends
                    
                    
                    -
                    
                    
                    
                    (936,644
                    )Exercise
      of options
                    
                    
                    264,079
                    
                    
                    
                    285,747Exercise
      of warrants
                    
                    
                    86,743
                    
                    
                    
                    299,998Net
      cash provided by financing activities
                    
                    
                    8,368,897
                    
                    
                    
                    4,090,263Effect
      of exchange rate change on cash and equivalents
                    
                    
                    (22,435
                    )
                    
                    
                    -INCREASE
      IN CASH AND EQUIVALENTS
                    
                    
                    5,448,705
                    
                    
                    
                    1,797,743CASH
      AND EQUIVALENTS AT BEGINNING OF PERIOD
                    
                    
                    963,100
                    
                    
                    
                    299,849CASH
      AND EQUIVALENTS AT END OF PERIOD
                    
                    $
                    6,411,805
                    
                    
                    $
                    2,097,592
  10
  CLEVELAND
BIOLABS, INC. AND SUBSIDIARY
 
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 
 For the
Nine Months Ended September 30, 2010 and 2009 (unaudited)
 
 September 30
                    
                    
                    September 302010
                    
                    
                    2009(unaudited)
                    
                    
                    (unaudited)Supplemental
      disclosures of cash flow information:Cash
      paid during the period for interest
                    
                    $
                    -
                    
                    
                    $
                    1,960Cash
      paid during the period for income taxes
                    
                    $
                    -
                    
                    
                    $
                    -Supplemental
      schedule of noncash financing activities:Issuance
      of stock options to employees, consultants, and independent board
      members
                    
                    $
                    2,340,457
                    
                    
                    $
                    1,527,719Recapture
      of expense for nonvested options forfeited
                    
                    $
                    (39,483
                    )
                    
                    $
                    (37,878
                    )Issuance
      of shares to consultants and employees
                    
                    $
                    1,442,214
                    
                    
                    $
                    599,217Amortization
      of restricted shares to be issued to employees and
      consultants
                    
                    $
                    9,963
                    
                    
                    $
                    24,907Conversion
      of warrant liability to equity due to exercise of
      warrants
                    
                    $
                    626,775
                    
                    
                    $
                    -Noncash
      financing costs on common stock offering
                    
                    $
                    227,486
                    
                    
                    $
                    -Noncash
      warrant issuance costs
                    
                    $
                    91,283
                    
                    
                    $
                    -Conversion
      of preferred stock to common stock
                    
                    $
                    1,454,540
                    
                    
                    $
                    19,114,136Accrual
      of Series B preferred stock dividends
                    
                    $
                    -
                    
                    
                    $
                    615,351
  11


CLEVELAND
BIOLABS, INC. AND SUBSIDIARY





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





Note
1. Organization




Cleveland BioLabs, Inc. (“CBLI”) and its subsidiary (collectively, the
“Company”) is a biotechnology company focused on developing biodefense, tissue
protection and cancer treatment drugs based on the concept of modulation of cell
death for therapeutic benefit. CBLI was incorporated under the laws of the State
of Delaware on June 5, 2003 and is headquartered in Buffalo, New
York.





The
consolidated financial statements include the accounts of CBLI’s majority-owned,
Russian subsidiary, Incuron, LLC (“Incuron”) a limited liability company formed
on January 31, 2010, in the Russian Federation.  All intercompany
balances and transactions have been eliminated in consolidation.





In May,
2010, CBLI contributed certain intellectual property rights to Incuron in
exchange for an 83.9% membership interest.  The minority partner,
Bioprocess Capital Ventures (“BCV”) contributed a total of 105,840,000 Russian
rubles (approximately $3.4 million based on the current exchange rate) during
April and June of 2010 in exchange for the remaining 16.1% membership
interest.  Incuron was formed to develop CBLI’s curaxin technology for
certain medical applications including oncology.  The participation
agreement between CBLI and BCV entered in December 2009 and amended in April
2010, requires (i) additional capital contributions in the amount of 69,730,000
Russian rubles (approximately $2.3 million based on the current exchange rate)
by BCV and (ii) further contributions up to 373,927,000 Russian rubles
(approximately $12.1 million based on the current exchange rate) by BCV
contingent on the achievement of pre-determined scientific milestones and
contingent contributions by CBLI to preserve CBLI’s intended ultimate membership
interest in Incuron of 50.1%. Incuron commenced operations in May 2010 and the
results of its research and development efforts have been included in the
Company’s results of operations since that date.





The
Company’s financial statements have been prepared on the accrual basis of
accounting in accordance with accounting principles generally accepted in the
United States of America, or GAAP, and on a going concern basis which
contemplates the realization of assets and the liquidation of liabilities in the
ordinary course of business. The Company has incurred substantial losses from
operations which raises a question about its ability to continue as a going
concern.  The Company sustained a net loss of $13,006,964, for the
nine months ended September 30, 2010 and $12,826,409 for the fiscal year ended
December 31, 2009.





The
Company continues to explore investment and licensing arrangements and plans to
submit proposals for government contracts and grants over the next two years
totaling over $10 million. The Company has two applications pending totaling
nearly $52 million. Many of the proposals will be submitted to government
agencies that have awarded contracts and grants to the Company in the recent
past.  Finally, the Company has implemented cost containment efforts that
permit the incurrence of those costs that are properly funded, either through a
government contract or grant or other capital sources. It is expected that
the successful implementation of the financing and cost containment efforts
identified above will allow the Company to continue to realize its assets and
liquidate its liabilities in the ordinary course of business.





Note 2. Summary of Significant
Accounting Policies





A.
            Basis
      of Presentation - The information at September 30, 2010 and for the three
      months and nine months ended September 30, 2010 and September 30, 2009, is
      unaudited. In the opinion of management, these financial statements have
      been prepared on a basis consistent with the Company’s annual audited
      financial statements and include all adjustments, consisting of normal
      recurring adjustments, necessary for a fair presentation of the results
      for the interim periods presented. Interim results are not necessarily
      indicative of results for a full year. These financial statements should
      be read in conjunction with the Company’s audited financial statements for
      the year ended December 31, 2009, which were contained in the Company’s
      Annual Report on Form 10-K filed with the U.S. Securities and Exchange
      Commission ("SEC").





B.
            Cash
      and Equivalents - The Company considers highly liquid investments with a
      maturity date of three months or less to be cash equivalents. In addition,
      the Company maintains cash and equivalents at financial institutions,
      which may exceed federally insured amounts at times and which may, at
      times, significantly exceed balance sheet amounts due to outstanding
      checks. Included in cash equivalents are cash balances and certificates of
      deposits held by Incuron totaling $2,420,765 and
      $0 as of September 30, 2010 and December 31, 2009,
      respectively.





C.
            Marketable
      Securities and Short Term Investments - The Company considers investments
      with a maturity date of more than three months to be short-term
      investments and has classified these securities as available-for-sale.
      Such investments are carried at fair value, with unrealized gains and
      losses included as accumulated other comprehensive income (loss) in
      stockholders' equity. The cost of available-for-sale securities sold is
      determined based on the specific identification
  method.


12


D.
            Accounts
      Receivable - The Company extends unsecured credit to customers under
      normal trade agreements and according to terms of government contracts and
      grants, which generally require payment within 30 days. Management
      estimates an allowance for doubtful accounts which is based upon
      management's review of delinquent accounts and an assessment of the
      Company's historical evidence of collections. There is no allowance for
      doubtful accounts as of September 30, 2010 and December 31,
      2009.





E.
            Equipment
      - Equipment is stated at cost and depreciated over the estimated useful
      lives of the assets (generally five years) using the straight-line method.
      Leasehold improvements are depreciated on the straight-line method over
      the shorter of the lease term or the estimated useful lives of the assets.
      Expenditures for maintenance and repairs are charged to expense as
      incurred. Major expenditures for renewals and betterments are capitalized
      and depreciated. Depreciation expense was $97,429 and $87,531 for the
      three months ended September 30, 2010 and 2009,
      respectively.  Depreciation expense was $290,426 and $268,074
      for the nine months ended September 30, 2010 and 2009,
      respectively.





F.
            Impairment
      of Long-Lived Assets - Long-lived assets to be held and used, including
      equipment and intangible assets subject to depreciation and amortization,
      are reviewed for impairment at least annually and whenever events or
      changes in circumstances indicate that the carrying amounts of the assets
      or related asset group may not be recoverable. Determination of
      recoverability is based on an estimate of discounted future cash flows
      resulting from the use of the asset and its eventual disposition. In the
      event that such cash flows are not expected to be sufficient to recover
      the carrying amount of the asset or asset group, the carrying amount of
      the asset is written down to its estimated net realizable
      value.





G.
            Intellectual
      Property - The Company capitalizes the costs associated with the
      preparation, filing, and maintenance of patent applications relating to
      intellectual property. If the patent applications are approved, costs paid
      by the Company associated with the preparation, filing, and maintenance of
      the patents will be amortized on a straight-line basis over the shorter of
      20 years from the initial application date or the anticipated useful life
      of the patent. If the patent application is not approved, the costs
      associated the patent application will be expensed as part of selling,
      general and administrative expenses at that time. Capitalized intellectual
      property is reviewed annually for
impairment.





A portion
of this intellectual property is owned by the Cleveland Clinic Foundation
(“CCF”) and granted to the Company through an exclusive licensing agreement. As
part of the licensing agreement, the Company agrees to bear the costs associated
with the preparation, filing and maintenance of patent applications relating to
this intellectual property. Gross capitalized patents and patents pending costs
were $784,468 and $688,355 for eleven patent applications as of September 30,
2010 and December 31, 2009, respectively. Two of the CCF patent applications
were approved by several nations and are amortized on a straight-line basis over
the weighted average estimated remaining life of approximately fourteen years.
The remainder of the CCF patent applications are still pending approval. The
Company recognized $4,120, and $0 in amortization expense for the three months
ended September 30, 2010 and 2009, respectively.  The Company
recognized $11,255, and $0 in amortization expense for the nine months ended
September 30, 2010 and 2009, respectively.





The
Company also has submitted patent applications as a result of intellectual
property exclusively developed and owned by the Company. Gross capitalized
patents pending costs were $222,715 and $199,371 for four patent applications as
of September 30, 2010 and December 31, 2009, respectively. The patent
applications are still pending approval.





The
Company has also submitted two patent applications as a result of the
collaborative research agreement with the Roswell Park Cancer Institute
(“RPCI”).  As part of this collaborative agreement, the Company agrees
to bear the costs associated with the preparation, filing and maintenance of
patent applications related to the intellectual property being
developed.  Gross capitalized patents pending costs were $13,716 and
$8,340 for two patent applications as of September 30, 2010 and December 31,
2009, respectively.





The
Company has also submitted one patent application as a result of the
collaborative research agreement with the ChemBridge Corporation
(“ChemBridge”).  As part of this collaborative agreement, the Company
agrees to bear the costs associated with the preparation, filing and maintenance
of patent applications related to the intellectual property being
developed.  Gross capitalized patents pending costs were $39,971 and
$38,484 for this patent application as of September 30, 2010 and December 31,
2009, respectively.





Below is
a summary of the major identifiable intangible assets and weighted average
amortization periods for each identifiable asset:


13





As of September 30, 2010WeightedAverageAccumulated
                  
                  
                  Net Intangible
                  
                  
                  AmortizationIntangible Assets
                  
                  Cost
                  
                  
                  Amortization
                  
                  
                  Asset
                  
                  
                  Period(Years)Patents
                  
                  $
                  239,015
                  
                  
                  $
                  15,375
                  
                  
                  $
                  223,640
                  
                  
                  
                  14.2Patent
      applications
                  
                  
                  821,855
                  
                  
                  
                  -
                  
                  
                  
                  821,855
                  
                  
                  n.a.$
                  1,060,870
                  
                  
                  $
                  15,375
                  
                  
                  $
                  1,045,495





The
estimated amortization expense for the next five years for approved patents is
as follows:





2010
                  
                  $
                  14,4182011
                  
                  $
                  15,3302012
                  
                  $
                  15,3302013
                  
                  $
                  15,3302014
                  
                  $
                  15,330





H.
            Line
      of Credit - The Company has a working capital line of credit that is fully
      secured by cash equivalents and short-term investments. This
      fully-secured, working capital line of credit carries an interest rate of
      prime minus 1%, a borrowing limit of $600,000, and will expire on May 31,
      2011. At September 30, 2010 and December 31, 2009, there were no
      outstanding borrowings under this credit
  facility.





I.
            Accrued
      Warrant Liability – The Company issued warrants as part of the Series D
      Private Placement (as defined in Note 3) and as part of the 2010 Common
      Stock Equity Offering (as defined in Note 3). The warrants are accounted
      for as derivative instruments in accordance with the FASB Accounting
      Standards Codification on derivatives and hedging as the warrants are not
      indexed to the Company’s stock and as the warrants contain a cashless
      exercise provision.  The warrants are initially recorded as
      accrued warrant liabilities based on their fair values on the date of
      issuance. Subsequent changes in the value of the warrants are shown in the
      statement of operations as “Change in value of warrant
      liability.”





The
Series D Private Placement warrants carry a seven-year term and are exercisable
for common shares of the Company at $1.60 per share.  The Company has
a balance in accrued warrant liability of $15,752,534 and $8,410,379 at
September 30, 2010 and December 31, 2009 for these warrants,
respectively.





The 2010
Common Stock Equity Offering warrants carry a five-year term and are exercisable
six months after the grant date for common shares of the Company at $4.50 per
share.  The Company has a balance in accrued warrant liability of
$3,085,232 and $0 at September 30, 2010 and December 31, 2009 for these
warrants, respectively.





The
remaining outstanding warrants that were not part of the Series D Private
Placement or the 2010 Common Stock Equity Offering were treated as equity upon
issuance and continue to be treated as equity since these remaining warrants do
not contain any mandatory redemption features or other provisions that would
require classifications of these warrant instruments outside of permanent
equity.  Furthermore, these warrants do not contain any contingent
exercise provisions or anti-dilution provisions that impact the fixed-for-fixed
option.





J.
            Foreign
      Currency Translation-
      The Company translates all assets and liabilities of its foreign
      subsidiary, where the U.S. dollar is not the functional currency, at the
      period-end exchange rate and translates income and expenses at the average
      exchange rates in effect during the period. The net effect of this
      translation is recorded in the consolidated financial statements as
      accumulated other comprehensive income
(loss).





K.
            Fair
      Value of Financial Instruments - Financial instruments, including cash and
      equivalents, accounts receivable, accounts payable and accrued
      liabilities, are carried at net realizable
  value.





The
Company values its financial instruments in accordance with the FASB Accounting
Standards Codification on fair value measurements and disclosures which
establishes a hierarchy for the inputs used to measure fair
value.  The fair value hierarchy prioritizes the valuation inputs into
three broad levels as follows: Level 1 inputs are quoted prices (unadjusted) in
active markets for identical assets or liabilities; Level 2 inputs are quoted
prices for similar assets and liabilities in active markets or inputs that are
observable for the asset or liability, either directly or indirectly; and Level
3 inputs are unobservable inputs in which little or no market data exists,
therefore requiring a company to develop its own assumptions.  The
Company does not have any significant assets or liabilities measured at fair
value using Level 1 or Level 2 inputs as of September 30, 2010 and December 31,
2009.


14


The
Company carries its Series D Private Placement warrants at fair value totaling
$15,752,534 and $8,410,379 as of September 30, 2010 and December 31, 2009,
respectively.  The Company carries its 2010 Common Stock Equity
Offering warrants at fair value totaling $3,085,232 and $0 as of September 30,
2010 and December 31, 2009, respectively.  The Company used Level 3
inputs for valuation of the warrants, and their fair values were determined
using the Black-Scholes option pricing model based on the following
assumptions:





Preferred DWarrant
                  
                  
                  2010 OfferingWarrantValue at
                  
                  
                  Value atSeptember 30,2010
                  
                  
                  September 30, 2010Stock
      price
                  
                  $
                  5.16
                  
                  
                  $
                  5.16Exercise
      price
                  
                  $
                  1.60
                  
                  
                  $
                  4.50Term
      in years
                  
                  
                  2.74
                  
                  
                  
                  2.21Volatility
                  
                  
                  104.20
                  %
                  
                  
                  88.01
                  %Annual
      rate of quarterly dividends
                  
                  
                  -
                  
                  
                  
                  -Discount
      rate- bond equivalent yield
                  
                  
                  0.58
                  %
                  
                  
                  0.47
                  %





Fair Value
                          
                          
                          Fair Value Measurements atAs of
                          
                          
                          September 30, 2010September 30,2010
                          
                          
                          Using Fair Value HierarchyLiabilities
                          
                          
                          
                          
                          Level 1
                          
                          
                          Level 2
                          
                          
                          Level 3Series
      D Preferred
      Warrant liability
                          
                          $
                          15,752,534
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          $
                          15,752,5342010
      Offering Warrant liability
                          
                          $
                          3,085,232
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          $
                          3,085,232Total
                          
                          $
                          18,837,766
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          $
                          18,837,766





The
following tables set forth a summary of changes in the fair value of the
Company’s Level 3 warrant liabilities using significant unobservable inputs for
the three and nine months ended September 30, 2010 and 2009.





FortheThreeMonthsEndedSeptember30,2010SeriesDPrivate
                      Placement
                    
                    
                    2010Common
                      StockEquity
                      Offering
                    
                    
                    TotalBeginning
      balance
                    
                    $
                    10,741,246
                    
                    
                    $
                    1,935,386
                    
                    
                    $
                    12,676,632Total
      gains or losses (realized/unrealized)Included
      in earnings as change in value of warrant liability
                    
                    
                    5,258,402
                    
                    
                    
                    1,149,846
                    
                    
                    
                    6,408,248Purchases,
      issuances, sales and settlements, net
                    
                    
                    (247,114
                    )
                    
                    
                    -
                    
                    
                    
                    (247,114
                    )Ending
      balance
                    
                    $
                    15,752,534
                    
                    
                    $
                    3,085,232
                    
                    
                    $
                    18,837,766The
      amount of total gains or losses for the period included in earnings
      attributable to the change in unrealized gains or losses relating to
      assets still held at the reporting date
                    
                    $
                    5,175,293
                    
                    
                    $
                    1,149,846
                    
                    
                    $
                    6,325,139


FortheThreeMonthsEndedSeptember30,2009SeriesDPrivate
                        Placement
                      
                      
                      2010Common
                        StockEquity
                        Offering
                      
                      
                      TotalBeginning
      balance
                      
                      $
                      8,470,532
                      
                      
                      $
                      -
                      
                      
                      $
                      8,470,532Total
      gains or losses (realized/unrealized)Included
      in earnings as change in value of warrant liability
                      
                      
                      4,111,578
                      
                      
                      
                      -
                      
                      
                      
                      4,111,578Purchases,
      issuances, sales and settlements, net
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Ending
      balance
                      
                      $
                      12,582,110
                      
                      
                      $
                      -
                      
                      
                      $
                      12,582,110The
      amount of total gains or losses for the period included in earnings
      attributable to the change in unrealized gains or losses relating to
      assets still held at the reporting date
                      
                      $
                      4,111,578
                      
                      
                      $
                      -
                      
                      
                      $
                      4,111,578




15





FortheNineMonthsEndedSeptember30,2010SeriesDPrivate
                      Placement
                    
                    
                    2010Common
                      StockEquity
                      Offering
                    
                    
                    TotalBeginning
      balance
                    
                    $
                    8,410,379
                    
                    
                    $
                    -
                    
                    
                    $
                    8,410,379Total
      gains or losses (realized/unrealized)Included
      in earnings as change in value of warrant liability
                    
                    
                    7,968,929
                    
                    
                    
                    136,615
                    
                    
                    
                    8,105,544Purchases,
      issuances, sales and settlements, net
                    
                    
                    (626,774
                    )
                    
                    
                    2,948,617
                    
                    
                    
                    2,321,843Ending
      balance
                    
                    $
                    15,752,534
                    
                    
                    $
                    3,085,232
                    
                    
                    $
                    18,837,766The
      amount of total gains or losses for the period included in earnings
      attributable to the change in unrealized gains or losses relating to
      assets still held at the reporting date
                    
                    $
                    7,744,051
                    
                    
                    $
                    136,615
                    
                    
                    $
                    7,880,666





For the Nine Months Ended September 30, 20009Series D Private
                            Placement
                          
                          
                          2010 Common
                            Stock Equity
                            Offering
                          
                          
                          TotalBeginning
      balance
                          
                          $
                          -
                          
                          
                          $
                          -
                          
                          
                          $
                          -Total
      gains or losses (realized/unrealized)Included
      in earnings as change in value of warrant liability
                          
                          
                          9,565,276
                          
                          
                          
                          -
                          
                          
                          
                          9,565,276Purchases,
      issuances, sales and settlements, net
                          
                          
                          3,016,834
                          
                          
                          
                          -
                          
                          
                          
                          3,016,834Ending
      balance
                          
                          $
                          12,582,110
                          
                          
                          $
                          -
                          
                          
                          $
                          12,582,110The
      amount of total gains or losses for the period included in earnings
      attributable to the change in unrealized gains or losses relating to
      assets still held at the reporting date
                          
                          $
                          9,565,276
                          
                          
                          $
                          -
                          
                          
                          $
                          9,565,276





At March
31, 2010, the assumption for the expected term in years used to value the Series
D Private Placement warrants was changed based on an analysis of warrant
exercise activity for the twelve months since issuance. At the time the warrants
were issued, an expected term of two years was established based on the
expectation that the warrants would be exercised earlier in their term as the
warrants were immediately exercisable at a price below the market price of the
stock.  At March 31, 2010, the Company determined that the safe harbor
method for determining of the assumption relating to the expected term was more
appropriate based on the limited exercise experienced to date.  The
safe harbor method calculates the expected term as one half of the remaining
term of the warrants.





The
Company recognized a fair value measurement loss of $5,258,402 and $4,111,578 on
the Series D Private Placement warrants for the three months ended September 30,
2010 and 2009, respectively.  The Company recognized a fair value
measurement loss of $1,149,846 and $0 on the 2010 Common Stock Equity Offering
warrants for the three months ended September 30, 2010 and 2009,
respectively.  In total, the Company recognized a fair value
measurement loss of $6,408,248 and $4,111,578 for the three months ended
September 30, 2010 and 2009, respectively.


The
Company recognized a fair value measurement loss of $7,968,929 and
$9,565,276 on the Series D Private Placement warrants for the nine months ended
September 30, 2010 and 2009, respectively.  The Company recognized a
fair value measurement loss of $136,615 and $0 on the 2010 Common Stock Equity
Offering warrants for the nine months ended September 30, 2010 and 2009,
respectively.  In total, the Company recognized a fair value
measurement loss of $8,105,544 and $9,565,276 for the nine months ended
September 30, 2010 and 2009 respectively.





The
Company does not have any other non-recurring assets and liabilities that are
required to be presented on the balance sheets at fair value.





L.
            Use
      of Estimates - The preparation of financial statements in conformity with
      GAAP requires management to make estimates and assumptions that affect the
      reported amounts of assets and liabilities and disclosure of contingent
      assets and liabilities at the date of the financial statements and the
      reported amounts of revenues and expenses during the reporting period. The
      Company bases its estimates on historical experience and on various other
      assumptions that the Company believes to be reasonable under these
      circumstances. Actual results could differ from those
      estimates.


16


M.
            Revenue
      Recognition - Revenue sources consist of government grants, government
      contracts and commercial development
contracts.




Revenues
from government grants and contracts are for research and development purposes
and are recognized in accordance with the terms of the award and the government
agency. Grant revenue is recognized in one of two different ways depending on
the grant. Cost reimbursement grants require us to submit proof of costs
incurred that are invoiced by us to the government agency, which then pays the
invoice. In this case, grant revenue is recognized during the period that the
costs were incurred according to the terms of the government grant. Fixed cost
grants require no proof of costs at the time of invoicing, but proof is required
for audit purposes and grant revenue is recognized during the period that the
costs were incurred according to the terms of the government grant. The grant
revenue under these fixed costs grants is recognized using a
percentage-of-completion method, which uses assumptions and estimates. These
assumptions and estimates are developed in coordination with the principal
investigator performing the work under the government fixed-cost grants to
determine key milestones, expenses incurred, and deliverables to perform a
percentage-of-completion analysis to ensure that revenue is appropriately
recognized. Critical estimates involved in this process include total costs
incurred and anticipated to be incurred during the remaining life of the
grant.





Government
contract revenue is recognized as allowable research and development expenses
are incurred during the period and according to the terms of the government
contract.





The
Company recognizes revenue related to the funds received from the State of New
York under the sponsored research agreement with the RPCI. This results in the
recognition of revenue as allowable costs are incurred. The Company recognizes
revenue on research laboratory services and the subsequent use of related
equipment. The amount paid as a payment toward future services related to the
equipment is recognized as a prepaid asset and will be recognized as revenue
ratably over the useful life of the asset and the prepaid asset is recognized as
expense.





Commercial
revenue is recognized when the service or development is delivered or upon
complying with the relevant terms of the commercial agreement.





N.
            Deferred
      Revenue – Deferred revenue results when payment is received in advance of
      revenue being earned. The Company makes a determination as to whether the
      revenue has been earned by applying a percentage-of-completion analysis to
      compute the need to recognize deferred revenue. The percentage of
      completion method is based upon (1) the total income projected for the
      project at the time of completion and (2) the expenses incurred to date.
      The percentage-of-completion can be measured using the proportion of costs
      incurred versus the total estimated cost to complete the
      contract.





The
Company received $2,000,000 in funds from the State of New York through RPCI
during the second quarter of 2007.  The Company received an additional
$1,000,000 in funds from the State of New York through RPCI during the second
quarter of 2008.  The Company is recognizing this revenue over the
terms and conditions of the sponsored research agreement. The Company recognizes
revenue on research laboratory services and the purchase and subsequent use of
related equipment. The amount paid as a payment toward future services related
to the equipment is recognized as a prepaid asset and will be recognized as
revenue ratably over the useful life of the asset.





For the
nine months ended September 30, 2010, the Company recognized $12,570 as revenue
resulting in a balance of deferred revenue of $2,317,046 at September 30, 2010.
At December 31, 2009, the balance in deferred revenue was $2,329,616. $2,300,194
is classified as long-term as of September 30, 2010, due to the schedule of
collaborations planned over the life of the agreement.


O.
            Research
      and Development – Research and development expenses consist primarily of
      costs associated with salaries and related expenses for personnel, costs
      of materials used in research and development, costs of facilities and
      costs incurred in connection with third-party collaboration efforts.
      Expenditures relating to research and development are expensed as
      incurred.





P.
            Equity
      Incentive Plan - On May 26, 2006, the Company's Board of Directors adopted
      the 2006 Equity Incentive Plan (“Plan”) to attract and retain persons
      eligible to participate in the Plan, motivate participants to achieve
      long-term Company goals and further align participants' interests with
      those of the Company's other stockholders. The Plan was to expire on May
      26, 2016 and the aggregate number of shares of stock which could be
      delivered under the Plan may not exceed 2,000,000 shares. On February 14,
      2007, these 2,000,000 shares were registered with the SEC by filing a Form
      S-8 registration statement. On April 29, 2008, the stockholders of the
      Company approved an amendment and restatement of the Plan (the “Amended
      Plan”) that clarified certain aspects of the Plan, contained updates that
      reflect changes and developments in federal tax laws and set the
      expiration date at April 29, 2018. On June 8, 2010, the stockholders of
      the Company approved an additional amendment to the Plan increasing the
      total shares that could be awarded under the Amended Plan to
      7,000,000.  As of September 30, 2010, there were 3,512,585 stock
      options and 753,451 shares granted under the Amended Plan and 122,332
      shares forfeited leaving 2,856,296 shares of stock available to be awarded
      under the Amended Plan.


17


During
the three months ended September 30, 2010, the Company issued 175,499 stock
options and 40,054 shares of common stock for the following:





·
            90,499
      stock options issued to employees and consultants under the Company’s
      incentive bonus plan.


·
            80,000
      stock options to two new employees as part of their
      compensation.


·
            5,000
      stock options to a consultant for payment of accounting services
      rendered.


·
            36,635
      shares of common stock to four consultants for payment of corporate
      strategy consulting services rendered.  The shares were valued
      at $156,711.


·
            3,419
      shares of common stock to one consultant for payment of financial
      consulting services rendered.  The shares were valued at
      $12,514





During
the nine months ended September 30, 2010, the Company issued 1,021,932 stock
options and 306,919 shares of common stock for the following:





·
            230,932
      stock options issued to employees and consultants under the Company’s
      incentive bonus plan.


·
            175,000
      stock options to six new employees as part of their
      compensation.


·
            46,000
      stock options to two consultants for payment of corporate strategy
      consulting services
rendered.


·
            10,000
      stock options to two consultants for payment of accounting services
      rendered.


·
            140,000
      stock options to outside board members as part of their
      compensation.


·
            420,000
      stock options to the executive management team for the 2009 executive
      compensation bonus plan.


·
            59,717
      shares of common stock to outside board members as part of their
      compensation.  The shares were valued at
    $196,076.


·
            181,379
      shares of common stock to seven consultants for payment of corporate
      strategy consulting services rendered.  The shares were valued
      at $663,595.


·
            65,823
      shares of common stock to four consultants for payment of financial
      consulting services rendered.  The shares were valued at
      $238,137.





During
the year ended December 31, 2009, the Company issued 787,932 stock options and
211,532 shares of common stock for the following:





·
            452,932
      stock options issued to employees and consultants under the Company’s
      incentive bonus plan.


·
            140,000
      stock options to independent directors as part of their compensation as
      directors.


·
            135,000
      stock options to employees and consultants for a performance
      bonus.


·
            60,000
      stock options to a consultant for payment of investor relations services
      rendered.


·
            103,484
      shares of common stock to three consultants for payment of corporate
      strategy consulting services rendered.  The shares were valued
      at $399,323.


·
            78,048
      shares of common stock to five consultants for payment of financial
      consulting services rendered.  The shares were valued at
      $291,763.


·
            30,000
      shares of common stock to an employee for a performance
      bonus.  The shares were valued at
  $99,900.





Q.
            Stock-Based
      Compensation - The Company recognizes and values employee stock-based
      compensation under the provisions of the FASB Accounting Standards
      Codification on stock compensation.





The fair
value of each stock option granted is estimated on the grant date. The Black
Scholes model is used for standard stock options, but if market conditions are
present within the stock options, the Company utilizes Monte Carlo simulation to
value the stock options. The assumptions used to calculate the fair value of
options granted are evaluated and revised, as necessary, to reflect the
Company's experience. The Company uses a risk-free rate published by the St.
Louis Federal Reserve at the time of the option grant, assumes a forfeiture rate
of zero, assumes an expected dividend yield rate of zero based on the Company's
intent not to issue a dividend in the foreseeable future, uses an expected life
based on the safe harbor method, and computes an expected volatility based on
the volatility of similar high-growth, publicly-traded, biotechnology companies'
common stock. In 2008, the Company began to include the use of its own stock in
the volatility calculation and is layering in the volatility of the stock of the
Company with that of comparable companies since there is not adequate trading
history to rely solely on the volatility of the Company. The Company recognizes
the fair value of share-based compensation in net income on a straight-line
basis over the requisite service period.





During
the three months ended September 30, 2010 and September 30, 2009, the Company
granted 175,499 and 65,221 stock options, respectively. The Company recognized a
total of $388,186 and $306,694 in expense related to stock options for the three
months ended September 30, 2010 and September 30, 2009,
respectively.  The Company also recaptured $696 and $0 of previously
recognized expense due to the forfeiture of non-vested stock options during the
three months ended September 30, 2010 and September 30, 2009,
respectively.  The net
expense for options for thethreemonths endedSeptember30, 2010 andSeptember30, 2009 was $387,490and $306,694, respectively.


18


During
the nine months ended September 30, 2010 and September 30, 2009, the Company
granted 1,021,932 and 723,276 stock options, respectively. The Company
recognized a total of $1,332,457 and $1,527,719 in expense related to stock
options for the nine months ended September 30, 2010 and September 30, 2009,
respectively.  The Company also recaptured $39,483 and $37,878 of
previously recognized expense due to the forfeiture of non-vested stock options
during the nine months ended September 30, 2010 and September 30, 2009,
respectively.  The
Company also incurred an additional $37,800 of expense for stock options awarded
under the 2009 Executive Compensation Plan. These options were originally
expensed in 2009 based on the December 31, 2009 variables, but were not issued
until May 18, 2010. The change in dates resulted in a difference in valuation
assumptions used in the Black-Scholes model causing an increase in the grant
date fair value. This increase in the grant date fair value from $2.31 to $2.40
per share resulted in the incurrence of $37,800 in expense.  The net
expense for options for theninemonths endedSeptember30, 2010 andSeptember30, 2009was $1,330,774 and $1,489,841,
respectively.





The
assumptions used to value these option and grants using the Black-Scholes option
valuation model are as follows:





2010 YTD
                  
                  
                  2009Risk-free
      interest rate
                  
                  
                  1.46-2.75
                  %
                  
                  
                  1.87-2.74
                  %Expected
      dividend yield
                  
                  
                  0
                  %
                  
                  
                  0
                  %Expected
      life
                  
                  5-6
      years
                  
                  
                  5-6
      yearsExpected
      volatility
                  
                  
                  84.23-89.55
                  %
                  
                  
                  84.13-90.06
                  %





The
weighted average, estimated grant date fair values of stock options granted
during the three months ended September 30, 2010 and September 30, 2009 were
$2.59 and $1.76, respectively.





The
following tables summarize the stock option activity for the nine months ended
September 30, 2010 and September 30, 2009, respectively.





Weighted
                  
                  
                  WeightedAverage
                  
                  
                  AverageExercise
                  
                  
                  RemainingStock
                  
                  
                  Price per
                  
                  
                  ContractualOptions
                  
                  
                  Share
                  
                  
                  Term (in Years)Outstanding,
      December 31, 2009
                  
                  
                  2,517,007
                  
                  
                  $
                  5.46Granted
                  
                  
                  1,021,932
                  
                  
                  $
                  3.45Exercised
                  
                  
                  143,648
                  
                  
                  $
                  1.84Forfeited,
      Canceled
                  
                  
                  91,155
                  
                  
                  $
                  7.10Outstanding,
      September 30, 2010
                  
                  
                  3,304,136
                  
                  
                  $
                  4.95
                  
                  
                  
                  8.01Exercisable,
      September 30, 2010
                  
                  
                  2,962,511
                  
                  
                  $
                  4.76
                  
                  
                  
                  7.98


19


Weighted
                    
                    
                    WeightedAverage
                    
                    
                    AverageExercise
                    
                    
                    RemainingPrice per
                    
                    
                    ContractualShares
                    
                    
                    Share
                    
                    
                    Term (in Years)Outstanding,
      December 31, 2008
                    
                    
                    1,948,874
                    
                    
                    $
                    6.17Granted
                    
                    
                    723,276
                    
                    
                    $
                    2.72Exercised
                    
                    
                    149,534
                    
                    
                    $
                    1.91Forfeited,
      Canceled
                    
                    
                    3,313
                    
                    
                    $
                    4.00Outstanding,
      September 30, 2009
                    
                    
                    2,519,303
                    
                    
                    $
                    5.43
                    
                    
                    
                    8.22Exercisable,
      September 30, 2009
                    
                    
                    2,161,153
                    
                    
                    $
                    5.05
                    
                    
                    
                    8.18





The
Company recognized $169,224 and $95,375 in expense for shares issued under the
Amended Plan during the three months ended September 30, 2010 and September 30,
2009, respectively.   The Company issued a total of 40,054 shares
and 25,772 shares during the three months ended September 30, 2010 and September
30, 2009, respectively.  In addition, the Company recognized $3,333
and $8,333 in compensation expense related to the amortization of restricted
shares during the three months ended September 30, 2010 and September 30, 2009,
respectively.





The
Company also recognized $1,442,215 and $599,217 in expense for shares issued
under the Amended Plan during the nine months ended September 30, 2010 and
September 30, 2009, respectively.   The Company issued a total of
415,919 shares and 193,312 shares during the nine months ended September 30,
2010 and September 30, 2009, respectively.  In addition, the Company
recognized $9,963 and $24,907 in compensation expense related to the
amortization of restricted shares during the nine months ended September 30,
2010 and September 30, 2009, respectively.





R.
            Income
      Taxes - No income tax expense was recorded for the nine months ended
      September 30, 2010, as the Company does not expect to have taxable income
      in 2010 and does not expect any current federal or state tax
      expense.  A full valuation allowance has been recorded against
      the Company’s deferred tax asset, which is primarily related to operating
      loss and tax credit carryforwards and accrued
  expenses.





S.
            Net
      Loss Per Share - Basic and diluted net loss per share has been computed
      using the weighted-average number of shares of common stock outstanding
      during the period.


The
following table presents the calculation of basic and diluted net loss per share
for the three months and nine months ended September 30, 2010 and September 30,
2009:





Three Months Ended
                  
                  
                  Nine Months EndedSeptember 30, 2010
                  
                  
                  September 30, 2009
                  
                  
                  September 30, 2010
                  
                  
                  September 30, 2009Net
      loss available to common stockholders
                  
                  $
                  (7,203,293
                  )
                  
                  $
                  (5,313,179
                  )
                  
                  $
                  (13,006,964
                  )
                  
                  $
                  (15,240,289
                  )Net
      loss per share, basic and diluted
                  
                  $
                  (0.27
                  )
                  
                  $
                  (0.33
                  )
                  
                  $
                  (0.51
                  )
                  
                  $
                  (1.00
                  )Weighted-average
      shares used in computing net loss per share, basic and
    diluted
                  
                  
                  26,984,059
                  
                  
                  
                  15,878,331
                  
                  
                  
                  25,756,300
                  
                  
                  
                  15,184,785





The
Company has excluded all outstanding preferred shares, warrants and options from
the calculation of diluted net loss per share because all such securities are
antidilutive for all periods presented.





The total
number of shares excluded from the calculations of diluted net loss per share,
prior to application of the treasury stock method is as follows:




Common Equivalent Securities
                    
                    September 30, 2010
                    
                    
                    September 30, 2009Preferred
      Shares
                    
                    
                    -
                    
                    
                    
                    3,723,695Warrants
                    
                    
                    9,745,046
                    
                    
                    
                    8,939,528Options
                    
                    
                    3,304,136
                    
                    
                    
                    2,519,303Total
                    
                    
                    13,049,182
                    
                    
                    
                    15,182,526


20


T.
            Concentrations
      of Risk - Grant and contract revenue was comprised wholly from grants and
      contracts issued by federal and state governments and accounted for 100.0%
      total revenue for the nine months ended September 30, 2010 and September
      30, 2009. Although the Company anticipates ongoing federal grant and
      contract revenue, there is no guarantee that this revenue stream will
      continue in the future.





Financial
instruments that potentially subject us to a significant concentration of credit
risk consist primarily of cash and cash equivalents and securities
available-for-sale. The Company maintains deposits in federally insured
institutions in excess of federally insured limits. The Company does not believe
it is exposed to significant credit risk due to the financial position of the
depository institutions in which those deposits are held. Additionally, the
Company has established guidelines regarding diversification of its investment
portfolio and maturities of investments, which are designed to meet safety and
liquidity.





U.
            Foreign
      Currency Exchange Rate Risk - The Company has entered into a manufacturing
      agreement to produce one of its drug compounds with a foreign third party
      and is required to make payments in the foreign currency. As a result, the
      Company's financial results could be affected by changes in foreign
      currency exchange rates. Currently, the Company's exposure primarily
      exists with the Euro. As of September 30, 2010, the Company is obligated
      to make payments under the agreements of 1,470,709 Euros. As of September
      30, 2010, the Company has purchased forward contracts for 751,344
      Euros and, therefore, at September 30, 2010, had foreign currency
      commitments of $987,040 for Euros given prevailing currency exchange spot
      rates.





V.
            Comprehensive
      Income/(Loss) - The Company applies the FASB Accounting Standards
      Codification on comprehensive income that requires disclosure of all
      components of comprehensive income on an annual and interim basis.
      Comprehensive income is defined as the change in equity of a business
      enterprise during a period from transactions and other events and
      circumstances from non-owner
sources.





W.
            Recently Issued Accounting
      Pronouncements –In January 2010, the
      Financial Accounting Standards Board ("FASB") issued updated guidance to
      amend the disclosure requirements related to recurring and nonrecurring
      fair value measurements. This update requires new disclosures on
      significant transfers of assets and liabilities between Level 1 and
      Level 2 of the fair value hierarchy (including the reasons for these
      transfers) and the reasons for any transfers in or out of Level 3.
      This update also requires a reconciliation of recurring Level 3
      measurements about purchases, sales, issuances and settlements on a gross
      basis. In addition to these new disclosure requirements, this update
      clarifies certain existing disclosure requirements. For example, this
      update clarifies that reporting entities are required to provide fair
      value measurement disclosures for each class of assets and liabilities
      rather than each major category of assets and liabilities. This update
      also clarifies the requirement for entities to disclose information about
      both the valuation techniques and inputs used in estimating Level 2
      and Level 3 fair value measurements. This update became effective for
      the Company with the interim and annual reporting period beginning
      January 1, 2010, except for the requirement to provide the
      Level 3 activity of purchases, sales, issuances, and settlements on a
      gross basis, which will become effective for the Company with the interim
      and annual reporting period beginning January 1, 2011. The Company
      will not be required to provide the amended disclosures for any previous
      periods presented for comparative purposes. Other than requiring
      additional disclosures, adoption of this update did not have a material
      effect on the Company's financial
statements.


In
September 2009, the FASB provided updated guidance (1) on whether, in a
revenue arrangement, multiple deliverables exist, how the deliverables should be
separated, and how the consideration should be allocated; (2) requiring an
entity to allocate revenue in an arrangement using estimated selling prices of
deliverables if a vendor does not have vendor-specific objective evidence or
third-party evidence of selling price; and (3) eliminating the use of the
residual method and requiring an entity to allocate revenue using the relative
selling price method. The update is effective for fiscal years beginning on or
after June 15, 2010, with early adoption permitted. Adoption may either be
on a prospective basis or by retrospective application. The adoption of this
guidance did not materially impact the Company's financial
statements.





Note 3. Stock
Transactions





See Note
2P – Equity Incentive Plan for stock transactions made under the Company's
Equity Incentive Plan.





Series
D Preferred Stock and Warrants and Related Adjustments





On
February 2, 2009, the Company issued 75,000 restricted shares of common stock to
designees of the placement agents in the Series D Preferred Stock
offering.


21


On
February 13, 2009, March 20, 2009, and March 27, 2009, the Company entered into
Securities Purchase Agreements (“Purchase Agreements”) with various accredited
investors (“Purchasers”), pursuant to which the Company agreed to sell to the
Purchasers an aggregate of 542.84 shares of Series D Convertible Preferred
Stock, with a par value of $0.005 per share and a stated value of $10,000 per
share (“Series D Preferred”), and Common Stock Purchase Warrants (“Series D
Warrants”) to purchase an aggregate of 3,877,386 shares of the Company’s common
stock, par value $0.005 per share (“Series D Private Placement”).  The
Series D Warrants have a seven-year term and an exercise price of $1.60. Each
share of Series D Preferred was initially convertible into approximately 7,143
shares of common stock, subject to adjustment as described below.





The
aggregate purchase price paid by the Purchasers for the Series D Preferred and
the Series D Warrants was approximately $5,428,307 (representing $10,000 for
each Series D Preferred together with a Series D Warrant). After related fees
and expenses, the Company received net proceeds of approximately
$4,460,000.





In
consideration for its services as exclusive placement agent, Garden State
Securities, Inc. received cash compensation and Series D Warrants to purchase an
aggregate of approximately 387,736 shares of common stock. In the aggregate,
Series D Preferred and Series D Warrants issued in the transaction were
initially convertible into, and exercisable for, approximately 8,142,508 shares
of common stock subject to adjustment as described below. Each share of Series D
Preferred was initially convertible into a number of shares of common stock
equal to the stated value of the share ($10,000), divided by $1.40 (“Conversion
Price”), subject to adjustment as discussed below. As of February 9, 2010, all
shares of Series D Preferred were converted into an aggregate of 4,576,979
shares of the Company’s common stock, and no shares of Series D Preferred
remained outstanding.





At the
time of its issuance, the Series D Preferred ranked junior to the Company’s
Series B Convertible Preferred Stock and senior to all shares of common
stock and other capital stock of the Company. The terms of the Series D
Preferred provide that if the Company fails to meet certain milestones, the
Conversion Price would, unless the closing price of the common stock was greater
than $3.69 on the date the relevant milestone is missed, be reduced to 80% of
the Conversion Price in effect on that date (“Milestone
Adjustment”).  As described further below, the first Milestone
Adjustment became effective on December 31, 2009. In addition to the Milestone
Adjustment, the conversion provision of the Series D Preferred provide for
periodic adjustments to the Conversion Price beginning on August 13, 2009 (the
“Initial Adjustment Date”), whereby the Conversion Price was reduced to 95% of
the Conversion Price on the Initial Adjustment Date, and on each three month
anniversary of the Initial Adjustment Date, the then Conversion Price is to be
reduced by $0.05 (subject to adjustment) until maturity or converted as
described below.  The Conversion Price is also subject to proportional
adjustment in the event of any stock split, stock dividend, reclassification or
similar event with respect to the common stock and to anti-dilution adjustment
in the event of any Dilutive Issuance as defined in the Certificate of
Designation.





Immediately
after the completion of the transactions contemplated by the Purchase
Agreements, the conversion price of the Company’s Series B Preferred was
adjusted, pursuant to weighted-average anti-dilution provisions, to $4.67,
causing the conversion rate of Series B Preferred into common stock to change to
approximately 1-to-1.49893.  In addition, the exercise prices of the
Company’s Series B Warrants and Series C Warrants were adjusted, pursuant to
weighted-average anti-dilution provisions, to $6.79 and $7.20, from the original
exercise prices of $10.36 and $11.00, respectively. Certain other warrants
issued prior to the Company’s initial public offering were also adjusted
pursuant to anti-dilution provisions contained in those warrants such that their
per share exercise price reduced from $2.00 to $1.48. In addition to the
adjustment to the exercise prices of the Series B Warrants and Series C
Warrants, the aggregate number of shares issuable upon exercise of the Series B
Warrants and the Series C Warrants increased to 3,609,261and 408,032, from
2,365,528and
267,074, respectively. For certain warrants issued prior to the Company’s
initial public offering, the aggregate number of shares of common stock issuable
increased from 281,042 to 379,792.


The fair
value of the 4,265,122 Series D Warrants issued with the Series D Private
Placement was $3,016,834 and was computed using the Black-Scholes option pricing
model using the following assumptions:





Warrants
                  
                  
                  Warrants
                  
                  
                  WarrantsIssued on
                  
                  
                  Issued on
                  
                  
                  Issued onFebruary 13, 2009
                  
                  
                  March 20, 2009
                  
                  
                  March 27, 2009Stock
      price  (prior day close)
                  
                  $
                  2.95
                  
                  
                  $
                  1.41
                  
                  
                  $
                  2.44Exercise
      price
                  
                  $
                  2.60
                  
                  
                  $
                  1.60
                  
                  
                  $
                  1.60Term
      in years
                  
                  
                  2.00
                  
                  
                  
                  2.00
                  
                  
                  
                  2.00Volatility
                  
                  
                  110.14
                  %
                  
                  
                  108.87
                  %
                  
                  
                  111.57
                  %Annual
      rate of quarterly dividends
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Discount
      rate- bond equivalent yield
                  
                  
                  0.89
                  %
                  
                  
                  0.87
                  %
                  
                  
                  0.90
                  %Discount
      due to lack of marketability
                  
                  
                  40
                  %
                  
                  
                  40
                  %
                  
                  
                  40
                  %


22


The
Company recorded a 40% reduction in the calculated value as shown above as the
shares of common stock into which the Series D Warrants were convertible were
not registered on the date such warrants were issued.  This 40%
reduction was determined based on research that indicated that historical median
and mean discounts for lack of marketability were approximately 25% and further
research that indicated that impact of the 2008-2009 economic downturn warranted
an increase in historical discounts for lack of marketability by an additional
11 to 27 basis points.





The value
assigned to the warrants could not exceed the value of the gross proceeds at the
issuance date of each tranche of the offering.  As such, the value
assigned to the warrants on the March 27, 2009 tranche of the Series D Private
Placement was reduced to $789,000 which represents the gross proceeds from that
tranche of the offering.  In addition, since the Series D Preferred
was convertible into shares of common stock, an embedded beneficial conversion
feature existed.  However, the beneficial conversion feature was
considered a deemed dividend, and since the Company had an accumulated deficit,
there was no effect on the statement of stockholders’ equity.





On August
13, 2009, pursuant to the terms of the Certificate of Designation of
Preferences, Rights and Limitations of the Series D Preferred, the Conversion
Price of the Series D Preferred was automatically reduced from $1.40 to $1.33
(“Adjustment”). The Adjustment caused the number of shares of common stock into
which the 542.84 outstanding shares of Series D Preferred could be converted to
increase from 3,877,386 to 4,081,445.  In addition, pursuant to the
weighted-average anti-dilution provisions of the Series B Warrants and the
Series C Warrants, the Adjustment caused the exercise price of the Series B
Warrants to decrease from $6.79 to $6.73, the aggregate number of shares of
common stock issuable upon exercise of the Series B Warrants to increase from
3,609,300 to 3,641,479, the exercise price of the Series C Warrants to decrease
from $7.20 to $7.13 and the aggregate number of shares of common stock issuable
upon exercise of the Series C Warrants to increase from 408,036 to 412,042.
Certain other warrants issued prior to the Company’s initial public offering
were also affected by the Adjustment causing their exercise price to decrease
from $1.48 to $1.47 and the aggregate number of shares of common stock issuable
to increase from 343,537 to 345,855.





On
October 26, 2009, the SEC declared effective a registration statement of the
Company registering up to 4,366,381 shares of common stock for resale from time
to time by the selling stockholders named in the prospectus contained in the
registration statement. This number represented 4,366,381 shares of common stock
issuable upon the conversion or exercise of the securities issued in the
Company’s February and March 2009 private placement. Of these 4,366,381 shares
of common stock, up to 3,863,848 shares were issuable upon conversion of Series
D Preferred and up to 502,533 shares were issuable upon exercise of the Series D
Warrants. The Company will not receive any proceeds from the sale of the
underlying shares of common stock, although to the extent the selling
stockholders exercised warrants for the underlying shares of common stock, the
Company will receive the exercise price of those warrants unless the warrant
holder exercises the warrants using the cashless provision.  The
registration statement was filed to satisfy registration rights that the Company
had granted as part of the private placement. Since the securities are
convertible into common shares and the underlying shares of common stock are
freely tradable after conversion, the 40% reduction described above was
eliminated when calculating fair market values of the Series D Warrants.
Subsequent to the effectiveness of the registration statement and as of December
31, 2009, 13.4 Series D Preferred shares were converted into common stock and
71,429 Series D Warrants were exercised for common stock.





On
November 13, 2009, the Conversion Price of the Series D Preferred automatically
reduced from $1.33 to $1.28 (“Second Adjustment”). The Second Adjustment caused
the number of shares of common stock into which the 470.25 outstanding shares of
Series D Preferred could be converted to increase from 3,627,041 to 3,673,844.
In addition, pursuant to the weighted-average anti-dilution provisions of the
Series B Warrants and the Series C Warrants, the Second Adjustment caused the
exercise price of the Series B Warrants to decrease from $6.73 to $6.68, the
aggregate number of shares of common stock issuable upon exercise of the Series
B Warrants to increase from 3,641,479 to 3,668,727, the exercise price of the
Series C Warrants to decrease from $7.13 to $7.08 and the aggregate number of
shares of common stock issuable upon exercise of the Series C Warrants to
increase from 412,042 to 414,952. Certain other warrants issued prior to the
Company’s initial public offering were also affected by the Second Adjustment
causing their exercise price to decrease from $1.47 to $1.46 and the aggregate
number of shares of common stock issuable to increase from 111,447 to
112,210.


On
December 31, 2009, the conversion price of the Company’s Series D
Convertible Preferred Stock was reduced from $1.28 to $1.02. This reduction was
the result of the Milestone Adjustment provided in the Certificate of
Designation of Preferences, Rights and Limitations of the Series D
Preferred.  This reduction caused the number of shares of common stock
issuable upon conversion of the Series D Preferred to increase from 3,647,281 to
4,576,979 as of December 31, 2009. In addition, pursuant to the weighted-average
anti-dilution provisions of the Series B Warrants and the Series C Warrants,
this adjustment caused the exercise price of the Series B Warrants to decrease
from $6.68 to $6.37, the aggregate number of shares of common stock issuable
upon exercise of the Series B Warrants to increase from 3,668,727 to 3,847,276,
the exercise price of the Series C Warrants to decrease from $7.08 to $6.76 and
the aggregate number of shares of common stock issuable upon exercise of the
Series C Warrants to increase from 414,952 to 434,596. Certain other warrants
issued prior to the Company’s initial public offering were also adjusted
pursuant to anti-dilution provisions contained in those warrants such that their
per share exercise price reduced from $1.46 to $1.39. For these warrants issued
prior to the Company’s initial public offering, the aggregate number of shares
of common stock issuable increased from 112,210 to 117,861.





As a
result of the satisfaction of certain conditions contained in Section 8(a) of
the Certificate of Designation of Preferences, Rights and Limitations of the
Series D Preferred, filed with the Secretary of State of Delaware on February
13, 2009, including that the closing sale price of the Company’s common stock on
the NASDAQ Capital Market has exceeded 300% of the conversion price of the
Series D Preferred ($1.02) for 20 consecutive trading days, on February 9, 2010,
466.85 shares of Series D Preferred, which represented all outstanding Series D
Preferred, converted into 4,576,979 shares of common stock.


23


2010
Common Stock Equity Offering and Related Adjustments





On March
2, 2010, the Company issued 1,538,462shares of common stock
and Common Stock Purchase Warrants to purchase an aggregate of 1,015,385shares of common stock,
for an aggregate purchase price of $5,000,000. The Warrants are exercisable
commencing six months following issuance and expire on March 2,
2015.  The placement agent also received additional warrants to
purchase 123,077 shares of common stock.





The fair
value of the 1,138,462 Warrants issued with the 2010 Common Stock Equity
Offering was $2,948,617 and was computed using the Black-Scholes option pricing
model using the following assumptions:





WarrantsIssued onFebruary 25, 2010Stock
      price  (prior day close)
                  
                  $
                  4.26Exercise
      price
                  
                  $
                  4.50Term
      in years
                  
                  
                  2.75Volatility
                  
                  
                  104.01
                  %Annual
      rate of quarterly dividends
                  
                  
                  -Discount
      rate- bond equivalent yield
                  
                  
                  1.28
                  %





Immediately
after the completion of the 2010 Common Stock Equity Offering, pursuant to
weighted-average anti-dilution provisions of the Series B Warrants and Series C
Warrants, the exercise price of the Company’s Series B Warrants reduced from
$6.37 to approximately $5.99, and the aggregate number of shares of common stock
issuable upon exercise of the Series B Warrants increased from 3,847,276 to
approximately 4,091,345; and the exercise price of the Company’s Series C
Warrants reduced from $6.76 to approximately $6.35, and the aggregate number of
shares of common stock issuable upon exercise of the Series C Warrants increased
from 434,596 to approximately 462,654.





Other
Issuances





On
January 1, 2010, the Company issued 34,000 shares of common stock to several
consultants of the Company.





On
January 4, 2010, the Company issued 70,000 shares of common stock to several
consultants of the Company.


Note 4. Commitments and
Contingencies





The Company has entered into various
agreements with third parties and certain related parties in connection with the
research and development activities of its existing product candidates as well
as discovery efforts on potential new product candidates. These agreements
include costs for research and development and license agreements that represent
the Company's fixed obligations payable to sponsor research and minimum royalty
payments for licensed patents. These amounts do not include any additional
amounts that the Company may be required to pay under its license agreements
upon the achievement of scientific, regulatory and commercial milestones that
may become payable depending on the progress of scientific development and
regulatory approvals, including milestones such as the submission of an
investigational new drug application to the FDA and the first commercial sale of
the Company's products in various countries. These agreements include costs
related to manufacturing, clinical trials and preclinical studies performed by
third parties.





The Company is also party to three
agreements that require it to make milestone payments, royalties on net sales of
the Company's products and payments on sublicense income received by the
Company. As ofSeptember
30, 2010, $350,000 in
milestone payments have been made under one of these agreements.There are no milestone payments or
royalties on net sales accrued for any of the three agreements as of September
30, 2010 and December 31, 2009.





From time to time, the Company may have
certain contingent liabilities that arise in the ordinary course of business.
The Company accrues for liabilities when it is probable that future expenditures
will be made and such expenditures can be reasonably estimated. For all periods
presented, the Company is not a party to any pending litigation or other
material legal proceedings. From time to time in the ordinary course of
business, the Company may be subject to claims brought against it. It is not
possible to state the ultimate liability, if any,that could result to the Company as a
result ofthese
matters.


24


The Company currently has operating
lease commitments in place for facilities in Buffalo, New York and Chicago,
Illinois as well as office equipment. The Company recognizes rent expense on a
straight-line basis over the term of the relatedoperating leases. The operating lease
expenses recognizedwere
$81,139and $95,120 for the three months ended
September 30, 2010 and September 30, 2009, respectively.  The
operating lease expenses recognized were $264,286and $268,557 for the nine months ended
September 30, 2010 and September 30, 2009, respectively.





Annual future minimum lease payments
under present lease commitments are as follows:





OperatingLeases2010 remaining
      quarter
                          
                          $
                          81,1392011
                          
                          
                          315,3422012
                          
                          
                          147,9152013
                          
                          
                          3,540$
                          547,937





The Company has entered into stock
option agreements with key employees, board members and consultants with
exercise prices ranging from $0.66 to $17.00. These awards were approved by the
Company’s Board of Directors. The options expire ten years from the date of
grant exceptfor18,000 options that
expire on December 31, 2012, subject to the terms applicable in the
agreement.





The following tables summarize the stock
option activity for theninemonths endedSeptember 30, 2010 and September 30,
2009:





Weighted AverageOptions
                  
                  
                  Exercise Price Per ShareOutstanding,
      December 31, 2009
                  
                  
                  2,517,007
                  
                  
                  $
                  5.46Granted
                  
                  
                  1,021,932
                  
                  
                  $
                  3.45Exercised
                  
                  
                  143,648
                  
                  
                  $
                  1.84Forfeited,
      Canceled
                  
                  
                  91,155
                  
                  
                  $
                  7.10Outstanding,
      September 30, 2010
                  
                  
                  3,304,136
                  
                  
                  $
                  4.95





Weighted AverageOptions
                  
                  
                  Exercise Price Per ShareOutstanding,
      December 31, 2008
                  
                  
                  1,948,874
                  
                  
                  $
                  6.17Granted
                  
                  
                  723,276
                  
                  
                  $
                  2.72Exercised
                  
                  
                  149,534
                  
                  
                  $
                  1.91Forfeited,
      Canceled
                  
                  
                  3,313
                  
                  
                  $
                  4.00Outstanding,
      September 30, 2009
                  
                  
                  2,519,303
                  
                  
                  $
                  5.43





The Company has enteredinto warrant agreements with strategic
partners, consultants and investors with exercise prices ranging from$1.60 to$10.00. Theseawards were approved by the Company’s
Board of Directors. The warrants expire between five and seven years from the
date of grant, subject to the terms applicable in the agreement. A list of the
total warrants awarded and exercised appears below:


25





Weighted
      Average
                    
                    
                    Number of
      CommonWarrants
                    
                    
                    Exercise Price Per
      Share
                    
                    
                    Shares Exerciseable
      IntoOutstanding, December 31,
      2009
                    
                    
                    6,956,673
                    
                    
                    $
                    3.71
                    
                    
                    
                    8,641,893Granted
                    
                    
                    1,138,461
                    
                    
                    $
                    4.50
                    
                    
                    
                    1,138,461Exercise Price
      Adjustment
                    
                    
                    
                    
                    
                    $
                    (0.14
                    )
                    
                    
                    272,127Exercised
                    
                    
                    267,512
                    
                    
                    $
                    1.54
                    
                    
                    
                    301,717Forfeited,
      Canceled
                    
                    
                    3,973
                    
                    
                    $
                    1.39
                    
                    
                    
                    5,718Outstanding, September 30,
      2010
                    
                    
                    7,823,649
                    
                    
                    $
                    3.90
                    
                    
                    
                    9,745,046
  Weighted
      Average
                    
                    
                    Number of
      CommonWarrants
                    
                    
                    Exercise Price Per
      Share
                    
                    
                    Shares Exerciseable
      IntoOutstanding, December 31,
      2008
                    
                    
                    3,453,268
                    
                    
                    $
                    8.86
                    
                    
                    
                    3,453,268Granted
                    
                    
                    4,265,122
                    
                    
                    $
                    1.20
                    
                    
                    
                    4,265,122Exercise Price
      Adjustment
                    
                    
                    
                    
                    
                    $
                    (3.35
                    )
                    
                    
                    1,522,007Exercised
                    
                    
                    291,444
                    
                    
                    $
                    1.17
                    
                    
                    
                    300,869Forfeited,
      Canceled
                    
                    
                    -
                    
                    
                    
                    n/a
                    
                    
                    
                    -Outstanding, September 30,
      2009
                    
                    
                    7,426,946
                    
                    
                    $
                    3.59
                    
                    
                    
                    8,939,528





The
Company has entered into employment agreements with three key executives who, if
terminated by the Company without cause as described in these agreements, would
be entitled to severance pay.





The
Company was awarded a $440,000 grant from the New York Empire State Certified
Development Corporation. The award provides minimum employee levels required to
receive the remainder of the award and contains provisions of recapture of
monies paid if required employment levels are not maintained.





The
Company is not currently a party to any pending material legal actions. From
time to time in the ordinary course of business, the Company may be subject to
claims brought against it.





Note 5. Subsequent
Events





No
material subsequent events have occurred since the balance sheet date of
September 30, 2010.


26


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





This management's discussion and
analysis of financial condition and results of operations and other portions of
this filing contain forward-looking information that involves risks and
uncertainties. Our actual results could differ materially from those anticipated
by the forward-looking information. Factors that may cause such differences
include, but are not limited to, availability and cost of financial resources,
results of our research and development, efforts and clinical trials, product
demand, market acceptance and other factors discussed below and inourother SEC filings, includingourAnnual Report on Form 10-K for the year
ended December 31, 2009.See also the Risk Factors discussed
under Item 1A. of our
Annual Report on Form 10-K for the year ended December 31, 2009.This management's discussion and
analysis of financial condition and results of operations should be read in
conjunction with our financial statements and the related notes included
elsewhere in this filing and in our Annual Report on Form 10-K for the year
ended December 31, 2009.





OVERVIEW





Cleveland BioLabs, Inc. is a
biotechnology company focused on developing biodefense, tissue protection and
cancer treatment drugs based on the concept of modulation of cell death for
therapeutic benefit.CBLI
wasincorporated in Delaware and commenced
business operations in June 2003. We have devoted substantially all of our
resources to the identification, development and commercialization of new types
of drugs for protection of normal tissues from exposure to radiation and other
stresses, such as toxic chemicals and cancer treatments. Our pipeline includes
products from two primary families of compounds: protectans and curaxins. We are
developing protectans as drug candidates that protect healthy tissues from acute
stresses such as radiation, chemotherapy and ischemia (pathologies that develop
as a result of blocking blood flow to a part of the body). Curaxins are being
developedby Incuron, our
majority-owned, newly formed Russian subsidiary,as anticancer agents that could act as
mono-therapy drugs or in combination with other existing anticancer
therapies.





On July 20, 2006, we sold 1,700,000
shares of common stock, par value $0.005 per share, in our initial public
offering at a per share price of $6.00. Our common stock is listed on the NASDAQ
Capital Market under the symbol “CBLI.”





Technology





Our development efforts are based on
discoveries made in connection with the investigation of the cell-level process
known as apoptosis. Apoptosis is a highly specific and tightly regulated form of
cell death that can occur in response to external events such as exposure to
radiation, toxic chemicals or internal stresses. Apoptosis is a major
determinant of tissue damage caused by a variety of medical conditions including
cerebral stroke, heart attack and acute renal failure. Conversely, apoptosis is
also an important protective mechanism that allows the body to shed itself of
defective cells, which otherwise can cause cancerous growth.





Research has demonstrated that apoptosis
is sometimes suppressed naturally. For example, most cancer cells develop
resistance to apoptotic death caused by drugs or natural defenses of the human
body. Our research is geared towards identifying the means by which apoptosis
can be affected and manipulated depending on the need.





If the need is to protect healthy
tissues against an external event such as exposure to radiation, we focus our
research efforts on attempting to temporarily and reversibly suppress apoptosis
in those healthy tissues, thereby imitating the apoptotic-resistant tendencies
displayed by cancer cells. A drug with this effect would also be useful in
ameliorating the toxicities of anticancer drugs and radiation that cause
collateral damage to healthy tissues during cancer treatment. Because the severe
toxicities of anticancer drugs and radiation often limit their dosage in
cancer patients, an apoptosis suppressant drug may enable a more aggressive
treatment regimen using anticancer drugs and radiation and thereby increase
their effectiveness.





On the other hand, if the need is to
destroy cancerous cells, we focus our research efforts on restoring apoptotic
mechanisms that are suppressed in tumors, so that those cancerous cells will
once again become vulnerable to apoptotic death. In this regard, we believe that
our drug candidates could have significant potential for improving, and becoming
vital to, the treatment of cancer patients.





Through our research and development
("R&D"), and our strategic partnerships, we have established a technological
foundation for the development of new pharmaceuticals and their rapid
preclinical evaluation.





We have acquired rights to develop and
commercialize the following prospective drugs:





·
            Protectans - modified factors of
      microbes that protect cells from apoptosis, and which therefore have a
      broad spectrum of potential applications. The potential applications
      include both non-medical applications such as protection from exposure to
      radiation, whether as a result of military or terrorist action or as a
      result of a nuclear accident, as well as medical applications such as
      reducing cancer treatment
toxicities.


27





·
            Curaxins - small molecules
      designed to kill tumor cells by simultaneously targeting two regulators of
      apoptosis. Initial test results indicate that curaxins can be effective
      against a number of malignancies, including hormone-refractory prostate
      cancer, renal cell carcinoma ("RCC") (a highly fatal form of kidney
      cancer), and soft-tissue
sarcoma.





In the area of radiation protection, we
have achieved high levels of protection in animal models. With respect to cancer
treatment, the biology of cancer is such that there is no single drug that can
be successfully used to treat a significant proportion of the large number of
different cancers and there is wide variability in individual responses to most
therapeutic agents. This means there is a continuing need for additional
anticancer drugs for most cancers.





These drug candidates demonstrate the
value of our scientific foundation. Based on theaccelerated review andapprovalstatuscurrently available fordrugs qualifying for Fast Track
status, our most advanced
drug candidate, Protectan CBLB502 may be approved fortreatment of acute radiation syndromewithin 18 - 24 months.
Anotherdrug candidate,
Curaxin CBLC102, demonstrated activity and safety in a Phase IIa clinical trial
concluded in late 2008.InNovember 2010, the first
patient was dosed in a multi-center trial of Curaxin CBLC102 in patients with
liver tumors in The Russian Federation.





STRATEGIES AND
OBJECTIVES





Our primary objective is to become a
leading developer of drugs for the protection of human tissues against radiation
and other stresses and for cancer treatment. Key elements of our strategy
include:





·
            Aggressively
      working towards the commercialization of Protectan CBLB502. Our most advanced drug
      candidate, Protectan CBLB502, offers the potential to protect normal
      tissues against exposure to radiation.Because CBLB502 demonstrates the
      potential to address an unmet medical need and is intended to treat a
      serious or life-threatening condition, CBLB502 has been granted Fast Track
      status by the U.S. Food and Drug Administration ("FDA").  The
      Fast Track designation will allow us to file a Biologic License
      Application ("BLA"), on a rolling basis and will allow the FDA to review
      the filing as it is received rather than waiting for the complete
      submission prior to commencing the review process.  In addition,
      our BLA filing will be eligible for priority review, which could result in
      an abbreviated review time of six months. We expect to complete
      development of Protectan CBLB502 fortreatment of acute radiation
      syndromeandinitiatesubmission of the BLA with theFDA in
      2011.





·
            Leveraging our
      relationship with leading research and clinical development
      institutions.The
      Cleveland Clinic ("CCF"),one of the top research medical
      facilities in the world, is one of our co-founders. In January 2007, we
      entered into a strategic research partnership with Roswell Park Cancer
      Institute ("RPCI"), in Buffalo, New York.We have continued our research and
      development program that we initiated at CCF at RPCI and RPCI shares
      valuable expertise with us as developmental efforts are performed on our
      drug candidates.Thesepartnershipswill enhance the speed and
      efficiency of our clinical research and provide us with access to the
      state-of-the-art clinical development facilities of a globally recognized
      cancer research center.





·
            Utilizing
      governmental initiatives to target our markets.Our focus on drug candidates such
      as Protectan CBLB502, which has applications that have been deemed useful
      for military and defense purposes, provides us with a built-in market for
      our drug candidates. This enables us to invest less in costly retailand marketing
      resources. In an effort to improve our responsiveness to military and
      defense needs, we have established a collaborative relationship with the
      Department of Defense ("DoD"), and theBiomedical Advanced Research and
      Development Authority ("BARDA"), of the Departmentof Health and Human Services
      ("HHS").





·
            Utilizing and
      developing other strategic relationships.We have collaborative
      relationships with other leading organizations that enhance our drug
      development and marketing efforts. For example, one of our founders, with
      whom we maintain a strategic partnership, is ChemBridge Corporation. Known
      for its medicinal chemistry expertise and synthetic capabilities,
      ChemBridge provides valuable resources to our drug development research
      including access to a chemical library ofalmost2,000,000compounds.


28


RESEARCH AND
DEVELOPMENT





We are highly dependent on the success
of our R&D efforts and, ultimately, upon regulatory approval and market
acceptance of our products under development.





There are significant risks and
uncertainties inherent in the preclinical and clinical studies associated with
our R&D projects. As a result, the costs to complete such projects, as well
as the period in which net cash outflows from such programs are expected to be
incurred, may not be reasonably estimated. From our inception toSeptember 30, 2010, we spent$68,539,954on R&D.





Our ability to complete our R&D on
schedule is, however, subject to a number of risks and
uncertainties.  In addition, we have sustained losses from operations
in each fiscal year since our inception in June 2003, and we may exhaust our
financial resources and be unable to complete the development of our products
due to the substantial investment in R&D that will be required for the next
several years. We expect to spend substantial additional sums on the continued
R&D of proprietary products and technologies with no certainty that losses
will not increase or that we will ever become profitable as a result of these
expenditures.





The testing, marketing and manufacturing
of any product for use in the U.S. will require approval from the FDA. We cannot
predict with any certainty the amount of time necessary to obtain such FDA
approval and whether any such approval will ultimately be granted. Preclinical
and clinical trials may reveal that one or more products are ineffective or
unsafe, in which event further development of such products could be seriously
delayed or terminated. Moreover, obtaining approval for certain products may
require testing on human subjects of substances whose effects on humans are not
fully understood or documented. Delays in obtaining FDA or any other necessary
regulatory approvals of any proposed productor thefailure to receive such approvals would
have an adverse effect on the product’s potential commercial success and on our
business, prospects, financial condition and results of operations. In addition,
it is possible that a product may be found to be ineffective or unsafe due to
conditions or facts that arise after development has been completed and
regulatory approvals have been obtained. In this event, we may be required to
withdraw such product from the market. To the extent that our success will
depend on any regulatory approvals from government authorities outside of the
U.S. that perform roles similar to that of the FDA, uncertainties similar to
those stated above will also exist.





PRODUCTS IN
DEVELOPMENT





Protectans





We are exploring a new natural source of
factors that temporarily suppress the programmed cell death (apoptosis) response
in human cells, which can be rapidly developed into therapeutic products. These
inhibitors, known as protectans, are anti-apoptotic factors developed by
microorganisms of human microflora throughout millions of years of co-evolution
with mammalian hosts.  We have established a technological process for
screening of these factors and their rapid preclinical evaluation. These
inhibitors may be used as protection from cancer treatment toxicities and
antidotes against injuries induced by radiation and other stresses associated
with severe pathologies (i.e., heart attack or stroke).





We currently have issuedpatents and pendingpatent applications relating to
ninesetsof patent applicationsthat werefiled over the pastsevenyears around various aspects and
qualities of the protectan family of compounds. The first patent covering the
method of protecting a mammal from radiation using flagellin or its derivatives
was granted by theU.S. Patent and Trademark Office(US Patent No. 7,638,485 titled
"Modulating Apoptosis") and the
European Patent Office (European Publication Number FP 1706133, titled
"Methods of Protecting Against Radiation Using Flagellin.").This patent was also granted by
the nine member countries of the Eurasian Patent Organization and the Ukraine
and we have received a notice of allowance for this patent from the State
Intellectual Property Office of the People’s Republic of China.A second patent titled ”Method of
Protecting Against Apoptosis using Lipopeptides was granted by South Africa
(Patent Number 2008/00126) and we have received an notice of intent to grant
from the Eurasian Patent Organization.A second patenttitled “Small Molecule Inhibitors of
MRP1 and Other Multidrug Responders” was approved by several nations,not including the
U.Sand we have received a
notice of intent to grant from the Eurasian Patent Organization.We believe that with the
patent applications filed to date in the U.S. and internationally around various
properties of protectan compounds, we have protected the potentially broad uses
of our protectan technology. The patents belonging to the first patent family
referenced above have a legal expiration date of December 1, 2024 and the
patents belonging to the second patent family referenced above have a legal
expiration date of June 12, 2026.





We spent approximately$13,738,983 and $8,995,500 on R&D
for protectans for all applications in the fiscal years ended December 31, 2009
and 2008, respectively.For
the quarters endedSeptember30, 2010 and 2009,we spent$2,694,882and $3,268,615, respectively.  For theninemonths endedSeptember30, 2010 and 2009,we spent$10,021,195and $10,028,839, respectively.From our inception toSeptember30, 2010, we spent$50,268,677onR&Dfor protectans.





Protectan CBLB502





Protectan CBLB502 is our leading
radioprotectant molecule in the protectans family. Protectan CBLB502 represents
a rationally designed derivative of the microbial protein, flagellin. Flagellin
is secreted bySalmonella
typhimuriumand many other
Gram-negative bacteria, and in nature, arranges itself in a hollow cylinder to
form the filament in bacterial flagellumand acts as a natural activator of NF-kB
(nuclear factor-kappa B), a protein complex widely used by cells as a regulator
of genes that control cell proliferation and cell survival. Thus, Protectan
CBLB502 reduces injury from acute stresses by mobilizing several natural cell
protective mechanisms, including inhibition of apoptosis, reduction of oxidative
damage and induction of factors (cytokines) that induce protection and
regeneration of stem cells in bone marrow and the
intestines.


29


Protectan CBLB502 is a single agent,
anti-radiation therapy with demonstrated significant survival benefits at a
single dose in animal models. Animal studies indicate that
Protectan CBLB502 protects mice without increasing the risk of
radiation-induced cancer development. The remarkably strong radioprotective
abilities of Protectan CBLB502 are the result of a combination of several
mechanisms of action. Potential applications for Protectan CBLB502 include
reduction of radiation therapy or chemotherapy toxicities in cancer patients,
protection from Acute Radiation Syndrome ("ARS"), in defense scenarios and
protection from acute organ failure. Protectan CBLB502 is administered through
intramuscular injection.





Six setsof patent applications have been filed
for Protectan CBLB502, includingtwo U.S. patent applications related to
various aspects and properties for CBLB502 and related protectan compounds,
including new methods of the use of flagellin derivatives and screening for new
compounds with similar properties.





We spent approximately$13,732,416 and $8,021,040 on R&D
for Protectan CBLB502 in the fiscal years ended December 31, 2009 and 2008,
respectively.For the quarters ended September 30, 2010 and 2009, we
spent $2,869,779 and $3,267,201, respectively, on R&D for Protectan
CBLB502.  For the nine months ended September 30, 2010 and 2009, we
spent $10,016,092 and $10,022,272, respectively, on R&D for Protectan
CBLB502.  From our inception to September 30, 2010, we spent
$47,126,633 on R&D for Protectan CBLB502.





Non-medical
Applications





Our scientists have demonstrated that
injecting Protectan CBLB502 into mice, rats and non-human primates protects them
from lethal doses of total body gamma radiation. An important advantage of
Protectan CBLB502, above any otherradioprotectant known to us, is the
ability to effectively protect not only the hematopoietic system, but also the
gastrointestinal ("GI"), tractwhich is among the most sensitive areas
of the human body to radiation. High levels of radiation, among other effects,
induce moderate to severe bone marrow damage. The immune and blood stem cells
are also depleted and death is caused by anemia, infection, bleeding or poor
wound healing. GI damage often occurs at higher doses of radiation and may
result in death through sepsis as a result of perforation of the GI tract.
Protectan CBLB502’s ability to effectively protect the hematopoietic system and
GI tract may make Protectan CBLB502 uniquely useful as a radioprotective
antidote. Protectan CBLB502 was shown to be safe at its therapeutic doses in
rodents and non-human primates. In addition, Protectan CBLB502 has proved to be
a stable compound for storage purposes. It can be stored at temperatures close
to freezing, room temperature or extreme heat. Manufacturing of Protectan
CBLB502 is cost efficient due to its high yield bacterial producing strain and
simple purification process.





Protectan CBLB502 is being developed
under the FDA’s animal efficacy rule(21 C.F.R. § 314.610, drugs; §
601.91, biologics) to treat
radiation injury following exposure to radiation from nuclear or radiological
weapons, or from nuclear accident.The animal efficacy rule creates a new
regulatory paradigm for measuring efficacy by permitting the FDA to approve
drugs and biologics for counterterrorism uses based on animal data when it is
unethical or unfeasible to conduct human efficacy studies.  Thus, this approval pathway requires
demonstration of efficacy in at least one well-characterized animal model and
safety andpharmacodynamics studies in animals and representative samples of healthy human
volunteers to allow selection of an effective dose in humans. Protectan CBLB502 has demonstrated
activity as a radioprotectant in several animal species, including non-human
primates. Human safety, pharmacokinetic,pharmacodynamic and biomarker
studies are the only stage of
human testing required for approval in this indication.





We have successfully established current
Good Manufacturing Practices ("cGMP"), quality manufacturing for Protectan
CBLB502 and have completedtwoPhase I human safety studiesfor Protectan CBLB502 in ARS. The
initial human Phase I safety and tolerability study involved single injections
of Protectan CBLB502 in ascending-dose cohorts. The 50 participants in the study
were assessed for adverse side effects over a 28-day time period and blood
samples were obtained to assess the effects of ProtectanCBLB502 on various biomarkers. Data from
these subjects indicates that Protectan CBLB502 was well tolerated and that
normalized biomarker results corresponded to previously demonstrated activity in
animal models of ARS. A pattern of biomarker production was observed consistent
with those patterns seen in animals during mitigation of radiation-induced
injury by dosing with Protectan CBLB502.




InJanuary 2010, we began dosing in the second
human safety study, a Phase Ib study, for CBLB502 and completed dosing in May
2010. This safety study included a total of 100 healthy volunteers randomized
among four dosing regimens of CBLB502. Our goal is to complete the data analysis
and filing of the final study report with the FDA in November 2010. Participants
in the 100-subject study were assessed for adverse side effects and blood
samples were obtained to assess the effects of CBLB502 on various biomarkers.
The primary objectives of this study were to gather additional data on safety,
pharmacokinetics, and cytokine biomarkers in a larger and broader subject
population.  Administration of CBLB502 resulted in a rapid and potent
cytokine response, similar to that seen in the prior clinical trial and in
previously conducted non-human primate studies. Single and double doses of
CBLB502 were well tolerated. The primary adverse event associated with CBLB502
administration was a transient flu-like syndrome consistent with what was
observed in the previous trial and which generally resolved within 24 hours.
There was no difference in the adverse event profile between the doses
tested.After
determining an appropriate dose to take forward and determine the size of a
definitive human safety study, we would then anticipate moving forward with a
definitive safety study in a larger group of healthy human
volunteers.


30


The Defense Threat Reduction Agency of
theDoDawarded us a $1.3 million grant in
March 2007, to fund “development leading to the acquisition” of Protectan
CBLB502 as a radiation countermeasure, in collaboration with Armed Forces
Radiobiology Research Instritute, which has also received significant
independent funding for work on Protectan CBLB502.





In March 2008, the DoD, awarded us a
contract valued at up to $8.9 million over eighteen months through the Chemical
Biological Medical Systems Joint Project Management Office Broad Agency
Announcement ("BAA"), for selected tasks in the advanced development of
Protectan CBLB502 as a Medical Radiation Countermeasure ("MRC"), to treatradiation injury following
exposure to radiation from nuclear or radiological weapons (the “2008 DoD
Contract”). The specific tasks include thecompletion by us of non-Good
Laboratory Practices ("non-GLP") efficacy animal studies, Chemistry,
Manufacturing and Controls ("CMC") tasks, in vitroand in vivostudies supporting
CBLB502’s Investigational New Drug ("IND") application, definitive GLP efficacy
studies, and drug formulation from single-dose vials within the timeframe of the
contract. In September 2009, the
DoD increased the funding under this contract by $0.6 million to $9.5 million to
support bridging studies between lyophilized and liquid drug formulations.Wesuccessfully completed all tasks
related to the 2008 DoD Contract by the contract end date of August 31,
2010.




As a
government contract subject to the Federal Acquisition Regulation (“FAR”),
pursuant to FAR 52.227-11 (Patent Rights – Ownership by the Contractor) we were
permitted to retain title to any patentable invention or discovery made while
performing the contract. However, no inventions were made by us during the
performance of the 2008 DoD Contract. Had any inventions been made, the U.S.
government would have received a non-exclusive, non-transferable, irrevocable,
paid-up license to the subject inventions throughout the world.  In
addition, pursuant to FAR 52.227-14 (Rights in Data – General), which was
incorporated into the base 2008 DoD Contract and removed by the first amendment
to the contract in June 2008, the U.S. government retains unlimited rights in
the technical data produced between March and June 2008 in the performance of
the 2008 DoD Contract.




In September 2008, we were awarded a
$774,183 grant from the National Institute of Allergy and Infectious Diseases
("NIAID"), of the National Institutes of Health ("NIH"), to further study
certain mitigating properties of Protectan CBLB502 in the context of
hematopoietic damage from radiation exposure. In September 2009, NIAID awarded
us an additional $458,512 for the continuation of the same grant.





In September 2008, BARDAawarded us a contract under the BAA
titled, "Therapies for Hematopoietic Syndrome, Bone Marrow Stromal Cell Loss,
and Vascular Injury Resulting from Acute Exposure to Ionizing Radiation," for
selected tasks in the advanced development of Protectan CBLB502.BARDA seeks to acquire developed medical
countermeasures that will be clinically useful in a civilian medical emergency
situation that results from or involves exposure of a large population to the
effects of a nuclear detonation, a radiologic dispersive device (such as a dirty
bomb), or exposure to radioactive material with or without combined injury or
trauma.




The selected tasks in the Statement of
Work include the following:





·
            Performing
      certain non-clinical experiments, including non-human primate
      experiments.


·
            Facilitating
      bone marrow transplantation in the rescue of irradiated mice by CBLB502
      treatment.


·
            Performing
      stability studies of Good Manufacturing Practices-grade CBLB502 and
      conducting Phase II clinical
trials.


·
            Submitting
      necessary regulatory documents to the BARDA and the FDA for
      approval.


·
            Planning,
      initiating and overseeing Phase II trials on healthy volunteers and
      drafting and finalizing the Phase II clinical reports and submitting such
      reports to the BARDA and the FDA.





The total contract value including all
milestone-based options started at $13.3 million over a three-year period, with
the first year's award of $3.4 million. In September 2009, BARDA increased the
total contract value $2.3 million to $15.6 million and awarded the first
milestone option of $6.3 million. BARDA has since awarded the second,thirdand fourthmilestone options under the contract for
$1.47 million,$0.46million and $4.14 million,
respectively.





Pursuant
to FAR 52.227-11, we will be permitted to retain title to any patentable
invention or discovery made while performing the contract. The U.S. government,
in return, will receive a non-exclusive, non-transferable, irrevocable, paid-up
license to the subject invention throughout the world. The U.S. government will
also have unlimited rights in the data produced in the performance of the HHS
Contract.


31




In September 2010, we were awarded a contract
(the “2010 DoD Contract”) by the Chemical Biological and Medical Systems
("CBMS") Medical Identification and Treatment Systems ("MITS") of the DoD for
the advanced development and procurement of CBLB502 as a medical radiation
countermeasure.  The 2010 DoD Contract is valued at up to $45 million,
including all options provided thereunder.  Under the terms of the
contract, CBMS-MITS will initiate funding of $14.8 million, including all
options, for the advanced development of CBLB502 through the receipt of approval
from the FDA. Selected tasks related to the advanced development of CBLB502
under the DoD contract include primarily conducting pilot animal model studies
to support approval under the FDA animal rule. In addition, the 2010 DoD
Contract includes options for the purchase of an aggregate of up to 37,500
troop-equivalent doses, in pre-determined increments, for
$30,000,000.  The 2010 DoD Contract requires us to provide the
DoD with periodic status reports and to maintain, to the maximum extent
possible, the employment of certain key personnel during the duration of the
program.




Pursuant
to FAR 52.227-11, we will be permitted to retain title to any patentable
invention or discovery made while performing the contract. The U.S. government,
in return, will receive a non-exclusive, non-transferable, irrevocable, paid-up
license to the subject inventions throughout the world.  In addition,
pursuant to FAR 52.227-14 (Rights in Data – General) the U.S. government will
also have unlimited rights in the technical data produced in the performance of
the 2010 DoD Contract. Furthermore, the DoD has the right to terminate the 2010
DoD Contract at any time. In certain instances, the 2010 DoD Contract also
limits our ability to engage in certain activities, such as subcontracting
a portion of the work, without prior approval from the DoD.





The Project BioShield Act of 2004, which
further expedites theapproval of drug candidates for certain uses, is intended to bolster our
nation’s ability to provide protections and countermeasures against biological,
chemical, radiologicalor
nuclear agents that may be used in a military, terrorist or nuclear attack. This
law also allows for the use of expedited peer review when assessing the merit of
grants and contracts of up to $1,500,000 for countermeasure research. We have
been awarded and successfully completed a $1,500,000 research grant pursuant to
this law.





We spent approximately$13,676,289 and $7,264,813 on R&D
for the non-medical applications of Protectan CBLB502 in the fiscal years ended
December 31, 2009 and 2008, respectively.For the quarters endedSeptember30, 2010 and 2009,we spent$2,689,779and $3,267,201,respectively,onR&Dfor the biodefense applications of
Protectan CBLB502.  For theninemonths endedSeptember30, 2010 and 2009,we spent$10,016,092and $9,966,145,respectively,onR&Dfor the biodefense applications of
Protectan CBLB502.  From our inception toSeptember30, 2010, we spent$45,293,577onR&Dfor the biodefense applications of
Protectan CBLB502.





Protectan CBLB502 is a candidate for
procurement by the DoD, HHS/BARDA and other countries/ territoriesfacing imminent nuclear and radiation
threats. The HHS opportunity is particularly positive for us as the agency’s
mandate is to protect the U.S. civilian population in the event of a
radiological emergency, including stockpiling radiation countermeasures for mass
distribution. Our contract awards from the DoD and BARDA evidence the
government’s focus on acquiring adequate protection against nuclear and
radiation threats for military and civilian populations. Upon FDA approval,
Protectan CBLB502 should be well positioned to fulfill both of these needs, with
its demonstrated unprecedented efficacy and survival benefits, unique ability to
address both hematopoietic and GI damage, broad window of efficacy relative to
radiation exposure and suitability for both military and civilian delivery
scenarios. We believe that Protectan CBLB502 is the only radiation
countermeasure with these capabilities in advanced development that can be self
or buddy-administered, without the need of additional supportive care in a
battlefield or civilian community setting.





We intend to enter into contracts to
sell Protectan CBLB502 to various U.S. government agencies. Future sales to U.S.
government agencies will depend, in part, on our ability to meet federal
contract requirements and the existence and development of competitive
compounds.





Regulatory Status





Extraordinary radioprotective
properties, an excellent toxicity profile, outstanding stability and cost
efficient production of Protectan CBLB502 to date make it a primary candidate
for clinical studies. Initially, Protectan CBLB502 will be developed for
non-medical purposes — as a radioprotectant antidote for the protection of
people with possible exposure to high doses of ionizing
radiation.  Our drug development strategy complies with the recently
adopted FDA rules for investigational drugs that address situations such as
radiation injury, where it would be unethical to conduct efficacy studies in
humans. While Phase II and Phase III human clinical trials are normally required
for the approval of marketing an investigational drug, under the FDA rules,
Protectan CBLB502 would be considered for approval for this indication based on
Phase I safety studies in humans and efficacy studies in two animal species.
Based upon this expedited approval process,Protectan CBLB502 could be approved for
non-medical applications within 18 - 24 months. Because Phase II and Phase III testing
involves applying a drug candidate to a large numbers of participants who suffer
from the targeted disease and condition and can last for a total of anywhere
from three to six or additional years, bypassing these phases represents a
significant time and cost savings in receiving FDA approval.





As part of this expedited approval
process, the FDA has indicated that it intends to engage in a highly interactive
review of IND applications, New Drug Applications ("NDA") and BLA and to
provide for accelerated review and licensure of certain medical products for
counterterrorism applications, including granting eligible applications “Fast
Track” status.The Fast Track program is designed to expedite the review
of investigational drugs for the treatment of patients with serious or
life-threatening diseases where there is an unmet medical need. Fast Track
designations allow a company to file a NDA or BLA on a rolling basis and permits
the FDA to review the filing as it is received, rather than waiting for the
complete submission prior to commencing the review process. Additionally, NDAs
and BLAs for fast track development programs are eligible for priority review,
which may result in an abbreviated review time of six months. In July 2010, the FDA granted our
application for Fast Track status in respect of CBLB502. Fast Track status will
allow us to have additional interactions with the FDA, including extra in-person
meetings and faster review of our BLA filing, which will expedite implementation
of the CBLB502 development plan and preparation and approval of the
BLA.


32


As part of the process to receive final
FDA licensure for Protectan CBLB502 for non-medical applications, we have
established cGMP compliant manufacturing of Protectan CBLB502. We were able to
develop a complicated, high-yield manufacturing process for CBLB502 and
prototype the process and resolve multiple challenges during the industrial
development. We currently have drug substance corresponding to several hundred
thousand projected human doses. The process we developed gives us the ability to
manufacture up to five million estimated doses within a year without any
additional scale-up; and if necessary, scale-up could be implemented relatively
easily.





Prior to our submission for FDA
licensure for Protectan CBLB502 for biodefense or non-medical applications, we
will need to complete several interim steps, including:





·
            Conducting pivotal animal efficacy
      studies with thecGMP
      manufactured drug candidate underGLP -Good Laboratory Practices
      conditions. We expect to complete these studies in 2011. Thestudies have an approximate cost
      of $2,500,000 andarecovered by a government
      developmentcontract.





·
            Completing the analysis and
      reporting ofthesecond Phase I safety study in
      100 healthy human volunteers, which we expect to complete in
      November 2010. This
      study has an approximate cost of $1,400,000 and is covered by a government
      developmentcontract.





·
            Performing a Phase II human safety
      study in a larger number of volunteers using the dose of Protectan CBLB502
      previously shown to be safe in humans and efficacious in animals. Weestimate completion
      of this study in 2011 at an approximate cost of $7,000,000 based on 500
      subjects tested in four locations. This study is covered by a government
      development contract pending
approval.





·
            Filing a BLA which weexpect toinitiate in 2011.  At
      the present time, the costs of the filing cannot be approximated with any
      level of certainty.





Medical Applications





While our current focus remains on its
non-medical applications, Protectan CBLB502 has been observed to dramatically
increase the efficacy of radiotherapy of experimental tumors in mice. Protectan
CBLB502 appears to increase the tolerance of mice to radiation while having no
effect on the radiosensitivity of tumors, thus opening the possibility of
combining radiotherapy with Protectan CBLB502 treatment to improve the overall
anticancer efficacy of radiotherapy. Our animal efficacy studies have
demonstrated that up to 100% of mice treated with Protectan CBLB502 prior to
being exposed to radiation survived without any associated signs of toxicity.
This compares to a 100% mortality rate in the animal group that received a
placebo drug.





Protectan CBLB502 has demonstrated the
ability to reduce the toxicities of a chemotherapeutic drug, cisplatin
(Platinol), broadly used for the treatment of ovarian, endometrial, head and
neck, lung, stomach and other types of cancer in animal models. Cisplatin
treatment was used in the study as an example of chemotherapy-associated
toxicity. Cisplatin injected at toxic doses is known to induce myelosuppression
(suppression of bone marrow) and nephrotoxicity (kidney damage). The prospect of
increasing patients' tolerance to chemotherapeutic drugs and optimizing
treatment regimens would be a significant improvement in cancer treatment. It isestimated that
approximately 40% of the roughly $50 billion annually spent on cancer treatment
represents supportive care addressing toxicities of various treatments,
including chemotherapy.





Consistent with this strategy, we plan
to initiate a Phase I/II study for Protectan CBLB502 in head and neck cancer
patientswho are undergoing radiotherapy and radio-sensitizing
chemotherapyin late 2010 / early 2011for themedical indication of CBLB502.The primary goal of this trial will be to demonstrate safety and
tolerability of CBLB502 in cancer patients with a secondary goal of
demonstrating potential efficacy of CBLB502 in a clinical setting. The primary endpoint of the study will
be the reduction of toxicities of radiation and chemotherapy, such as mucositis
(a painful inflammation and ulceration of oral mucosa causing difficulties with
speaking and eating). Mucositis weakens the patient by not allowing for the oral
intake of nutrients and fluids and forces the temporary suspension of
radiotherapy and chemotherapy until the tissues of the mouth and throat have
healed. Due to the ability of head and neck cancer cells to regrow during
periods of interrupted treatment, any interruption in radiotherapy should be
avoided. Since the main cause of treatment interruptions in radiotherapy or
combinations of chemotherapy and radiotherapy treatment regimens of head and
neck cancer is acute mucositis, the ability to prevent mucositis, and therefore,
interruptions in treatment, could potentially result in better outcomes for
patients with cancers of the head and neck.


33


In other studies, we have demonstrated
the potential of Protectan CBLB502 to be applicable to ischemic conditions. Our
researchers, in collaboration with investigators fromCCF, have demonstrated that a single
injection of Protectan CBLB502 effectively prevents acute renal failure and
subsequent death in a mouse model of ischemia-reperfusion renal
injury.





The DoD awarded a $1 million grant toCCFin 2008 to conduct pre-clinical studies
on Protectan CBLB502 for use in tourniquet and other ligation-reperfusion
battlefield injuries where blood flow is stopped and then restored after a
prolonged period of time. These studies have demonstrated Protectan CBLB502’s
ability to accelerate limb recovery in an animal model of tourniquet-mediated
injury simulating the situation occurring in human. It has been demonstrated
that injection of Protectan CBLB502 within 30 minutes of tourniquet removal
leads to a marked reduction in the severity of injury, including reductions in
tissue edema, pro-inflammatory cytokine production and leukocyte infiltration
leading to accelerated recovery of limb function.





In September 2009, we were awarded a
$5.3 million Grand Opportunities research grant under the American Recovery and
Reinvestment Act of 2009 from the Office of the Director of NIH and NIAID. The
grant will fund studies of molecular mechanisms by which Protectan CBLB502
mitigates GI damage from radiation exposure.





In contrast to the non-medical
applications of CBLB502, the use of Protectan CBLB502 to ameliorate the side
effects of radiation treatment and anticancer drugs will be subject to the full
FDA approval process.





In order for us to receive final FDA
licensure for Protectan CBLB502 for medical applications, we will need to
complete various tasks, including:




·
              Submitting an amendment to our
      CBLB502 IND applicationand receiving allowance from the
      FDA. We expect to submit the amendment in 2010. We estimate that the
      approximate cost of filing will be less than $100,000 whichis covered by a government
      grant.
 
 ·
              Performing a Phase I/II human
      efficacy study on a small number of head and neck cancerpatients. We expect to complete this study
      two years from the receipt of allowance from the FDA of the IND amendment
      at an approximate cost of $1,500,000 which is covered by a government
      development grant.
 
 ·
              Performing an additional Phase II
      efficacy study on a larger number of cancer patients. At the present time,
      the costs and the scope of this study cannot be approximated with any
      level of certainty.
 
 ·
              Performing a Phase III human
      clinical study on a large number of cancer patients and filing a BLA with
      the FDA.At the present time, the costs and
      scope of these steps cannot be approximated with any level of
      certainty.




Foursetsof patent applications have been filed
forthe medical
applications for Protectan CBLB502.





We spent approximately$56,127 and $756,227 on R&D for the
medical applications of Protectan CBLB502 in the fiscal years ended December 31,
2009 and 2008, respectively.For the quarters endedSeptember30, 2010 and 2009, we spent$0on R&D for the medical applications
of Protectan CBLB502.  For theninemonths endedSeptember30, 2010 and 2009, we spent$0and $56,127, respectively,on R&D for the medical applications
of Protectan CBLB502.  From our inception toSeptember 30, 2010, we spent$1,833,056onR&Dfor the medical applications of
Protectan CBLB502.





Protectan CBLB612





While the bulk of our R&D has
focused on Protectan CBLB502, we have conducted some preliminary research into a
compound derived from the same family and which we refer to as Protectan
CBLB612. Protectan CBLB612 is a modified lipopeptide mycoplasma that acts as a
powerful stimulator and mobilizer of hematopoietic (bone marrow/blood
production) stem cells ("HSC"), to peripheral blood. Potential applications for
Protectan CBLB612 include accelerated hematopoietic recovery during chemotherapy
and during donor preparation for bone marrow
transplantation.


34


Our research indicates that Protectan
CBLB612 is not only a potent stimulator of bone marrow stem cells, but also
causes their mobilization and proliferation throughout the blood. A single
administration of Protectan CBLB612 resulted in a three-fold increase in the
number of progenitor stem cells in mouse bone marrow within 24 hours after
administration. Furthermore, the number of these stem cells in peripheral blood
was increased ten-fold within four days of administration.





Protectan CBLB612 was also found to be
highly efficacious in stimulating proliferation and mobilization of
hematopoietic stem cells into peripheral blood in a primate model (Rhesus
macaques).  A single injection of Protectan CBLB612 in Rhesus macaques
resulted in a 20-fold increase of hematopoietic progenitor cells in
blood.  At the peak of the effect (48-72 hours post-injection) the
proportion of free-floating CD34+ cells in the total white blood cell count
reached 30% (compared with 1.5% in normal blood).  CD34 is a molecule
present on certain cells within the human body.  Cells expressing
CD34, otherwise known as CD34+ cells, are normally found in the umbilical cord
and bone marrow as hematopoietic cells.





This discovery opens a new and
innovative way for us to address a broad spectrum of human diseases, some of
which currently lack effective treatment. Direct comparisons of Protectan
CBLB612 and the market leading drug used for stimulation of blood regeneration,
G-CSF (Neupogen® or Neulasta®, Amgen, Inc.), demonstrated a stronger efficacy of
Protectan CBLB612 as a propagator and mobilizer of HSC in peripheral
blood.





Protectan CBLB612's strength as a stem
cell stimulator was further demonstrated by the outcome of its combined use with
G-CSF and Mozibil (AMD3100) (an FDA approved stem cell mobilizer from Genzyme
Corporation) where the addition of Protectan CBLB612 resulted in eight to ten
times higher yields of HSC in peripheral blood in comparison with the standard
protocol.





In addition to efficacy in stimulation
and mobilization of stem cells in animal models, Protectan CBLB612 was found to
be highly effective in an animal bone marrow stem cell transplantation model.
Blood from healthy mice treated by Protectan CBLB612 was transplanted into mice
that received a lethal dose of radiation that killed hematopoietic (bone
marrow/blood production) stem cells.  A small amount of blood from the
Protectan CBLB612 treated mice successfully rescued the mice with
radiation-induced bone marrow stem cell deficiency.  100% of the
deficient mice transplanted with blood from CBLB612 treated mice survived past
the 60-day mark, while 85% of the untreated deficient mice died within the first
three weeks of the experiment.  The 60-day mark is considered to be
the critical point in defining the presence of long-term, adult bone marrow stem
cells, which are capable of completely restoring lost or injured bone marrow
function.  The rescuing effect of the peripheral blood of the treated
mice was equivalent to that of conventional bone marrow
transplantation.





Adult hematological bone marrow stem
cell transplantation is currently used for hematological disorders (malignant
and non-malignant), as well as some non-hematological diseases, such as breast
cancer, testicular cancer, neuroblastoma, ovarian cancer, Severe Combined Immune
Deficiency, Wiskott-Aldrich syndrome and Chediak-Higashi
syndrome.





With efficacy andnon-GLPsafety already studied in mice and
monkeys, Protectan CBLB612 entered formal pre-clinical safety and manufacturing
development in February 2008. Further development of CBLB612 will continue upon
achieving sufficient funding for completing pre-clinical development and a Phase
I study. Development of Protectan CBLB612 has been supported by a grant from the
Defense Advanced Research Projects Agency of the DoD.





Two sets of patent applications have
been filed for Protectan CBLB612.One patent application, entitled
“Methods of Protecting Against Apoptosis Using Lipopeptides”received a
notice of grant of patent by
South Africa (Patent Number 2008/00126)and a notice of
intent to grant patent from the Eurasian Patent Organization ("EAPO"), which
includes the Russian Federation and eight other member countries.





In September 2009, we executed a license
agreement granting Zhejiang Hisun Pharmaceutical Co. Ltd. ("Hisun"), a leading
pharmaceutical manufacturer in the People's Republic of China exclusive rights
to develop and commercialize Protectan CBLB612 in China,Taiwan, Hong Kong and Macau. Under the terms of the license
agreement, we received product development payments of $1.65 million for
protectan research (including Protectan CBLB502). Hisun will be responsible for
all development and regulatory approval efforts for Protectan CBLB612 in China.
In addition, Hisun will pay us a 10% royalty on net sales over the 20-year term
of the agreement. This royalty may decrease to 5% of net sales only in the event
that patents for CBLB612 are not granted. We retain all rights to CBLB612 in the
rest of the world.





In order for us to receive final FDA
approval for Protectan CBLB612, we need to complete several interim steps,
including:




·
              Conducting pivotal animal safety
      studies with cGMP-manufactured
CBLB612;
 
 ·
              Submitting an IND application and
      receiving approval from the FDA to conduct clinical
      trials;
 
 ·
              Performing a Phase I
      dose-escalation human
study;




35


·
              Performing
      Phase II and Phase III human efficacy studies using the dose of CBLB612
      selected from the previous studies previously shown to be safe in humans
      and efficacious in animals; and
 
 ·
              Filing
      a New Drug Application.
 
 Because
of the uncertainties of the scope of the remaining clinical studies, we cannot
currently estimate when any development efforts may be completed or the cost of
completion. Nor can we estimate when we may realize any cash flow from the
development of Protectan CBLB612.
 
 We spent
approximately $6,567 and $974,459 on R&D for Protectan CBLB612 in the fiscal
years ended December 31, 2009 and December 31, 2008, respectively. For the
quarters ended September 30, 2010 and 2009, we spent $5,103 and $1,414,
respectively, on R&D for Protectan CBLB612.  For the nine months
ended September 30, 2010 and 2009, we spent $5,103 and $6,567, respectively, on
R&D for Protectan CBLB612.  From our inception to September 30,
2010, we spent $3,142,044 on R&D for Protectan CBLB612. Further development
and extensive testing will be required to determine its technical feasibility
and commercial viability.
 
 Curaxins
 
 Curaxins
are small molecules that are intended to destroy tumor cells by simultaneously
targeting two regulators of apoptosis. Our initial test results indicate that
curaxins may be effective against a number of malignancies, including RCC,
soft-tissue sarcoma, and hormone-refractory prostate cancer.
 
 The
original focus of our drug development program was to develop drugs to treat one
of the most treatment-resistant types of cancer, RCC. Unlike many cancer types
that frequently mutate or delete p53, one of the major tumor suppressor genes,
RCC belongs to a rare category of cancers that typically maintain a wild type
form of this protein. Nevertheless, RCC cells are resistant to apoptosis,
suggesting that in spite of its normal structure, p53 is functionally disabled.
The work of our founders has shown that p53 function is indeed inhibited in RCC
by an unknown dominant factor. We have established a drug discovery program to
identify small molecules that selectively destroy tumor cells by restoring the
normal function to functionally impaired p53 in RCC. This program yielded a
series of chemicals with the desirable properties named curaxins (CBLC100
series). We have isolated three chemical classes of curaxins. One of them
includes relatives of 9-aminoacridine, the compound that is the core structure
of many existing drugs. Pre-existing information about this compound has allowed
us to bypass the preclinical development and Phase I studies and bring one of
our drug candidates into Phase IIa clinical trials, saving years of R&D
efforts and improving the probability of success.
 
 One of
the most important outcomes of this drug discovery program was the
identification of the mechanism by which curaxins deactivate NF-kB. This
mechanism of action makes curaxins potent inhibitors of the production and the
activity of NF-kB not only in its stimulated form, but also in its basal form.
The level of active NF-kB is usually also increased in cancer cells. Moreover,
due to curaxin-dependent functional conversion of NF-kB-DNA complexes, the cells
with the highest basal or induced NF-kB activity are supposed to be the most
significantly affected by curaxins. Clearly, this paradoxical activity makes
deactivation of NF-kB by curaxins more advantageous compared to conventional
strategies targeting NF-kB activators.
 
 The
discovery of the mechanism of action of curaxins allowed us to predict and later
experimentally verify that curaxins could be used for treatment of multiple
forms of cancers, including hormone-refractory prostate cancer, hepatocellular
carcinoma, multiple myeloma, acute lymphocytic leukemia, acute myeloid leukemia,
soft-tissue sarcomas and several others.
 
 A
significant milestone in the curaxin program was achieved with a breakthrough in
deciphering the finer details of the mechanism of action of these
compounds.  Successful identification of the exact cellular moiety
that binds to curaxins has provided a mechanistic explanation for the
unprecedented ability of these compounds to simultaneously target several signal
transduction pathways.
 
 This
additional mechanistic knowledge enabled us to discover additional advantages of
curaxins and to rationally design treatment regimens and drug combinations,
which have since been validated in experimental models.  In addition,
this understanding further strengthens our intellectual property position for
this exciting class of principally new anticancer drugs.
 
 In July
2010, a discovery regarding potential antiviral applications for our curaxin
family of molecules was pre-published online in the Journal of Virology, the
world’s leading peer-reviewed journal in the field of virology (Gasparian,
Neznanov, et al., Journal of Virology,  doi:10.1128/JVI.02569-09; July
14, 2010).
 
 The
published study, conducted by our scientists in cooperation with investigators
from RPCI and Cleveland State University, examined the ability of the Company’s
prototype Curaxin CBLC102, or quinacrine, and other similar compounds to inhibit
a mechanism used by picornaviruses to synthesize their proteins that is
essential for their viability.  This group of viruses includes
important human pathogens such as poliovirus.  In particular, the
specific interaction of curaxins with double-stranded RNA effectively blocks
synthesis of viral, but not cellular proteins.  This study provides
proof of principle for the prospective extension of curaxins from anticancer to
antiviral applications.
  36
  Nine sets
of patent applications have been filed around the curaxin family of
compounds.
 
 We spent
approximately $592,690 and $3,233,872 on R&D for curaxins overall in the
fiscal years ended December 31, 2009 and 2008, respectively. For the quarters
ended September 30, 2010 and 2009, we spent $324,427 and $58,994 respectively on
R&D for curaxins.  For the nine months ended September 30, 2010
and 2009, we spent $728,888 and $573,753 respectively on R&D for
curaxins.  From our inception to September 30, 2010, we spent
$12,963,170 on R&D for curaxins.
 
 In
December 2009, we entered into our Incuron joint venture with Bioprocess Capital
Ventures ("BCV"), a Russian Federation venture capital fund, to develop our
curaxin compounds for cancer, liver, viral and age related disease applications.
According to the terms of the agreement, we transferred the aforementioned
rights of curaxin molecules to the new joint venture, and BCV will contribute an
aggregate of 549,497,000 Russian rubles (approximately $17.8 million based on
the current exchange rate) to support development of the compounds. BCV made the
first payments of 105,840,000 Russian rubles (approximately $3.4 million based
on the current exchange rate) during April and June of 2010. Pursuant to the
participation agreement, as amended, BCV will make an additional payment of
69,730,000 Russian rubles (approximately $2.3 million based on the current
exchange rate) as part of its initial contribution. BCV will make the balance of
its contribution upon the achievement of predetermined development milestones.
The first milestone payment of 192,737,000 Russian rubles (approximately $6.4
million based on the current exchange rate) will be made upon approval to begin
clinical trials on oncology patients with a selected lead curaxin compound, or
upon progression of a clinical program of CBLC102. The second milestone payment
of 181,190,000 Russian rubles (approximately $6.0 million based on the current
exchange rate) will be made upon completion of at least one Phase I/II trial in
cancer patients. Although it is anticipated that we will ultimately own
50.1% of the membership interest in Incuron, depending on the U.S.
dollar/Russian ruble exchange rate and the U.S. dollar-equivalent value of the
aggregate contributions made by BCV, we may be required to either transfer
a portion of its ownership interest to BCV or make a cash contribution to
Incuron. In such a case, if we choose to transfer a portion of its
ownership interest to BCV, we may ultimately own less than 50.1% of the
membership interest of Incuron, but will retain the right to appoint a majority
of the members of the board of directors of Incuron. We serve as a subcontractor
to Incuron to support certain mechanistic studies and oversee clinical
development in the U.S.
 
 Curaxin
CBLC102
 
 One of
the curaxins from the 9-aminoacridine group is a long-known, anti-infective
compound known as quinacrine, which we refer to as Curaxin CBLC102. It has been
used for over 40 years to treat malaria, osteoarthritis and autoimmune
disorders. However, we have discovered new mechanisms of action for quinacrine
in the area of apoptosis. Through assay testing performed at Dr. Andrei Gudkov’s
laboratories at CCF beginning in 2002, which included testing in a variety of
human tumor-derived cell lines representing cancers of different tissue origin
(including RCC, sarcomas, prostate, breast and colon carcinomas), we have
observed that Curaxin CBLC102 behaves as a potent NF-kB suppressor and activator
of p53 in these types of cancer cells. As published in Oncogene (Guo et al.,
Oncogene, 2009, 28:1151-1161), it has now been shown that treatment of cancer
cells with CBLC102 results in the inhibition of the molecular pathway
(PI3K/Akt/mTOR) that is important for cancer cell survival and is considered to
be a highly relevant anticancer treatment target.  Finally, CBLC102
has favorable pharmacological and toxicological profiles and demonstrates the
anticancer effect in transplants of human cancer cells into
primates.
 
 We
launched a Phase II study with CBLC102 in January 2007 to provide proof of
safety and of anti-neoplastic activity in cancer patients and establish a
foundation for clinical trials of our new proprietary curaxin molecules, which
have been designed and optimized for maximum anticancer effects, as well as for
additional treatment regimens based on ongoing research into the precise
molecular mechanisms of action of curaxins.  Thirty-one patients were
enrolled in the Phase II study of CBLC102 as a monotherapy in late stage,
hormone-refractory taxane-resistant prostate cancer.  All patients had
previously received hormonal treatment for advanced prostate cancer and 28 of
the 31 had also previously received chemotherapy.  One patient had a
partial response, while 50% of the patients exhibited a decrease or
stabilization in PSA velocity, a measure of the speed of prostate cancer
progression.  CBLC102 was well tolerated and there were no serious
adverse events attributed to the drug.  The trial demonstrated
indications of activity and a remarkable safety profile in one of the most
difficult groups of cancer patients.
 
 The
indications of activity and remarkable safety demonstrated in the CBLC102 Phase
II trial, in conjunction with new mechanistic discoveries, point to additional
potential treatment paradigms including combination therapies with existing
drugs or prospective use as a cancer prevention agent.  Additional
potential uses for CBLC102 will be explored in conjunction with our strategic
partners at RPCI and through the Incuron joint venture.
 
 In
November 2010, the first patient was dosed in a multi-center clinical trial of
CBLC102 on patients with liver tumors in the Russian Federation. The study is an
open-label, dose escalation, Phase 1b safety and tolerability study in patients
with liver metastases of solid tumors of epithelial origin, or primary advanced
hepatic carcinoma for which standard therapy has failed or does not
exist.  The primary objective of the study is to determine the maximum
tolerated dose and dose limiting toxicity in patients receiving
CBLC102.  Secondary objectives of the study include describing the
safety profile, pharmacokinetics, and response to CBLC102.
  37
  The study
includes a dose escalation arm of up to 30 patients divided into five cohorts,
with an additional six patients to be enrolled at the selected therapeutic
dose.  Patients will be treated with CBLC102 for eight weeks, with a
loading dose administered in week 1 and maintenance doses administered in weeks
2-8.  Dose escalation will be done gradually, starting with a loading
dose of 300mg and a maintenance dose of 100mg.  Recruitment is
anticipated to take approximately six months, with overall duration of the study
to last approximately 12 months.
  The lead
center for the study is the Russian Oncological Scientific Center ("ROSC") in
Moscow, a leading oncology center in Russia.  The national coordinator
for the study is Professor S.A. Tyulyandin, MD, D.Sc., Deputy Director of
Clinical Oncology and Director of Clinical Pharmacology and Chemotherapy at
ROSC.  Dr. Tyulyandin is one of the leading experts in drug therapy of
malignant tumors in Russia and is considered a recognized expert on
chemotherapy.  Complex methods for the treatment of malignant neoplasms of
the testes, and breast, ovarian and other tumors have been developed under his
leadership.
 
 New
insights into the mechanism of action of Curaxin CBLC102 were published in one
of the world’s leading cancer journals, Oncogene (Guo et al., Oncogene, 2009,
28:1151-1161).The
published study uncovered additional molecular mechanisms underlying the
anticancer activity of CBLC102, which was previously known to involve
simultaneous targeting of two key regulators of the controlled cell death
process (p53 and NF-kB).  It has now been shown that treatment of
cancer cells with CBLC102 results in the inhibition of the molecular pathway
(PI3K/Akt/mTOR) that is important for cancer cell survival and is considered to
be a highly relevant anticancer treatment target.
 
 Another
breakthrough discovery related to the mechanism of action of CBLC102 was
published in an international health science journal, Cell Cycle (Neznanov et
al., Cell Cycle 8:23, 1-11; December 1, 2009). This study examined the ability
of CBLC102 to inhibit heat shock response, a major adaptive pro-survival pathway
that rescues cells from stressful conditions involving accumulation of misfolded
proteins (known as proteotoxic stress). Tumor cells typically become dependent
on constitutive activity of this salvaging mechanism making them selectively
susceptible to its inhibitors, especially if applied in combination with certain
cancer therapies provoking proteotoxic stress.
 
 The
potential use of curaxins as adjuvants to cancer therapies inducing proteotoxic
stress, such as bortezomib (Velcade(R)) or thermotherapy, opens a whole new
avenue of potential treatment options that may broaden the spectrum of
responding tumors by cutting off an escape mechanism.
 
 Three
sets of patent applications have been filed for Curaxin CBLC102.
 
 We
anticipate that additional clinical efficacy studies will be required before we
are able to apply for FDA licensure. Because of the uncertainties of the scope
of the remaining clinical studies, we cannot currently estimate when any
development efforts may be completed or the cost of completion. Nor can we
estimate when we may realize any cash flow from the development of Curaxin
CBLC102.
 
 We spent
approximately $262,637 and $1,741,194 on R&D for Curaxin CBLC102 in the
fiscal years ended December 31, 2009 and 2008, respectively. For the quarters
ended September 30, 2010 and 2009, we spent $86,131 and $34,074, respectively,
on R&D for Curaxin CBLC102.  For the nine months ended September
30, 2010 and 2009, we spent $288,061 and $252,209, respectively, on R&D for
Curaxin CBLC102.  From our inception to September 30, 2010, we spent
$7,017,180 on R&D for Curaxin CBLC102.
 
 Other
Curaxins
 
 As
mentioned above, screening of the chemical library for compounds capable of
restoring normal function to wild type p53 in the context of RCC yielded three
chemical classes of compounds. Generation of focused chemical libraries around
the hits from one of these classes and their structure-activity optimization
brought about a new generation of curaxins. As the part of this program
performed in the partnership with ChemBridge Corporation, more than 800
proprietary compounds were screened for p53 activation, efficacy in animal tumor
models, selective toxicity and metabolic stability in the presence of rat and
human microsomes. The most active compounds were efficacious in preventing tumor
growth in models for colon carcinoma, melanoma, ovarian cancer, RCC, and breast
cancer.
 
 As a
result of this comprehensive hit-to-lead optimization program, we have developed
CBLC137, which is a drug candidate with proprietary composition of matter
belonging to our next generation of highly improved curaxins. CBLC137 has
demonstrated reliable anti-tumor effects in animal models of colon, breast,
renal and prostate cancers.  CBLC137 has favorable pharmacological
characteristics, is suitable for oral administration and demonstrates a complete
lack of genotoxicity.  It shares all of the positive aspects of
CBLC102, but significantly exceeds the former compound’s activity and efficacy
in preclinical tumor models.  Further development of CBLC137 will
continue through the Incuron joint venture.
  38
  Six sets
of patent applications have been filed for other curaxins.
 
 We spent
approximately $330,053 and $1,492,678 on R&D for other curaxins in the
fiscal years ended December 31, 2009 and 2008, respectively. For the quarters
ended September 30, 2010 and 2009, we spent $238,296 and $24,920, respectively,
on R&D for other curaxins.  For the nine months ended September
30, 2010 and 2009, we spent $440,827 and $321,544, respectively, on R&D for
other curaxins.  From our inception to September 30, 2010, we spent
$5,945,990 on R&D for other curaxins.
 
 CBLC137
is at a very early stage of its development and, as a result, it is premature to
estimate when any development may be completed, the cost of development or when
any cash flow could be realized from development.
 
 FINANCIAL
OVERVIEW
 
 Including
several non-cash charges, our net loss increased from $5,189,279 for the three
months ended September 30, 2009 to $7,285,539 for the three months ended
September 30, 2010, an increase of $2,096,260 or 40.4%. We incurred non-cash
charges of depreciation and amortization of $101,549 and $87,531, non-cash
salaries and consulting fees of $560,048 and $410,402 and a change in the value
of warrants of $6,408,248 and $4,111,578 for the three months ended September
30, 2010 and 2009, respectively.  Excluding these non-cash charges,
our net loss decreased $364,074 or 62.8% from $579,768 for the three months
ended September 30, 2009 to $215,694 for the three months ended September 30,
2010. This decrease was due to lower R&D costs.
 
 Including
several non-cash charges, our net loss decreased from $14,624,938 for the nine
months ended September 30, 2009 to $13,178,458 for the nine months ended
September 30, 2010, a decrease of $1,446,480 or 9.9%. We incurred non-cash
charges of depreciation and amortization of $301,227 and $268,074, non-cash
salaries and consulting fees of $2,782,951 and $2,113,965 and a change in the
value of warrants of $8,105,544 and $9,565,276 for the nine months ended
September 30, 2010 and 2009, respectively.  Excluding these non-cash
charges, our net loss decreased $688,887 or 25.7% from $2,677,623 for the nine
months ended September 30, 2009 to $1,988,736 for the nine months ended
September 30, 2010. This decrease was due to increased government funding and
our cost containment efforts that include incurring R&D costs that are
predominantly supported through government funding or direct investment and
reducing general and administrative costs.
 
 Equity
Overview
 
 On March
16, 2007, we consummated a transaction with various accredited investors
pursuant to which we agreed to sell to the investors, in a private placement, an
aggregate of approximately 4,288,712 shares of Series B Convertible Preferred
Stock and Series B Warrants to purchase approximately 2,144,356 shares of our
common stock pursuant to a securities purchase agreement of the same
date.  The Series B Warrants expire on March 15, 2012 and had an
initial per share exercise price of $10.36.  The aggregate purchase
price paid by the investors for the Series B Preferred and Series B Warrants was
approximately $30,000,000. Also issued in the transaction as partial
compensation for services rendered by the placement agents were Series C
Warrants, which had an initial per share exercise price of $11.00 and were
originally exercisable for 267,074 shares of common stock. The Series C Warrants
also expire on March 15, 2012. Afterrelated fees and
expenses, we received net proceeds of approximately $29,000,000. On September
16, 2009, the outstanding Series B Preferred shares reached their termination
date and, in accordance with their terms, were automatically converted into
shares of common stock.
 
 On
February 13, 2009, March 20, 2009, and March 27, 2009, we entered into purchase
agreements with various accredited investors, pursuant to which we agreed to
sell to these investors an aggregate of 542.84 shares of Series D Convertible
Preferred Stock and Series D Warrants to purchase an aggregate of 3,877,386
shares of the Company’s common stock.  The warrants have a seven-year
term and a per share exercise price of $1.60. Each share of Series D Preferred
was convertible into the number of shares of common stock equal to (1) the
stated value of the share ($10,000), divided by (2) the then-current conversion
price (initially $1.40, but subject to adjustment as described below). At the
initial conversion price of $1.40, each share of Series D Preferred was
convertible into approximately 7,143 shares of common stock. The aggregate
purchase price paid by the investors for the Series D Preferred and the warrants
was approximately $5,428,307 (representing $10,000 for each share together with
a warrant).  After related fees and expenses, we received net proceeds
of approximately $4,460,000. In consideration for its services as exclusive
placement agent, Garden State Securities received cash compensation and warrants
to purchase an aggregate of approximately 387,736 shares of common
stock.
 
 The
conversion price of the Series D Preferred was subject to certain automatic
adjustments, pursuant to which it reduced from $1.40 to $1.33 on August 13, 2009
and from $1.33 to $1.28 on November 13, 2009. On December 31, 2009, the
conversion price of the Series D Preferred reduced from $1.28 to $1.02 because
the Company failed to meet a particular development milestone by the end of
2009. At the conversion price of $1.02, each shares of Series D Preferred was
convertible into approximately 9,804 shares of common stock. Upon completion of
the Series D Preferred transaction and upon each adjustment to the conversion
price of the Series D Preferred, the exercise prices of the Company’s Series B
Warrants and Series C Warrants, and the exercise price of certain other warrants
issued prior to the Company’s initial public offering, were reduced pursuant to
weighted-average anti-dilution provisions. In addition to the adjustment to the
exercise prices of these warrants, the aggregate number of shares issuable upon
exercise of these warrants increased on each such occasion.
  39
  On
February 9, 2010, all outstanding shares of Series D Preferred automatically
converted into approximately 4,576,979 shares of common stock at the conversion
price of $1.02, as a result of the Company’s closing sales price being above a
certain level for 20 consecutive trading days as well as the satisfaction of
certain other conditions.
 
 On
February 25, 2010, we entered into a Securities Purchase Agreement with various
accredited investors, pursuant to which we agreed to sell an aggregate of
1,538,462 shares of our common stock and warrants to purchase an aggregate
of 1,015,384 shares of our common stock, for an aggregate purchase price of
$5,000,000. The transaction closed on March 2, 2010. After related fees and
expenses, the Company received net proceeds totaling approximately $4,500,000.
The Company intends to use the proceeds of the private placement for working
capital purposes. The common stock was sold at a price of $3.25 per share,
and the warrants have an exercise price of $4.50 per share, subject to future
adjustment for various events, such as stock splits or dilutive issuances. The
warrants are exercisable commencing six months following issuance and expire on
March 2, 2015. For its services as placement agent, Rodman & Renshaw, LLC
received gross cash compensation in the amount of approximately $350,000, and it
and its designees collectively received warrants to purchase
123,077 shares of common stock. The common stock and the shares of common
stock underlying the warrants issued to the purchasers and Rodman & Renshaw
have not been and will not be registered under the Securities Act of
1933.
 
 Immediately
after the completion of this transaction on March 2, 2010, pursuant to
weighted-average anti-dilution provisions:
 
 ·
              the
      exercise price of the  Series B Warrants reduced from $6.37 to
      $5.99, and the aggregate number of shares of common stock issuable upon
      exercise of the Series B Warrants increased from 3,847,276 to 4,091,345;
      and
 
 ·
              the
      exercise price of the Series C Warrants reduced from $6.76 to $6.35, and
      the aggregate number of shares of common stock issuable upon exercise of
      the Series C Warrants increased from 434,596 to
  462,654.
 
 Critical
Accounting Policies
 
 Our
management's discussion and analysis of our financial condition and results of
operations is based upon our financial statements, which have been prepared in
accordance with GAAP. The preparation of these financial statements requires us
to make estimates and judgments that affect the reported amounts of our assets,
liabilities, revenues, expenses and other reported disclosures. We believe that
we consistently apply these judgments and estimates and the financial statements
and accompanying notes fairly represent all periods presented. However, any
differences between these judgments and estimates and actual results could have
a material impact on our statements of income and financial position. We base
our estimates on historical experience and on various other assumptions that we
believe are reasonable under the circumstances.
 
 Note 2 to
our financial statements includes disclosure of our significant accounting
policies. Critical accounting estimates, as defined by the SEC, are those that
are most important to the portrayal of our financial condition and results of
operations and require our most difficult and subjective judgments and estimates
of matters that are inherently uncertain. While all decisions regarding
accounting policies are important, we believe that our policies regarding
revenue recognition, R&D expenses, intellectual property related costs,
stock-based compensation expense and fair value measurements could be considered
critical, and are discussed in more detail below.
 
 Revenue
Recognition
 
 Our
revenue sources consist of government grants, government contracts and a
commercial licensing and development contract.
 
 Grant
revenue is recognized using two different methods depending on the type of
grant. Cost reimbursement grants require us to submit proof of costs incurred
that are invoiced by us to the government agency, which then pays the invoice.
In this case, grant revenue is recognized during the period that the costs were
incurred.
 
 Fixed-cost
grants require no proof of costs and are paid as a request for payment is
submitted for expenses. The grant revenue under these fixed cost grants is
recognized using a percentage-of-completion method, which uses assumptions and
estimates. These assumptions and estimates are developed in coordination with
the principal investigator performing the work under the fixed-cost grants to
determine key milestones, expenses incurred, and deliverables to perform a
percentage-of-completion analysis to ensure that revenue is appropriately
recognized. Critical estimates involved in this process include total costs
incurred and anticipated to be incurred during the remaining life of the
grant.
  40
  We
recognize revenue related to the funds received from the State of New York under
the sponsored research agreement with RPCI as allowable costs are incurred. We
recognize revenue on research laboratory services and the subsequent use of
related equipment. The amount paid as a payment toward future services related
to the equipment is recognized as a prepaid asset and will be recognized as
revenue ratably over the useful life of the asset.
 
 Government
contract revenue is recognized as allowable R&D expenses are incurred during
the period and according to the terms of the contract.
 
 Commercial
revenue is recognized when the service or development is delivered or upon
complying with the relevant terms of the commercial agreement including
licensing agreements granting the rights to further develop technology leading
to commercialization in certain territories.
 
 Research
and Development Expenses
 
 R&D
costs are expensed as incurred. These expenses consist primarily of our
proprietary R&D efforts, including salaries and related expenses for
personnel, costs of materials used in our R&D costs of facilities and costs
incurred in connection with our third-party collaboration efforts. Pre-approved
milestone payments made by us to third parties under contracted R&D
arrangements are expensed when the specific milestone has been achieved. As of
September 30, 2010, $50,000 has been paid to CCF for milestone payments relating
to the filing of an IND with the FDA for Curaxin CBLC102, $250,000 has been paid
to CCF as a result of commencing Phase II clinical trials for Curaxin CBLC102
and $50,000 has been paid to CCF relating to the filing of an IND with the FDA
for Protectan CBLB502. Once a drug receives regulatory approval, we will record
any subsequent milestone payments in identifiable intangible assets, less
accumulated amortization, and amortize them evenly over the remaining agreement
term or the expected drug life cycle, whichever is shorter. We expect our
R&D expenses to increase as we continue to develop our drug
candidates.
 
 Intellectual
Property Related Costs
 
 We
capitalize costs associated with the preparation, filing and maintenance of our
intellectual property rights. Capitalized intellectual property is reviewed
annually for impairment. If a patent application is approved, costs paid by us
associated with the preparation, filing and maintenance of the patent will be
amortized on a straight line basis over the shorter of 20 years from the initial
application date or the anticipated useful life of the patent. If the patent
application is not approved, costs paid by us associated with the preparation,
filing and maintenance of the patent will be expensed as part of selling,
general and administrative expenses at that time.
  Through
December 31, 2009, we capitalized $929,976 in expenditures less amortization
associated with the preparation, filing and maintenance of certain of our
patents. We capitalized an additional $121,272, amortized an additional $10,801
and recognized a deferred gain of $5,048 related to foreign currency translation
for the nine months ended September 30, 2010, resulting in a balance of
capitalized intellectual property totaling $1,045,495.
  Stock-based
Compensation
 
 All
stock-based compensation, including grants of employee stock options, is
recognized in the statement of operations based on its fair value.
 
 The fair
value of each stock option granted is estimated on the grant date using accepted
valuation techniques such as the Black Scholes Option Valuation model or Monte
Carlo Simulation depending on the terms and conditions present within the
specific option being valued. The assumptions used to calculate the fair value
of options granted are evaluated and revised, as necessary, to reflect our
experience. We use a risk-free rate based on published rates from the St. Louis
Federal Reserve at the time of the option grant; assume a forfeiture rate of
zero; assume an expected dividend yield rate of zero based on our intent not to
issue a dividend in the foreseeable future; use an expected life based on the
safe harbor method; and presently compute an expected volatility based on a
method layering in the volatility of our common stock with that of the
volatility of similar high-growth, publicly-traded, biotechnology companies'
common stock due to the limited trading history of our company.
Compensation expense is recognized using the straight-line amortization method
for all stock-based awards.
 
 During
the nine months ended September 30, 2010 and September 30, 2009, we granted
1,021,932 and 723,276 stock options, respectively. We recognized a total of
$1,332,457 and $1,527,719 in expense related to stock options for the nine
months ended September 30, 2010 and September 30, 2009,
respectively.  We also recaptured $39,483 and $37,878 of previously
recognized expense due to the forfeiture of non-vested stock options during the
nine months ended September 30, 2010 and September 30, 2009,
respectively.  We also incurred an additional $37,800 of expense for
stock options awarded under the 2009 Executive Compensation Plan. These options
were originally expensed in 2009 based on December 31, 2009 variables, but were
not issued until May 18, 2010. The change in dates resulted in a difference in
valuation assumptions used in the Black-Scholes model causing an increase in the
grant date fair value. This increase in the grant date fair value from $2.31 to
$2.40 per share resulted in the incurrence of $37,800 in expense.  The
net expense for options for the nine months ended September 30, 2010 and
September 30, 2009 was $1,330,774 and $1,489,841, respectively.
  41
  We also
recognized a total of $1,272,990 and $599,217 in expense for shares issued and a
total of $9,963 and $24,907 in expense related to the amortization of restricted
shares for the nine months ended September 30, 2010 and September 30, 2009,
respectively
 
 Fair
Value Measurement
 
 We value
our financial instruments based on fair value measurements and disclosures which
establishes a valuation hierarchy for disclosure of the inputs to valuation used
to measure fair value. This hierarchy prioritizes the inputs into three
broad levels as follows: Level 1 inputs are quoted prices (unadjusted) in active
markets for identical assets or liabilities; Level 2 inputs are quoted prices
for similar assets and liabilities in active markets or inputs that are
observable for the asset or liability, either directly or indirectly; and Level
3 inputs are unobservable inputs in which little or no market data exists,
therefore requiring a company to develop its own assumptions.  We do
not have any significant assets or liabilities measured at fair value using
Level 1 or Level 2 inputs as of September 30, 2010.
 
 We
analyzed all financial instruments with features of both liabilities and
equity.
 
 We carry
the warrants issued in the Series D Private Placement at fair value using Level
3 inputs for its valuation methodology totaling $15,752,534 and $8,410,379 as of
September 30, 2010 and December 31, 2009, respectively.  We recognized
a fair value measurement loss of $5,258,402 and $4,111,578 for the three months
ended September 30, 2010 and 2009, respectively.  We recognized a fair
value measurement loss of $7,968,929 and $9,565,276 for the nine months ended
September 30, 2010 and 2009, respectively.
 
 We carry
the warrants issued in conjunction with the 2010 Common Stock Equity Offering at
fair value using Level 3 inputs for its valuation methodology totaling
$3,085,232 and $0 as of September 30, 2010 and December 31, 2009,
respectively.  We recognized a fair value measurement loss of
$1,149,846 and $0 for the three months ended September 30, 2010 and 2009,
respectively.  We recognized a fair value measurement loss of $136,615
and $0 for the nine months ended September 30, 2010 and 2009,
respectively.
 
 We did
not identify any other non-recurring assets and liabilities that are required to
be presented on the balance sheets at fair value.
 
 Recently
Issued Accounting Pronouncements
 
 See Note
2W to financial statements in Item 1.
 
 Results
of Operations
 
 The
following table sets forth our statement of operations data for the three and
nine months ended September 30, 2010 and 2009 and the years ended December 31,
2009 and 2008 and should be read in conjunction with our financial statements
and the related notes appearing elsewhere in this filing and in our annual
report on Form 10-K for the year ended December 31, 2009.
 
 Three Months
                        
                        
                        Three Months
                        
                        
                        Nine Months
                        
                        
                        Nine Months
                        
                        
                        Year Ended
                        
                        
                        Year EndedEnded
                        
                        
                        Ended
                        
                        
                        Ended
                        
                        
                        Ended
                        
                        
                        December 31,
                        
                        
                        December 31,30-Sep-10
                        
                        
                        30-Sep-09
                        
                        
                        30-Sep-10
                        
                        
                        30-Sep-09
                        
                        
                        2009
                        
                        
                        2008(unaudited)
                        
                        
                        (unaudited)
                        
                        
                        (unaudited)
                        
                        
                        (unaudited)Revenues
                        
                        $
                        3,189,488
                        
                        
                        $
                        3,223,094
                        
                        
                        $
                        11,570,599
                        
                        
                        $
                        9,717,803
                        
                        
                        $
                        14,345,908
                        
                        
                        $
                        4,705,597Operating
      expenses
                        
                        
                        4,157,193
                        
                        
                        
                        4,314,178
                        
                        
                        
                        16,615,789
                        
                        
                        
                        14,548,186
                        
                        
                        
                        20,728,837
                        
                        
                        
                        19,050,965Other
      expense (income)
                        
                        
                        6,367,282
                        
                        
                        
                        4,100,241
                        
                        
                        
                        8,196,128
                        
                        
                        
                        9,811,898
                        
                        
                        
                        6,463,208
                        
                        
                        
                        (59,597
                        )Net
      interest expense (income)
                        
                        
                        (49,448
                        )
                        
                        
                        (2,046
                        )
                        
                        
                        (62,860
                        )
                        
                        
                        (17,343
                        )
                        
                        
                        (19,728
                        )
                        
                        
                        (259,844
                        )Net
      income (loss)
                        
                        $
                        (7,285,539
                        )
                        
                        $
                        (5,189,279
                        )
                        
                        $
                        (13,178,458
                        )
                        
                        $
                        (14,624,938
                        )
                        
                        $
                        (12,826,409
                        )
                        
                        $
                        (14,025,927
                        )
 
 The
following table summarizes R&D expenses for the three months and nine months
ended September 30, 2010 and 2009 and the years ended December 31, 2009 and 2008
and since inception:
  42
 
 Three Months
                    
                    
                    Three Months
                    
                    
                    Nine Months
                    
                    
                    Nine Months
                    
                    
                    Year Ended
                    
                    
                    Year Ended
                    
                    
                    TotalEnded
                    
                    
                    Ended
                    
                    
                    Ended
                    
                    
                    Ended
                    
                    
                    December 31,
                    
                    
                    December 31,
                    
                    
                    Since30-Sep-10
                    
                    
                    30-Sep-09
                    
                    
                    30-Sep-10
                    
                    
                    30-Sep-09
                    
                    
                    2009
                    
                    
                    2008
                    
                    
                    Inception(unaudited)
                    
                    
                    (unaudited)
                    
                    
                    (unaudited)
                    
                    
                    (unaudited)
                    
                    
                    
                    
                    
                    
                    
                    
                    (unaudited)Research
      and development
                    
                    $
                    3,083,665
                    
                    
                    $
                    3,327,609
                    
                    
                    $
                    10,951,560
                    
                    
                    $
                    10,602,591
                    
                    
                    $
                    14,331,673
                    
                    
                    $
                    13,160,812
                    
                    
                    $
                    68,539,954General
                    
                    $
                    64,356
                    
                    
                    $
                    -
                    
                    
                    $
                    201,477
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    931,441
                    
                    
                    $
                    5,308,107Protectan
      CBLB502 - non-medical applications
                    
                    $
                    2,689,779
                    
                    
                    $
                    3,267,201
                    
                    
                    $
                    10,016,092
                    
                    
                    $
                    9,966,145
                    
                    
                    $
                    13,676,289
                    
                    
                    $
                    7,264,813
                    
                    
                    $
                    45,293,577Protectan
      CBLB502 - medical applications
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    56,127
                    
                    
                    $
                    56,127
                    
                    
                    $
                    756,227
                    
                    
                    $
                    1,833,056Protectan
      CBLB612
                    
                    $
                    5,103
                    
                    
                    $
                    1,414
                    
                    
                    $
                    5,103
                    
                    
                    $
                    6,567
                    
                    
                    $
                    6,567
                    
                    
                    $
                    974,459
                    
                    
                    $
                    3,142,044Curaxin
      CBLC102
                    
                    $
                    86,131
                    
                    
                    $
                    34,074
                    
                    
                    $
                    288,061
                    
                    
                    $
                    252,209
                    
                    
                    $
                    262,637
                    
                    
                    $
                    1,741,194
                    
                    
                    $
                    7,017,180Other
      Curaxins
                    
                    $
                    238,296
                    
                    
                    $
                    24,920
                    
                    
                    $
                    440,827
                    
                    
                    $
                    321,544
                    
                    
                    $
                    330,053
                    
                    
                    $
                    1,492,678
                    
                    
                    $
                    5,945,990
 
 Three
Months Ended September 30, 2010 Compared to Three Months Ended September 30,
2009
 
 Revenue
 
 Revenue
decreased from $3,223,094 for the three months ended September 30, 2009 to
$3,189,488 for the three months ended September 30, 2010, representing a
decrease of $33,606 or 1.0%.
 
 See the
table below for further details regarding the sources of our government grant
and contract revenue:
  Agency
                          
                          Program
                          
                          Amount
                          
                          Periodof
                            Performance
                          
                          Revenue
                            2010
                            (Julyl1thru
                            Sept.30)
                          
                          
                          Revenue
                            2009
                            (July1thru
                            Sept.30)
                          
                          
                          Revenue
                            2009(unaudited)
                          
                          
                          (unaudited)DoD
                          
                          DTRA
      Contract
                          
                          $
                          1,263,836
                          
                          03/2007-02/2009
                          
                          $
                          -
                          
                          
                          $
                          80,079
                          
                          
                          $
                          183,613NY
      State/RPCI
                          
                          Sponsored
      Research Agreement
                          
                          $
                          3,000,000
                          
                          03/2007-02/2012
                          
                          $
                          4,213
                          
                          
                          $
                          3,679
                          
                          
                          $
                          35,696DoD
                          
                          DOD
      Contract
                          
                          $
                          9,590,000
                          
                          05/2008-09/2010
                          
                          $
                          68,777
                          
                          
                          $
                          1,313,900
                          
                          
                          $
                          4,843,303HHS
                          
                          BARDA
      Contract
                          
                          $
                          15,600,000
                          
                          09/2008-09/2011
                          
                          $
                          2,348,526
                          
                          
                          $
                          1,172,088
                          
                          
                          $
                          5,374,535NIH
                          
                          NIAID
      Grant
                          
                          $
                          1,232,695
                          
                          09/2008-08/2010
                          
                          $
                          -
                          
                          
                          $
                          392,369
                          
                          
                          $
                          1,021,095NIH
                          
                          NIAID
      GO Grant
                          
                          $
                          5,300,000
                          
                          09/2009-08/2011
                          
                          $
                          739,882
                          
                          
                          $
                          260,979
                          
                          
                          $
                          1,237,666DOD
                          
                          CBMS-MITS
      Contract
                          
                          $
                          14,800,000
                          
                          09/2010-03/2013
                          
                          $
                          28,090
                          
                          
                          $
                          -
                          
                          
                          $
                          -Totals
                          
                          $
                          3,189,488
                          
                          
                          $
                          3,223,094
                          
                          
                          $
                          12,695,908
  We
anticipate our revenue over the next year to be derived mainly from government
grants and contracts. In addition, it is common in our industry for companies to
enter into licensing agreements with large pharmaceutical companies. To the
extent we enter into such licensing arrangements, we may receive additional
revenue from licensing fees.
 
 Operating
Expenses
 
 Operating
expenses have historically consisted of costs relating to R&D and general
and administrative expenses.  R&D expenses have consisted mainly
of supporting our R&D teams, process development, sponsored research at the
RPCI and CCF, clinical trials and consulting fees. General and administrative
expenses include all corporate and administrative functions that serve to
support our current and future operations while also providing an infrastructure
to support future growth. Major items in this category include management and
staff salaries, rent/leases, professional services and travel-related expenses.
We anticipate these expenses to increase as a result of increased legal and
accounting fees in connection with our compliance with ongoing reporting and
accounting requirements of the SEC and the expansion of our
business.
 
 Operating
expenses decreased from $4,314,178 for the three months ended September 30, 2009
to $4,157,193 for the three months ended September 30, 2010, a decrease of
$156,985 or 3.6%. We recognized a total of $560,048 of non-cash, stock-based
compensation for the three months ended September 30, 2010, compared to $410,402
for the three months ended September 30, 2009.  If these non-cash,
stock-based compensation expenses were excluded, operating expenses would have
decreased from $3,903,776 for the three months ended September 30, 2009 to
$3,597,145 for the three months ended September 30, 2010.  This
represents a decrease in operating expenses of $306,631 or 7.9% as explained
below.
  43
  R&D
costs decreased from $3,327,609 for the three months ended September 30, 2009 to
$3,083,665 for the three months ended September 30, 2010. This represents a
decrease of $243,944 or 7.3%. We recognized a total of $291,878 of R&D
non-cash, stock based compensation for the three months ended September 30,
2010, compared to $230,977 for the three months ended September 30,
2009.  Without the non-cash, stock-based compensation, R&D
expenses decreased from $3,096,632 for the three months ended September 30, 2009
to $2,791,787 for the three months ended September 30, 2010, a decrease of
$304,845 or 9.8%.  The lower R&D expenses were a result of
decreased subcontract costs.
 
 Selling,
general and administrative costs increased from $986,569 for the three months
ended September 30, 2009 to $1,073,528 for the three months ended September 30,
2010.  This represents an increase of $86,959 or 8.8%.  We
recognized a total of $268,170 of non-cash, stock-based compensation under
selling, general and administrative costs for the three months ended September
30, 2010, compared to $179,.425 for the three months ended September 30, 2009.
Without the non-cash, stock-based compensation, the selling, general and
administrative expenses decreased from $807,144 for the three months ended
September 30, 2009 to $805,358 for the three months ended September 30, 2010, a
decrease of $1,786 or 0.2%.  The lower general and administrative
expenses were incurred as a result of a tax refund received from the State of
New York partially offset by general and administrative costs to support the
continued growth and development of our infrastructure including for our
consolidated subsidiary, Incuron.
 
 Until we
introduce a product to the market, we expect these expenses in the categories
mentioned above will be the largest categories in our income
statement.
 
 Nine
Months Ended September 30, 2010 Compared to Nine Months Ended September 30,
2009
 
 Revenue
 
 Revenue
increased from $9,717,803 for the nine months ended September 30, 2009 to
$11,570,599 for the nine months ended September 30, 2010, representing an
increase of $1,852,796 or 19.1% resulting primarily from an increase in revenue
from various federal grants and contracts including the DoD and BARDA
contracts.
 
 See the
table below for further details regarding the sources of our government grant
and contract revenue:
  Agency
                                  
                                  Program
                                  
                                  Amount
                                  
                                  Period of
                                    Performance
                                  
                                  Revenue
                                    2010
                                    (thru
                                    September30)
                                  
                                  
                                  Revenue
                                    2009
                                    (thru
                                    September30)
                                  
                                  
                                  Revenue
                                    2009(unaudited)
                                  
                                  
                                  (unaudited)DoD
                                  
                                  DTRA
      Contract
                                  
                                  $
                                  1,263,836
                                  
                                  03/2007-02/2009
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  183,613
                                  
                                  
                                  $
                                  183,613NY
      State/RPCI
                                  
                                  Sponsored
      Research Agreement
                                  
                                  $
                                  3,000,000
                                  
                                  03/2007-02/2012
                                  
                                  $
                                  12,570
                                  
                                  
                                  $
                                  28,338
                                  
                                  
                                  $
                                  35,696DOD
                                  
                                  DOD
      Contract
                                  
                                  $
                                  9,590,000
                                  
                                  05/2008-09/2010
                                  
                                  $
                                  564,432
                                  
                                  
                                  $
                                  4,636,335
                                  
                                  
                                  $
                                  4,843,303HHS
                                  
                                  BARDA
      Contract
                                  
                                  $
                                  15,600,000
                                  
                                  09/2008-09/2011
                                  
                                  $
                                  8,789,749
                                  
                                  
                                  $
                                  3,649,347
                                  
                                  
                                  $
                                  5,374,535NIH
                                  
                                  NIAID
      Grant
                                  
                                  $
                                  1,232,695
                                  
                                  09/2008-02/2010
                                  
                                  $
                                  560
                                  
                                  
                                  $
                                  955,512
                                  
                                  
                                  $
                                  1,021,095NIH
                                  
                                  NIAID
      Grant
                                  
                                  $
                                  5,300,000
                                  
                                  09/2009-08/2011
                                  
                                  $
                                  2,175,197
                                  
                                  
                                  $
                                  264,658
                                  
                                  
                                  $
                                  1,237,666DOD
                                  
                                  CBMS-MITS
      Contract
                                  
                                  $
                                  14,800,000
                                  
                                  09/2010-03/2013
                                  
                                  $
                                  28,090
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  -Totals
                                  
                                  $
                                  11,570,599
                                  
                                  
                                  $
                                  9,717,803
                                  
                                  
                                  $
                                  12,695,908
  We
anticipate our revenue over the next year to be derived mainly from government
grants and contracts. In addition, it is common in our industry for companies to
enter into licensing agreements with large pharmaceutical companies. To the
extent we enter into such licensing arrangements, we may receive additional
revenue from licensing fees.
 
 Operating
Expenses
 
 Operating
expenses have historically consisted of costs relating to R&D and general
and administrative expenses.  R&D expenses have consisted mainly
of supporting our R&D teams, process development, sponsored research at the
RPCI and CCF, clinical trials and consulting fees. General and administrative
expenses include all corporate and administrative functions that serve to
support our current and future operations while also providing an infrastructure
to support future growth. Major items in this category include management and
staff salaries, rent/leases, professional services and travel-related expenses.
We anticipate these expenses to increase as a result of increased legal and
accounting fees in connection with our compliance with ongoing reporting and
accounting requirements of the SEC and the expansion of our
business.
  44
  Operating
expenses increased from $14,548,186 for the nine months ended September 30, 2009
to $16,615,789 for the nine months ended September 30, 2010, an increase of
$2,067,603 or 14.2%. We recognized a total of $2,782,951 of non-cash,
stock-based compensation for the nine months ended September 30, 2010, compared
to $2,113,965 for the nine months ended September 30, 2009.  If these
non-cash, stock-based compensation expenses were excluded, operating expenses
would have increased from $12,434,221 for the nine months ended September 30,
2009 to $13,832,838 for the nine months ended September 30,
2010.  This represents an increase in operating expenses of $1,398,617
or 11.2% as explained below.
 
 R&D
costs increased from $10,602,591 for the nine months ended September 30, 2009 to
$10,951,960 for the nine months ended September 30, 2010. This represents
an increase of $348,969 or 3.3%. We recognized a total of $648,735 of
R&D non-cash, stock based compensation for the nine months ended September
30, 2010, compared to $895,397 for the nine months ended September 30,
2009.  Without the non-cash, stock-based compensation, the R&D
expenses increased from $9,707,194 for the nine months ended September 30, 2009
to $10,302,825 for the nine months ended September 30, 2010, an increase of
$595,631 or 6.1%.  The higher R&D expenses were a result of
increased costs to support the increase in grant and contract
revenue.
 
 Selling,
general and administrative costs increased from $3,945,595 for the nine months
ended September 30, 2009 to $5,664,229 for the nine months ended September 30,
2010.  This represents an increase of $1,718,634 or
43.6%.  We recognized a total of $2,134,216 of non-cash, stock-based
compensation under selling, general and administrative costs for the nine months
ended September 30, 2010, compared to $1,218,568 for the nine months ended
September 30, 2009. Without the non-cash, stock-based compensation, the selling,
general and administrative expenses increased from $2,727,027 for the nine
months ended September 30, 2009 to $3,530,013 for the nine months ended
September 30, 2010, an increase of $802,986 or 29.4.%.  The higher
general and administrative expenses were incurred as a result of higher G&A
costs to support the growth of the company and costs to develop the
infrastructure for our consolidated subsidiary, Incuron.
 
 Until we
introduce a product to the market, we expect these expenses in the categories
mentioned above will be the largest categories in our statement of
operations.
 
 Liquidity
and Capital Resources
 
 We have
incurred annual operating losses since our inception, and, as of September 30,
2010, we had an accumulated deficit of $82,694,896.  Our principal
sources of liquidity have been cash provided by sales of our securities,
government grants and contracts and licensing agreements. Our principal uses of
cash have been R&D and working capital. We expect our future sources of
liquidity to be primarily government contracts and grants, equity financing,
licensing fees and milestone payments in the event we enter into licensing
agreements with third parties, and research collaboration fees in the event we
enter into research collaborations with third parties, which to date we have
not.
 
 Net cash
used in operating activities totaled $2,368,259 for the nine months ended
September 30, 2010, compared to $3,092,572 used in operating activities for the
nine months ended September 30, 2009. This decrease in cash used in operating
activities resulted from cost containment efforts combined with focusing our
R&D efforts on projects where grant and contract funding was
awarded.
 
 Net cash
used in investing activities was $511,499 for the nine months ended September
30, 2010, and net cash provided by investing activities was $800,052 for the
nine months ended September 30, 2009. The decrease in cash provided by investing
activities resulted primarily from the liquidation of a short-term investment in
2009 as compared to 2010.
 
 Net cash
provided by financing activities totaled $8,368,897 for the nine months ended
September 30, 2010, compared to net cash provided by financing activities of
$4,090,263 for the nine months ended September 30, 2009.  The increase
in cash provided by financial activities was attributed to the investment in
Incuron, LLC by BCV and the 2010 Common Stock Equity Offering during the first
nine months of 2010 as compared to the Series D Preferred and Series D Warrants
offering during the same period in 2009.
 
 Under our
exclusive license agreement with CCF, we may be responsible for making milestone
payments to CCF in amounts ranging from $50,000 to $4,000,000. The milestones
and corresponding payments for Protectan CBLB502 and Curaxin CBLC102 are set
forth above under “Item 1 – Description of Business – Collaborative Research
Agreements – Cleveland Clinic Foundation.”
 
 Our
agreement with CCF also provides for payment by us to CCF of royalty payments
calculated as a percentage of the net sales of the drug candidates ranging from
1-2%, and sublicense royalty payments calculated as a percentage of the
royalties received from the sublicenses ranging from 5-35%. However, any royalty
payments and sublicense royalty payments assume that we will be able to
commercialize our drug candidates, which are subject to numerous risks and
uncertainties, including those associated with the regulatory approval process,
our R&D process and other factors. Accrued milestone payments, royalty
payments and sublicense royalty payments are payable upon achievement of the
milestone.
  45
  We
believe that although existing cash resources will be sufficient to finance our
currently planned operations beyond the next twelve months, these amounts will
not be sufficient to meet our longer-term cash requirements, including our cash
requirements for the commercialization of certain of our drug candidates
currently in development. We may be required to issue equity or debt securities
or enter into other financial arrangements, including relationships with
corporate and other partners, in order to raise additional capital. Depending
upon market conditions, we may not be successful in raising sufficient
additional capital for our long-term requirements. In such event, our business,
prospects, financial condition and results of operations could be materially
adversely affected.
 
 Impact
of Inflation
 
 We
believe that our results of operations are not dependent upon moderate changes
in inflation rates.
 
 Impact
of Exchange Rate Fluctuations
 
 We
believe that our results of operations are somewhat dependent upon changes in
foreign currency exchange rates. We have entered into agreements with foreign
third parties to produce one of our drug compounds and are required to make
payments in the foreign currency. As a result, our financial results could be
affected by changes in foreign currency exchange rates. As of September 30,
2010, we are obligated to make payments under these agreements of 1,470,709
Euros. We have purchased 751,344. Euros and therefore, at September 30, 2010,
had foreign currency risk of $987,040 for Euros given prevailing currency
exchange spot rates.
 
 Off-Balance
Sheet Arrangements
 
 We have
not entered into any off-balance sheet arrangements.
  46
  Item
3: Quantitative and Qualitative Disclosures About Market Risk
 
 We are
exposed to certain market risks, including changes to interest rates, foreign
currency exchange rates and equity investment prices. To reduce the volatility
related to these exposures, we may enter into various derivative hedging
transactions pursuant to our investment and risk management policies. There are
inherent risks that may only be partially offset by our hedging programs should
there be unfavorable movements in interest rates, foreign currency exchange
rates, or equity investment prices.
 
 Interest Rate Risk. Our
interest income is sensitive to changes in the general level of domestic
interest rates, particularly since our investments are classified as short-term
held to maturity.  Due to our intention to hold our investments to
maturity, we have concluded that there is no material interest rate risk
exposure.
 
 Our
revolving credit facility also would have been affected by fluctuations in
interest rates as it is based on prime minus 1%. As of September 30, 2010, we
had not drawn on this facility.
 
 Foreign Currency Risk. As of
September 30, 2010, we have agreements with third parties that require payment
in the foreign currency. As a result, our financial results could be affected by
changes in foreign currency exchange rates. Currently, our exposure primarily
exists with the Euro.  As a consequence, movements in exchange rates
could cause our foreign currency denominated expenses to fluctuate as a
percentage of net revenue, affecting our profitability and cash flows. At this
time, our exposure to foreign currency fluctuations is not
material.
 
 In
addition, our consolidated financial reports are presented in U.S. dollars,
whereas the functional currency for Incuron is Russian rubles. As such, we are
subject to translation risks relating to exchange rates between the U.S. dollar
and the Russian ruble. Therefore, due to Incuron, our results may be affected by
changes in the exchange rate between U.S. dollars and Russian rubles.
Furthermore, although it is anticipated that we will ultimately own 50.1% of the
membership interest in Incuron, depending on the U.S. dollar/Russian ruble
exchange rate and the U.S. dollar-equivalent value of the aggregate
contributions made by BCV, we may be required to either transfer a portion of
its ownership interest to BCV or make a cash contribution to Incuron. In such a
case, if we choose to transfer a portion of its ownership interest to BCV,
we may ultimately own less than 50.1% of the membership interest of Incuron, but
will retain the right to appoint a majority of the members of the board of
directors of Incuron.
 
 Finally,
the indirect effect of fluctuations in interest rates and foreign currency
exchange rates could have a material adverse effect on our business financial
condition and results of operations. For example, currency exchange rate
fluctuations could affect international demand for our products in the future.
Furthermore, interest rate and currency exchange rate fluctuations may broadly
influence the U.S. and foreign economies resulting in a material adverse effect
on our business, financial condition and results of operations. As a result, we
cannot give any assurance as to the effect that future changes in foreign
currency rates will have on our financial position, results of operations or
cash flows.
 
 Item
4: Controls and Procedures
 
 Effectiveness
of Disclosure
 
 Our
management, with the participation of our Chief Executive Officer and Chief
Financial Officer, evaluated the effectiveness of our disclosure controls and
procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended, or the Exchange Act as of September 30,
2010. Our management recognizes that any controls and procedures, no matter how
well designed and operated, can provide only reasonable assurance of achieving
their objectives and management necessarily applies its judgment in evaluating
the cost-benefit relationship of possible controls and procedures. Based on the
evaluation of our disclosure controls and procedures as of September 30, 2010,
our Chief Executive Officer and Chief Financial Officer concluded that, as of
such date, our disclosure controls and procedures were effective to assure that
information required to be declared by us in reports that we file or submit
under the Exchange Act is (1) recorded, processed, summarized, and reported
within the periods specified in the SEC’s rules and forms and (2) accumulated
and communicated to our management, including our Chief Executive Officer and
Chief Financial Officer, as appropriate, to allow timely decisions regarding
required disclosure.
 
 Changes
in Internal Control over Financial Reporting
 
 There was
no change in our internal control over financial reporting (as defined in Rules
13a-15(f) and 15(d)-15(f) under the Exchange Act) during the fiscal quarter
ended September 30, 2010, that has materially affected, or is reasonably likely
to materially affect, our internal control over financial
reporting.
  47
  PART
II - Other Information
 
 Item
1. Legal Proceedings
 
 As
of September 30, 2010, we were not a party to any litigation or other legal
proceeding.
 
 Item
2. Unregistered Sales of Equity Securities and Use of Proceeds
 
 (a)
None.
 
 (b) Not
applicable.
 
 (c)
None.
 
 Item
3. Defaults Upon Senior Securities
 
 None.
 
 Item
4. Removed and Reserved
 
 Item
5. Other Information
 
 None.
 
 Item
6. Exhibits
 
 (a) The
following exhibits are included as part of this report:
 
 Exhibit
                  Number
                
                Description of Document10.1
                
                Contract
      (W9113M-10-C-0088), effective as of September 15, 2010, between Cleveland
      BioLabs, Inc. and the U.S. Army Space and Missile Defense Command/Army
      Forces Strategic Command (the “2010 DoD Contract”).10.2
                
                Amendment
      of Solicitation/Modification of Contract No. 1, effective as of September
      17, 2010, to the 2010 DoD Contract.10.3
                
                Contract
      (HHSO100200800059C), effective as of September 16, 2008, between Cleveland
      BioLabs, Inc. and the Biomedical Advanced Research and Development
      Authority of the U.S. Department of Health and Human Services (the “BARDA
      Contract”)10.4
                
                Amendment
      of Solicitation/Modification of Contract No. 1, effective June 24, 2009,
      to the BARDA Contract10.5
                
                Amendment
      of Solicitation/Modification of Contract No. 2, effective September 15,
      2009, to the BARDA Contract10.6
                
                Amendment
      of Solicitation/Modification of Contract No. 3, effective March 22, 2010,
      to the BARDA Contract10.7
                
                Amendment
      of Solicitation/Modification of Contract No. 4, effective April 14, 2010,
      to the BARDA Contract10.8
                
                Amendment
      of Solicitation/Modification of Contract No. 5, effective July 22, 2010,
      to the BARDA Contract10.9
                
                Cooperative
      Research and Development Agreement, effective August 1, 2004, among The
      Uniformed Services University of the Health Sciences, The Henry M. Jackson
      Foundation for the Advancement of Military Medicine, Inc., The Cleveland
      Clinic Foundation and Cleveland BioLabs, Inc.31.1
                
                Certification
      of Michael Fonstein, Chief Executive Officer, pursuant to Section 302 of
      the Sarbanes Oxley Act of 2002.31.2
                
                Certification
      of John A. Marhofer, Jr., Chief Financial Officer, pursuant to Section 302
      of the Sarbanes Oxley Act of 2002.32.1
                
                Certification
      Pursuant To 18 U.S.C. Section
1350
  48
  Signatures
 
 In
accordance with the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
 
 CLEVELAND
      BIOLABS, INC.Dated:
      November 15, 2010
                By:
                /s/ MICHAEL FONSTEINMichael
      Fonstein
                  Chief
      Executive Officer
                  (Principal
      Executive Officer)Dated:
      November 15, 2010
                By:
                /s/ JOHN A. MARHOFER,
JR.John
      A. Marhofer, Jr.
                  Chief
      Financial Officer
                  (Principal
      Financial Officer)
  49