UNITED
STATES SECURITIES AND EXCHANGE COMMISSION





WASHINGTON,
D.C. 20549





FORM
10-Q





(Mark
One)





þQUARTERLY REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934





For the
quarterly period ended September 30, 2009





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
 
 (Former
name, former address and former fiscal year,
 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 Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes o  No o





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 companyx





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, 2009, there were 20,127,792shares outstanding of
registrant's common stock, par value $0.005 per share










CLEVELAND
BIOLABS INC


10-Q


11/12/2009





TABLE
      OF CONTENTSPAGEPART
      I - FINANCIAL INFORMATIONITEM
      1:
                                                                                                                Financial
      StatementsBalance
      Sheets as of September 30, 2009 and December 31, 2008
                                                                                                                3Statements
      of Operations For Three and Nine Months Ended September 30, 2009 and
      2008
                                                                                                                5Statements
      of Cash Flows For Nine Months Ended September 30, 2009 and
      2008
                                                                                                                6Statement
      of Stockholders' Equity from January 1, 2008 to December 31, 2008 and to
      September 30, 2009
                                                                                                                8Notes
      to Financial Statements
                                                                                                                11ITEM
      2:
                                                                                                                Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations
                                                                                                                23ITEM
      3:
                                                                                                                Quantitative
      and Qualitative Disclosures About Market Risk
                                                                                                                42ITEM
      4:
                                                                                                                Controls
      and Procedures
                                                                                                                42PART
      II - OTHER INFORMATIONITEM
      1:
                                                                                                                Legal
      Proceedings
                                                                                                                43ITEM
      2:
                                                                                                                Unregistered
      Sales of Equity Securities and Use of Proceeds
                                                                                                                43ITEM
      3:
                                                                                                                Defaults
      Upon Senior Securities
                                                                                                                43ITEM
      4:
                                                                                                                Submission
      of Matters to a Vote of Securities Holders
                                                                                                                43ITEM
      5:
                                                                                                                Other
      Information
                                                                                                                43ITEM
      6:
                                                                                                                Exhibits
                                                                                                                43Signatures
                                                                                                                44




In this
report, “Cleveland BioLabs,” “CBLI,” “we,” “us” and “our” refer to Cleveland
BioLabs, Inc. Our common stock, par value $0.005 per share is referred to as
“common stock.”


2





CLEVELAND
BIOLABS, INC.





BALANCE
SHEETS





September
30, 2009 (unaudited) and December 31, 2008





September
      302009
                      
                      
                      December
      31(unaudited)
                      
                      
                      2008ASSETSCURRENT
      ASSETSCash
      and equivalents
                      
                      $
                      2,097,592
                      
                      
                      $
                      299,849Short-term
      investments
                      
                      
                      -
                      
                      
                      
                      1,000,000Accounts
      receivable:Trade
                      
                      
                      2,723,227
                      
                      
                      
                      1,043,821Interest
                      
                      
                      -
                      
                      
                      
                      9,488Other
      prepaid expenses
                      
                      
                      420,284
                      
                      
                      
                      510,707Total
      current assets
                      
                      
                      5,241,103
                      
                      
                      
                      2,863,865EQUIPMENTComputer
      equipment
                      
                      
                      314,058
                      
                      
                      
                      309,323Lab
      equipment
                      
                      
                      1,124,277
                      
                      
                      
                      1,102,465Furniture
                      
                      
                      333,980
                      
                      
                      
                      312,1341,772,315
                      
                      
                      
                      1,723,922Less
      accumulated depreciation
                      
                      
                      905,914
                      
                      
                      
                      637,840866,401
                      
                      
                      
                      1,086,082OTHER
      ASSETSIntellectual
      property
                      
                      
                      860,622
                      
                      
                      
                      733,051Deposits
                      
                      
                      23,482
                      
                      
                      
                      23,482884,104
                      
                      
                      
                      756,533TOTAL
      ASSETS
                      
                      $
                      6,991,608
                      
                      
                      $
                      4,706,480




3




CLEVELAND
BIOLABS, INC.





BALANCE
SHEETS





September
30, 2009 (unaudited) and December 31, 2008





September
      302009
                                                        
                                                        
                                                        December
      31(unaudited)
                                                        
                                                        
                                                        2008LIABILITIES
      AND STOCKHOLDERS' EQUITYCURRENT
      LIABILITIESAccounts
      payable
                                                        
                                                        $
                                                        1,278,287
                                                        
                                                        
                                                        $
                                                        1,101,961Deferred
      revenue
                                                        
                                                        
                                                        3,333,295
                                                        
                                                        
                                                        
                                                        2,365,312Dividends
      payable
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        321,293Accrued
      expenses
                                                        
                                                        
                                                        108,936
                                                        
                                                        
                                                        
                                                        379,653Accrued
      warrant liability
                                                        
                                                        
                                                        12,582,110
                                                        
                                                        
                                                        
                                                        -Total
      current liabilities
                                                        
                                                        
                                                        17,302,628
                                                        
                                                        
                                                        
                                                        4,168,219STOCKHOLDERS'
      EQUITYPreferred
      stock, $.005 par valueAuthorized
      - 10,000,000 shares at September 30, 2009and
      December 31, 2008Series
      B convertible preferred stock,Issued
      and outstanding 0 and 3,160,974shares
      at September 30, 2009 and December 31, 2008, respectively
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        15,805Series
      D convertible preferred stock,Issued
      and outstanding 495.25 and 0
                                                        
                                                        
                                                        2
                                                        
                                                        
                                                        
                                                        -shares
      at September 30, 2009 and December 31, 2008, respectivelyCommon
      stock, $.005 par valueAuthorized
      - 80,000,000 and 40,000,000 shares at September 30, 2009and
      December 31, 2008, respectivelyIssued
      and outstanding 19,460,954 and 13,775,805shares
      at September 30, 2009 and December 31, 2008, respectively
                                                        
                                                        
                                                        97,305
                                                        
                                                        
                                                        
                                                        68,879Additional
      paid-in capital
                                                        
                                                        
                                                        61,078,135
                                                        
                                                        
                                                        
                                                        56,699,750Accumulated
      deficit
                                                        
                                                        
                                                        (71,486,462
                                                        )
                                                        
                                                        
                                                        (56,246,173
                                                        )Total
      stockholders' equity (deficit)
                                                        
                                                        
                                                        (10,311,020
                                                        )
                                                        
                                                        
                                                        538,261TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY
                                                        
                                                        $
                                                        6,991,608
                                                        
                                                        
                                                        $
                                                        4,706,480


4





CLEVELAND
BIOLABS, INC.








STATEMENT
OF OPERATIONS





Three and
Nine Months Ending September 30, 2009 and 2008 (unaudited)





Three Months Ended
                    
                    
                    Nine Months EndedSeptember 30
                    
                    
                    September 30
                    
                    
                    September 30
                    
                    
                    September 302009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008(unaudited)
                    
                    
                    (unaudited)
                    
                    
                    (unaudited)
                    
                    
                    (unaudited)REVENUESGrant
      and contract
                    
                    $
                    3,223,094
                    
                    
                    $
                    1,851,419
                    
                    
                    $
                    9,717,803
                    
                    
                    $
                    3,082,119Service
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    120,0003,223,094
                    
                    
                    
                    1,851,419
                    
                    
                    
                    9,717,803
                    
                    
                    
                    3,202,119OPERATING
      EXPENSESResearch
      and development
                    
                    
                    3,327,609
                    
                    
                    
                    3,485,430
                    
                    
                    
                    10,602,591
                    
                    
                    
                    9,719,519Selling,
      general and administrative
                    
                    
                    986,569
                    
                    
                    
                    1,240,142
                    
                    
                    
                    3,945,595
                    
                    
                    
                    4,425,792Total
      operating expenses
                    
                    
                    4,314,178
                    
                    
                    
                    4,725,572
                    
                    
                    
                    14,548,186
                    
                    
                    
                    14,145,311LOSS
      FROM OPERATIONS
                    
                    
                    (1,091,084
                    )
                    
                    
                    (2,874,153
                    )
                    
                    
                    (4,830,383
                    )
                    
                    
                    (10,943,192
                    )OTHER
      INCOMEInterest
      income
                    
                    
                    2,046
                    
                    
                    
                    49,450
                    
                    
                    
                    19,303
                    
                    
                    
                    244,593Buffalo
      relocation reimbursement
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    220,000Sublease
      revenue
                    
                    
                    11,337
                    
                    
                    
                    2,656
                    
                    
                    
                    20,348
                    
                    
                    
                    7,970Gain
      on disposal of fixed assets
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1,394Gain
      on investment
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    3,292Total
      other income
                    
                    
                    13,383
                    
                    
                    
                    52,106
                    
                    
                    
                    39,651
                    
                    
                    
                    477,249OTHER
      EXPENSEWarrant
      issuance costs
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    266,970
                    
                    
                    
                    -Corporate
      relocation
                    
                    
                    -
                    
                    
                    
                    8,933
                    
                    
                    
                    -
                    
                    
                    
                    142,638Interest
      expense
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1,960
                    
                    
                    
                    -Change
      in value of warrant liability
                    
                    
                    4,111,578
                    
                    
                    
                    -
                    
                    
                    
                    9,565,276
                    
                    
                    
                    -Total
      other expense
                    
                    
                    4,111,578
                    
                    
                    
                    8,933
                    
                    
                    
                    9,834,206
                    
                    
                    
                    142,638NET
      LOSS
                    
                    $
                    (5,189,279
                    )
                    
                    $
                    (2,830,980
                    )
                    
                    $
                    (14,624,938
                    )
                    
                    $
                    (10,608,581
                    )DIVIDENDS
      ON CONVERTIBLE PREFERRED STOCK
                    
                    
                    (123,900
                    )
                    
                    
                    (317,814
                    )
                    
                    
                    (615,352
                    )
                    
                    
                    (898,260
                    )NET
      LOSS AVAILABLE TO COMMON SHAREHOLDERS
                    
                    $
                    (5,313,179
                    )
                    
                    $
                    (3,148,794
                    )
                    
                    $
                    (15,240,290
                    )
                    
                    $
                    (11,506,841
                    )NET
      LOSS AVAILABLE TO COMMON SHAREHOLDERSPER
      SHARE OF COMMON STOCK - BASIC ANDDILUTED
                    
                    $
                    (0.33
                    )
                    
                    $
                    (0.23
                    )
                    
                    $
                    (1.00
                    )
                    
                    $
                    (0.86
                    )WEIGHTED
      AVERAGE NUMBER OF SHARES USEDIN
      CALCULATING NET LOSS PER SHARE, BASIC ANDDILUTED
                    
                    
                    15,878,331
                    
                    
                    
                    13,605,822
                    
                    
                    
                    15,184,785
                    
                    
                    
                    13,415,376


5





CLEVELAND
BIOLABS, INC.





STATEMENTS
OF CASH FLOWS





For the
Nine Months Ended September 30, 2009 and 2008 (unaudited)





September 30
                            
                            
                            September 302009
                            
                            
                            2008(unaudited)
                            
                            
                            (unaudited)CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      loss
                            
                            $
                            (14,624,938
                            )
                            
                            $
                            (10,608,581
                            )Adjustments
      to reconcile net loss to net cashused
      by operating activities:Depreciation
                            
                            
                            268,074
                            
                            
                            
                            239,339Noncash
      salaries and consulting expense
                            
                            
                            2,113,965
                            
                            
                            
                            1,150,692Loss
      on abandoned patents
                            
                            
                            23,984
                            
                            
                            
                            -Series
      D warrant issuance costs
                            
                            
                            266,970
                            
                            
                            
                            -Change
      in value of warrant liability
                            
                            
                            9,565,276
                            
                            
                            
                            -Changes
      in operating assets and liabilities:Accounts
      receivable - trade
                            
                            
                            (1,679,406
                            )
                            
                            
                            (1,205,216
                            )Accounts
      receivable - interest
                            
                            
                            9,488
                            
                            
                            
                            44,643Other
      prepaid expenses
                            
                            
                            90,423
                            
                            
                            
                            (249,748
                            )Deposits
                            
                            
                            -
                            
                            
                            
                            1,964Accounts
      payable
                            
                            
                            176,326
                            
                            
                            
                            1,060,807Deferred
      revenue
                            
                            
                            967,983
                            
                            
                            
                            760,497Accrued
      expenses
                            
                            
                            (270,717
                            )
                            
                            
                            (97,848
                            )Milestone
      payments
                            
                            
                            -
                            
                            
                            
                            -Total
      adjustments
                            
                            
                            11,532,366
                            
                            
                            
                            1,705,130Net
      cash (used in) provided by operating activities
                            
                            
                            (3,092,572
                            )
                            
                            
                            (8,903,451
                            )CASH
      FLOWS FROM INVESTING ACTIVITIESSale
      of short-term investments
                            
                            
                            1,000,000
                            
                            
                            
                            -Purchase
      of equipment
                            
                            
                            (48,393
                            )
                            
                            
                            (153,253
                            )Costs
      of patents pending
                            
                            
                            (151,555
                            )
                            
                            
                            (263,284
                            )Net
      cash (used in) provided by investing activities
                            
                            
                            800,052
                            
                            
                            
                            (416,537
                            )CASH
      FLOWS FROM FINANCING ACTIVITIESProceeds
      from issuance of Series D preferred stock and warrants
                            
                            
                            5,428,307
                            
                            
                            
                            -Financing
      costs on Series D preferred stock
                            
                            
                            (720,175
                            )
                            
                            
                            -Series
      D warrant issuance costs
                            
                            
                            (266,970
                            )
                            
                            
                            -Dividends
                            
                            
                            (936,644
                            )
                            
                            
                            (1,250,410
                            )Exercise
      of stock options
                            
                            
                            285,747
                            
                            
                            
                            24,378Exercise
      of warrants
                            
                            
                            299,998
                            
                            
                            
                            -Net
      cash (used in) provided by financing activities
                            
                            
                            4,090,263
                            
                            
                            
                            (1,226,032
                            )INCREASE
      (DECREASE) IN CASH AND EQUIVALENTS
                            
                            
                            1,797,743
                            
                            
                            
                            (10,546,020
                            )CASH
      AND EQUIVALENTS AT BEGINNING OF PERIOD
                            
                            
                            299,849
                            
                            
                            
                            14,212,189CASH
      AND EQUIVALENTS AT END OF PERIOD
                            
                            $
                            2,097,592
                            
                            
                            $
                            3,666,169





6





CLEVELAND
BIOLABS, INC.





STATEMENTS
OF CASH FLOWS





For the
Nine Months Ended September 30, 2009 and 2008 (unaudited)





Supplemental
      disclosures of cash flow information:Cash
      paid during the period for interest
                
                $
                1,960
                
                
                $
                -Cash
      paid during the year for income taxes
                
                $
                -
                
                
                $
                -Supplemental
      schedule of noncash financing activities:Issuance
      of stock options to employees, consultants, and independent board
      members
                
                $
                1,527,719
                
                
                $
                1,929,432Expense
      recapture of expense for options expensed in 2007 but issued in
      2008
                
                $
                -
                
                
                $
                (1,459,425
                )Expense
      recapture of expense for options that were nonvested and
      forfeited
                
                $
                (37,878
                )
                
                $
                -Issuance
      of shares to consultants and employees
                
                $
                599,217
                
                
                $
                626,500Accrual
      of Series B preferred stock dividends
                
                $
                -
                
                
                $
                44,320Amortization
      of restricted shares issued to employees
                
                $
                24,907
                
                
                $
                54,185


7




CLEVELAND
BIOLABS, INC.





STATEMENTS
OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS





Period
From January 1, 2008 to December 31, 2008 and to


September
30, 2009 (unaudited)





Stockholders' EquityCommon StockShares
                      
                      
                      AmountBalance
      at January 1, 2008
                      
                      
                      12,899,241
                      
                      
                      $
                      64,496Issuance
      of options
                      
                      
                      -
                      
                      
                      
                      -Partial
      recapture of expense for options expensed in 2007but
      issued in 2008
                      
                      
                      -
                      
                      
                      
                      -Issuance
      of restricted shares
                      
                      
                      130,000
                      
                      
                      
                      650Restricted
      stock awards
                      
                      
                      -
                      
                      
                      
                      -Exercise
      of options
                      
                      
                      37,271
                      
                      
                      
                      186Conversion
      of Series B Preferred Shares to Common
                      
                      
                      709,293
                      
                      
                      
                      3,547Dividends
      on Series B Preferred shares
                      
                      
                      -
                      
                      
                      
                      -Net
      Loss
                      
                      
                      -
                      
                      
                      
                      -Balance
      at December 31, 2008
                      
                      
                      13,775,805
                      
                      
                      $
                      68,879Issuance
      of options
                      
                      
                      -
                      
                      
                      
                      -Issuance
      of restricted shares
                      
                      
                      193,312
                      
                      
                      
                      966Recapture
      of expense for nonvested options forfeited
                      
                      
                      -
                      
                      
                      
                      -Restricted
      stock awards
                      
                      
                      
                      
                      
                      
                      -Exercise
      of options
                      
                      
                      149,534
                      
                      
                      
                      748Exercise
      of warrants
                      
                      
                      290,953
                      
                      
                      
                      1,455Conversion
      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
                      
                      
                      357,820
                      
                      
                      
                      1,789Net
      Loss
                      
                      
                      -
                      
                      
                      
                      -Balance
      at September 30, 2009
                      
                      
                      19,460,954
                      
                      
                      $
                      97,305




8


CLEVELAND
BIOLABS, INC.





STATEMENTS
OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS





Period
From January 1, 2008 to December 31, 2008 and to


September
30, 2009 (unaudited)





Stockholders' EquityPreferred StockSeries B
                      
                      
                      Amount
                      
                      
                      Series D
                      
                      
                      AmountBalance
      at January 1, 2008
                      
                      
                      3,870,267
                      
                      
                      $
                      19,351
                      
                      
                      
                      -
                      
                      
                      $
                      -Issuance
      of options
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Partial
      recapture of expense for options expensed in 2007but
      issued in 2008
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Issuance
      of restricted shares
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Restricted
      stock awards
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Exercise
      of options
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Conversion
      of Series B Preferred Shares to Common
                      
                      
                      (709,293
                      )
                      
                      
                      (3,547
                      )
                      
                      
                      -
                      
                      
                      
                      -Dividends
      on Series B Preferred shares
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Net
      Loss
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Balance
      at December 31, 2008
                      
                      
                      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
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Exercise
      of warrants
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -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
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (48
                      )
                      
                      
                      (1
                      )Net
      Loss
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Balance
      at September 30, 2009
                      
                      
                      -
                      
                      
                      $
                      -
                      
                      
                      
                      495
                      
                      
                      $
                      2




9


CLEVELAND
BIOLABS, INC.





STATEMENTS
OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS





Period
From January 1, 2008 to December 31, 2008 and to


September
30, 2009 (unaudited)





Stockholders' EquityAdditional
                          
                          
                          
                          
                          
                          
                          
                          
                          ComprehensivePaid-in
                          
                          
                          Accumulated
                          
                          
                          
                          
                          
                          IncomeCapital
                          
                          
                          Deficit
                          
                          
                          Total
                          
                          
                          (Loss)Balance
      at January 1, 2008
                          
                          $
                          55,148,608
                          
                          
                          $
                          (41,038,212
                          )
                          
                          $
                          14,194,244Issuance
      of options
                          
                          
                          2,287,803
                          
                          
                          
                          -
                          
                          
                          
                          2,287,803Partial
      recapture of expense for options expensed in 2007but
      issued in 2008
                          
                          
                          (1,459,425
                          )
                          
                          
                          -
                          
                          
                          
                          (1,459,425
                          )Issuance
      of restricted shares
                          
                          
                          625,850
                          
                          
                          
                          -
                          
                          
                          
                          626,500Restricted
      stock awards
                          
                          
                          72,722
                          
                          
                          
                          -
                          
                          
                          
                          72,722Exercise
      of options
                          
                          
                          24,191
                          
                          
                          
                          -
                          
                          
                          
                          24,378Conversion
      of Series B Preferred Shares to Common
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -Dividends
      on Series B Preferred shares
                          
                          
                          -
                          
                          
                          
                          (1,182,033
                          )
                          
                          
                          (1,182,033
                          )Net
      Loss
                          
                          
                          -
                          
                          
                          
                          (14,025,927
                          )
                          
                          
                          (14,025,927
                          )
                          
                          $
                          (14,025,927
                          )Balance
      at December 31, 2008
                          
                          $
                          56,699,750
                          
                          
                          $
                          (56,246,172
                          )
                          
                          $
                          538,262Issuance
      of options
                          
                          
                          1,527,719
                          
                          
                          
                          -
                          
                          
                          
                          1,527,719Issuance
      of restricted shares
                          
                          
                          598,251
                          
                          
                          
                          -
                          
                          
                          
                          599,217Recapture
      of expense for nonvested options forfeited
                          
                          
                          (37,878
                          )
                          
                          
                          -
                          
                          
                          
                          (37,878
                          )Restricted
      stock awards
                          
                          
                          24,907
                          
                          
                          
                          -
                          
                          
                          
                          24,907Exercise
      of options
                          
                          
                          284,999
                          
                          
                          
                          -
                          
                          
                          
                          285,747Exercise
      of warrants
                          
                          
                          298,543
                          
                          
                          
                          -
                          
                          
                          
                          299,998Conversion
      of Series B Preferred Shares to Common
                          
                          
                          (7,663
                          )
                          
                          
                          -
                          
                          
                          
                          -Dividends
      on Series B Preferred shares
                          
                          
                          -
                          
                          
                          
                          (615,352
                          )
                          
                          
                          (615,352
                          )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
                          
                          
                          (1,788
                          )
                          
                          
                          
                          
                          
                          
                          -Net
      Loss
                          
                          
                          -
                          
                          
                          
                          (14,624,938
                          )
                          
                          
                          (14,624,938
                          )
                          
                          $
                          (14,624,938
                          )Balance
      at September 30, 2009
                          
                          $
                          61,078,135
                          
                          
                          $
                          (71,486,462
                          )
                          
                          $
                          (10,311,020
                          )




10




CLEVELAND
BIOLABS, INC.




NOTES
TO FINANCIAL STATEMENTS




Note
1. Organization




Cleveland
BioLabs, Inc. (“CBLI” or the “Company”) is engaged in the discovery, development
and commercialization of products for cancer treatment and protection of normal
tissues from radiation and other stresses. The Company was incorporated under
the laws of the State of Delaware on June 5, 2003 and is headquartered in
Buffalo, New York.





Basis of
Presentation





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.





In March
2009, the Company secured additional financing by issuing additional convertible
preferred shares with warrants. The Company continues to explore other
investment or licensing arrangements and also plans to submit proposals for
government contracts and grants over the next two years totaling over $30
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 such as direct investment.  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, 2009 and September 30,
      2008, and for the three months and nine months ended September 30, 2009
      and September 30, 2008, is unaudited. In the opinion of management, these
      financial statements 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 CBLI’s audited financial statements for the
      year ended December 31, 2008, which were contained in the Company’s Annual
      Report on Form 10-K filed with the U.S. Securities and Exchange
      Commission.





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.





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.





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, 2009 and December 31,
      2008.





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 $87,531 and $82,252 for the
      three months ended September 30, 2009 and 2008,
      respectively.  Depreciation expense was $268,074 and $239,317
      for the nine months ended September 30, 2009 and 2008,
      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.


11





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 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 at least
      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, CBLI agrees to bear the costs associated with
the preparation, filing and maintenance of patent applications relating to this
intellectual property. Gross capitalized patents pending costs were $672,979 and
$629,363 for thirteen patent applications as of September 30, 2009 and December
31, 2008, respectively. All of the CCF patent applications are still pending
approval.  During 2009, the Company abandoned one patent application
due to developing an improved drug for the same application and expensed $23,984
in selling, general and administrative expenses.





The
Company also has submitted six patent applications as a result of intellectual
property exclusively developed and owned by the Company. Gross capitalized
patents pending costs were $187,643 and $103,688 for five patent applications as
of September 30, 2009 and December 31, 2008, respectively. The patent
applications are still pending approval.




H.
            Line
      of Credit - The Company has a working capital line of credit that carries
      an interest rate of prime, a borrowing limit of $600,000 and a requirement
      that draw-downs be fully secured by short term investments and money
      market accounts. This credit line expires on September 25, 2010. At
      September 30, 2009 and December 31, 2008, there were no outstanding
      borrowings under this credit
facility.





I.
            Accrued
      Warrant Liability – The Company has issued warrants as part of the Series
      D Private Placement (as defined in Note 3). The warrants meet the
      definition of a derivative instrument in accordance with the FASB
      Accounting Standards Codification on derivatives and hedging as the
      warrants are not indexed to the Company’s stock, and consequently, should
      be accounted for as a derivative instrument.  Therefore, the
      warrants are initially recorded as accrued warrant liabilities at 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.”





These
warrants carry a seven-year term and are fully exercisable for common shares of
the Company at $1.60 per share.  The Company has a balance in accrued
warrant liability of $12,582,110 and $0 at September 30, 2009 and December 31,
2008, respectively.





J.
            Fair
      Value of Financial Instruments - Financial instruments, including cash and
      equivalents, accounts receivable, notes 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 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.  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, 2009.





The
Company analyzed all financial instruments with features of both liabilities and
equity in accordance with the FASB Accounting Standards Codification on
distinguishing liabilities from equity, and derivatives and
hedging.





The
Company carries its warrants issued in connection with the Series D Private
Placement at fair value totaling $12,582,110 and $0 as of September 30, 2009 and
December 31, 2008, respectively.  The Company used Level 3 inputs for
its valuation methodology for the warrant liability, and their fair values were
determined using the Black-Scholes option pricing model based on the following
assumptions:


12





WarrantValue atSeptember 30, 2009Stock
      price
                  
                  $
                  4.17Exercise
      price
                  
                  $
                  1.60Term
      in years
                  
                  
                  1.50Volatility
                  
                  
                  102.59
                  %Annual
      rate of quarterly dividends
                  
                  
                  -Discount
      rate- bond equivalent yield
                  
                  
                  68.00
                  %Discount
      due to limitations on marketability,
                  
                  
                  0.00
                  %liquidity
      and other credit factors





Fair Value
                        
                        Fair Value Measurements atAs of
                        
                        September 30, 2009September 30,2009
                        
                        Using Fair Value HierarchyLiabilities
                        
                        
                        
                        Level 1
                        
                        Level 2
                        
                        Level 3Warrant
      liability
                        
                        $
                        12,582,110
                        
                        
                        
                        
                        
                        $
                        12,582,110





The
Company recognized a fair value measurement loss of $4,111,578 and $0 for the
three months ended September 30, 2009 and September 30, 2008,
respectively.  The Company recognized a fair value measurement loss of
$9,565,276 and $0 for the nine months ended September 30, 2009 and September 30,
2008, 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.





K.
            Use
      of Estimates - The preparation of financial statements in conformity with
      accounting principles generally accepted in the U.S. 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.





L.
            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 Roswell Park Cancer
Institute (“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.




13




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




M.
            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.





During
the third quarter of 2009 the Company received $1,000,000 in funds from Zhejiang
Hisun Pharmaceutical Co. Ltd that has purchased exclusive rights to develop and
commercialize Protectan CBLB612 in the People's Republic of China. These funds
will be recognized as revenue when the information and data for the compound are
delivered in the fourth quarter of 2009.





For the
nine months ended September 30, 2009, the Company recognized $32,017 as revenue
and deferred the $1,000,000 from Hisun resulting in a balance of deferred
revenue of $3,333,295 at September 30, 2009. At December 31, 2008, the balance
in deferred revenue was $2,365,312.





N.
            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.





O.
            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”). The Amended Plan increases the number of shares available for
      issuance by an additional 2,000,000 shares, clarifies other aspects of the
      Plan, contains updates that reflect changes and developments in federal
      tax laws and expires April 29, 2018.  As of September 30, 2009
      there were 2,425,997 stock options and 348,312 shares granted under the
      Amended Plan and 21,366 shares forfeited leaving 1,247,057 shares of stock
      to be awarded under the Amended
Plan.





P.
            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
similar high-growth, publicly-traded, biotechnology companies. 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, 2009 and September 30, 2008, the Company
granted 65,221 and 43,456 stock options, respectively. The Company recognized a
total of $306,694 and $355,800 in expense related to stock options for the three
months ended September 30, 2009 and September 30, 2008,
respectively.


14


During
the nine months ended September 30, 2009 and September 30, 2008, the Company
granted 723,276 and 958,380 stock options, respectively.  The Company
recognized a total of $1,527,719 and $1,929,433 in expense related to stock
options for the nine months ended September 30, 2009 and September 30, 2008,
respectively.  The Company also recaptured $37,878 of previously
recognized expense due to the forfeiture of non-vested stock options during the
nine months ended September 30, 2009.  During the nine months ended
September 30, 2008 the Company recaptured $1,459,425 of previously recognized
expense due to the stock options awarded under its executive compensation
program.





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





2009 YTD
                      
                      
                      2008Risk-free
      interest rate
                      
                      
                      2.12
      - 2.74
                      %
                      
                      
                      2.43-3.58
                      %Expected
      dividend yield
                      
                      
                      0
                      %
                      
                      
                      0
                      %Expected
      life
                      
                      5 -
      6 years
                      
                      
                      5-6
      yearsExpected
      volatility
                      
                      
                      84.13
      - 90.06
                      %
                      
                      
                      64.25-82.47
                      %





The
weighted average, estimated grant date fair values of stock options granted
during the three months ended September 30, 2009 and September 30, 2008 were
$3.23 and $2.76, respectively.





The
following tables summarize the stock option activity for the nine months ended
September 30, 2009 and September 30, 2008, respectively.





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





Weighted
                    
                    WeightedAverage
                    
                    AverageExercise
                    
                    RemainingPrice per
                    
                    ContractualShares
                    
                    
                    Share
                    
                    Term (in Years)Outstanding,
      December 31, 2007
                    
                    
                    1,011,740
                    
                    
                    $
                    7.29Granted
                    
                    
                    958,380
                    
                    
                    $
                    4.89Exercised
                    
                    
                    42,534
                    
                    
                    $
                    1.04Forfeited,
      Canceled
                    
                    
                    -
                    
                    
                    
                    n/aOutstanding,
      September 30, 2008
                    
                    
                    1,927,586
                    
                    
                    $
                    6.23
                    
                    8.75Exercisable,
      September 30, 2008
                    
                    
                    1,577,799
                    
                    
                    $
                    5.55
                    
                    8.72





The
Company also recognized $95,375 and $5,627 in expense for shares issued under
the Amended Plan during the three months ended September 30, 2009 and September
30, 2008, respectively.   The Company issued a total of 25,772
shares and 15,000 during the three months ended September 30, 2009 and September
30, 2008, respectively.  In addition, the Company recognized $8,333
and $54,185 in compensation expense related to the amortization of restricted
shares during the three months ended September 30, 2009 and September 30, 2008,
respectively.


15





The
Company also recognized $599,217 and $626,500 in expense for shares issued under
the Plan during the nine months ended September 30, 2009 and September 30, 2008,
respectively.   The Company issued a total of 193,312 shares and
130,000 during the nine months ended September 30, 2009 and September 30, 2008,
respectively.  In addition, the Company recognized $24,907 and $54,185
in compensation expense related to the amortization of restricted shares during
the nine months ended September 30, 2009 and September 30, 2008,
respectively.





Q.
            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 and nine months ended September 30, 2009 and 2008:





Three Months Ended
                    
                    
                    Nine Months EndedSeptember 30, 2009
                    
                    
                    September 30, 2008
                    
                    
                    September 30, 2009
                    
                    
                    September 30, 2008Net
      loss available to common stockholders
                    
                    $
                    (5,313,179
                    )
                    
                    $
                    (3,148,794
                    )
                    
                    $
                    (15,240,289
                    )
                    
                    $
                    (11,506,841
                    )Net
      loss per share, basic and diluted
                    
                    $
                    (0.33
                    )
                    
                    $
                    (0.23
                    )
                    
                    $
                    (1.00
                    )
                    
                    $
                    (0.86
                    )Weighted-average
      shares used in computing net loss per share, basic and
    diluted
                    
                    
                    15,878,331
                    
                    
                    
                    13,605,822
                    
                    
                    
                    15,184,785
                    
                    
                    
                    13,415,376





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 applicable 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 for preferred shares, was
3,723,695 and 3,301,373 for the periods ended September 30, 2009 and 2008,
respectively. Such securities, had they been dilutive, would have been included
in the computation of diluted earnings per share.





The total
number of shares excluded from the calculations of diluted net loss per share,
prior to application of the treasury stock method for warrants, was 8,939,528 and
3,453,268 for the periods ended September 30, 2009 and 2008, respectively. Such
securities, had they been dilutive, would have been included in the computation
of diluted earnings per share.





The total
number of shares excluded from the calculations of diluted net loss per share,
prior to the application of the treasury stock method for options, was 2,519,303 and
1,927,586 for the periods ended September 30, 2009 and 2008, respectively. Such
securities, had they been dilutive, would have been included in the computation
of diluted earnings per share.





In
summary, the total number of shares excluded from the calculations of diluted
net loss per share, prior to application of the treasury stock method for all
dilutive securities, was 15,182,526 and 8,682,227 for the periods ended
September 30, 2009 and 2008, respectively. Such securities, had they been
dilutive, would have been included in the computation of diluted earnings per
share.




R.
            Concentrations
      of Risk - Grant and contract revenue was comprised wholly from grants and
      contracts issued by the federal government and accounted for 100.0% and
      96.3% of total revenue for the nine months ended September 30, 2009 and
      2008, respectively. 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.





S.
            Foreign
      Currency Exchange Rate Risk - The Company has entered into a manufacturing
      agreement to produce one of its drug compounds and into an agreement for
      assay development and validation with foreign third parties 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, 2009, the Company is obligated
      to make payments under the agreements of 2,441,500 Euros. As of September
      30, 2009, the Company has not purchased any forward contracts for
      Euros and, therefore, at September 30, 2009, had foreign currency
      commitments of $3,575,100 for Euros given prevailing currency exchange
      spot rates.


16


T.
            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.





U.
            Recently
      Issued Accounting Pronouncements – In June 2009, the Financial Accounting
      Standards Board (“FASB”) issued the FASB Accounting Standards
      Codification(the “Codification”), as the authoritative guidance
      for GAAP. The Codification, which changes the referencing of financial
      standards, became effective for interim and annual periods ending on or
      after September 15, 2009. The Codification is now the single official
      source of authoritative U.S. GAAP (other than interpretive releases
      and guidance issued by the SEC), superseding existing FASB, American
      Institute of Certified Public Accountants, Emerging Issues Task Force and
      related literature. Only one level of authoritative U.S. GAAP now
      exists. All other literature is considered non-authoritative. The
      Codification does not change U.S. GAAP. We adopted the Codification
      during the quarter ended September 30, 2009. Other than the manner in
      which new accounting guidance is referenced, the adoption of these changes
      had no impact on the financial
statements.





In June
2009, the FASB issued guidance on accounting for and disclosure of events that
occur after the balance sheet date but before financial statements are issued or
are available to be issued, otherwise known as “subsequent events.”
Specifically, these changes set forth the period after the balance sheet date
during which management of a reporting entity should evaluate events or
transactions that may occur for potential recognition or disclosure in the
financial statements, the circumstances under which an entity should recognize
events or transactions occurring after the balance sheet date in its financial
statements, and the disclosures that an entity should make about events or
transactions that occurred after the balance sheet date. The adoption of these
changes had no impact on the financial statements as management already followed
a similar approach prior to the adoption of this new guidance.





In June
2008, the FASB issued guidance on determining whether an instrument (or embedded
feature) is indexed to an entity's own stock. The guidance specifies that a
contract that would otherwise meet the definition of a derivative but is both
(a) indexed to the Company's own stock and (b) classified in stockholders'
equity in the statement of financial position would not be considered a
derivative financial instrument. The guidance provides a new two-step model to
be applied in determining whether a financial instrument or an embedded feature
is indexed to an issuer's own stock. The adoption of this guidance did not
materially impact the Company's financial statements.





Note
3. Stock Transactions




On
January 1, 2008, the Company issued 100,000 options to a new employee and 60,000
options to a key consultant of the Company.  The options vest over a
period from one to three years and allow for the purchase of 160,000 shares of
common stock at a price of $8.00 per share.  These options expire on
December 31, 2017.





On
January 4, 2008, the Company issued 20,000 restricted shares of common stock to
a new employee.  These shares vest over a three year period with
25% vested on issuance and 25% vesting on the anniversary date of the agreement
for each of the next three years.





On
February 4, 2008, the Company issued options to purchase 503,250 shares of
common stock under non-qualified stock option agreements to the executive
management team under the 2007 Executive Compensation Program.  These
options were originally expensed in 2007 at the December 31, 2007 closing price
of $8.80.  These options vest immediately, contain an exercise price
of $4.00 per share, and expire on February 4, 2018.   The Company
also issued options to purchase 34,398 shares of common stock to various
employees under non-qualified stock option agreements under an employee bonus
program.  These options vest immediately, contain an exercise price of
$4.00 per share, and expire on February 3, 2018.  Finally, the Company
issued stock options to various key employees under non-qualified stock option
agreements.  These options have up to three years
vesting.  These options allow for the purchase of 21,300 shares of
common stock at an exercise price of $4.00 per share and expire on February 3,
2018.




On March
12, 2008, the Company issued 1,000 stock options to a consultant under a
non-qualified stock option agreement.  These options vest immediately
and allow for the purchase of 1,000 shares of common stock at an exercise price
of $4.81 per share.  These options expire on March 11,
2018.




On March
14, 2008, the Company issued 100,000 shares of common stock to a key
consultant.


17


On April
8, 2008, the Company issued 40,000 stock options to three consultants under
non-qualified stock option agreements.  These options vest immediately
and allow for the purchase of 40,000 shares of common stock at an exercise price
of $4.18 per share.  These options expire on April 7,
2018.  On April 8, 2008, the Company also issued 25,000 restricted
shares of common stock.  These shares vest over a three month
period with 40% vested on issuance and 60% vesting three months from the date of
the agreement.




On April
29, 2008, the Company issued 140,000 stock options to four independent members
of the Board of Directors of the Company under non-qualified stock option
agreements.  These options vest immediately and allow for the purchase
of 140,000 shares of common stock at an exercise price of $5.33 per
share.  These options expire on April 28, 2018.




On May 7,
2008, the Company issued 14,976 stock options to various employees under
non-qualified stock option agreements under an employee bonus program. These
options vest immediately and allow for the purchase of 14,976 shares of common
stock at an exercise price of $5.28 per share.  These options expire
on May 6, 2018.




On July
15, 2008, the Company issued 28,456 stock options to various employees under
non-qualified stock option agreements under an employee bonus program. These
options vest immediately and allow for the purchase of 28,456 shares of common
stock at an exercise price of $3.98 per share.  These options expire
on July 14, 2018.




On
September 22 2008, the Company issued 35,000 stock options to a new employee
under non-qualified stock option agreements.  These options vest over
a three year period and allow for the purchase of 35,000 shares of common
stock at an exercise price of $4.69 per share.  These options expire
on September 21, 2018.




On
November 14, 2008, the Company issued 19,341 stock options to various employees
under non-qualified stock option agreements under an employee bonus program.
These options vest immediately and allow for the purchase of 19,341 shares of
common stock at an exercise price of $3.10 per share.  These options
expire on November 13, 2018.




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.




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





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





In
consideration for its services as exclusive placement agent, Garden State
Securities, Inc., received cash compensation and Warrants to purchase an
aggregate of approximately 387,736 shares of Common Stock.  In the
aggregate, Series D Preferred and Warrants issued in the transaction are
convertible into, and exercisable for, approximately 8,142,508 shares of Common
Stock. Each share of Series D Preferred is convertible into a number of shares
of Common Stock equal to the stated value of the share ($10,000), divided by
$1.40, subject to adjustment as discussed below (the “Conversion
Price”).





At the
time of its issuance, the Series D Preferred ranked junior to the Company’s
Series B Convertible Preferred Stock (“Series B Preferred”) and senior to all
shares of Common Stock and other capital stock of the Company.





If the
Company does not meet certain milestones, the Conversion Price will, unless the
closing price of the Common Stock is greater than $3.69 on the date the
Milestone is missed, be reduced to 80% of the Conversion Price in effect on that
date (the “Milestone Adjustment”).  In addition to the Milestone
Adjustment, on August 13, 2009 (the “Initial Adjustment Date”), the Conversion
Price shall be reduced to 95% of the then Conversion Price, and on each three
month anniversary of the Initial Adjustment Date, the then Conversion Price
shall be reduced by $0.05 (subject to adjustment) until maturity.  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.





If the
closing price for each of any 20 consecutive trading days after the effective
date of the initial registration statement filed pursuant to the Registration
Rights Agreement exceeds 300% of the then effective Conversion Price and various
other equity conditions are satisfied, the Company may cause the Series D
Preferred to automatically convert into shares of Common Stock.


18





At any
time after February 13, 2012, the Company may, if various equity conditions are
satisfied, elect either to redeem any outstanding Series D Preferred in cash or
to convert any outstanding Series D Preferred into shares of Common Stock at the
conversion rate then in effect.





If the
Company receives any cash funds after February 13, 2009 from fees, royalties or
revenues as a result of the license of any of its intellectual property (the “IP
Proceeds”), cash funds from development grants from any government agency for
the development of anti-cancer applications of any of the Company’s curaxin
compounds or anti-cancer or biodefense applications for the Company’s CBLB502
compound (the “Governmental Grant Proceeds”) or allocates cash proceeds to its
Escrow Account (the “Company Allocation”), then the Company must deposit 40% of
the IP Proceeds, 20% of the Governmental Grant Proceeds and the Company
Allocation into an escrow account (the “Sinking Fund”).  At any time
after the later of the Effective Date and the six month anniversary of the
initial contribution by the Company to the Sinking Fund, but no more than once
in every six month period, the Company will be required to use the funds
then in the Sinking Fund to redeem outstanding shares of Series D Preferred,
from the holders on a pro rata basis, at a premium of 15% to the stated value
through February 13, 2010, and 20% thereafter.





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, respectively,
from the original exercise prices of $10.36 and $11.00. 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.





On
September 16, 2009, pursuant to its terms, all of the Series B Preferred
converted into shares of Common Stock at the conversion rate of 1.51 which
resulted in an increase of 537,913 shares of Common Stock as of that
date.





The fair
value of the 4,265,122 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 limitations on marketability,liquidity
      and other credit factors
                  
                  
                  40
                  %
                  
                  
                  40
                  %
                  
                  
                  40
                  %





The
Company recorded a 40% reduction in the calculated value as shown above due to
the restrictions on marketability, liquidity and other credit
factors.  Since these shares are now convertible into common shares
and freely tradable after conversion, this reduction was eliminated when
calculating fair market values.





The
exercise price of the warrants issued on February 13, 2009 was adjusted,
pursuant to weighted-average anti-dilution provisions, to $1.60 as a result of
the March 20, 2009 tranche of the Series D Private Placement.





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 convertible preferred stock is convertible into shares of
common stock, an embedded beneficial conversion feature was recorded as a
discount to additional paid-in-capital.  However, the beneficial
conversion feature is considered a deemed dividend, and since the Company has an
accumulated deficit, there was no effect on the statement of stockholders’
equity.


19


On April
8, 2009, the Company issued 396,072 stock options to various employees and
consultants under non-qualified stock option agreements.  261,072 of
these stock options were issued under an employee bonus plan and vest
immediately and allow for the purchase of shares of common stock at an exercise
price of $1.90 per share.  The remaining 135,000 stock options vest
over a three year period and allow for the purchase of shares of common stock at
an exercise price of $1.90 per share.  These options expire on April
7, 2019.




On May
20, 2009, the Company issued 61,983 stock options to various employees and
consultants under non-qualified stock option agreements under an employee bonus
program. These options vest immediately and allow for the purchase of 61,983
shares of common stock at an exercise price of $3.91 per share.  These
options expire on May 19, 2019.




On May
27, 2009, the Company issued 25,000 shares of common stock to a key consultant
of the Company.




On June
25, 2009, the Company issued 140,000 stock options to four independent members
of the Board of Directors of the Company under non-qualified stock option
agreements.  These options vest immediately and allow for the purchase
of 140,000 shares of common stock at an exercise price of $3.33 per
share.  These options expire on June 24, 2019.




On June
26, 2009, the Company issued 60,000 stock options to a consultant under a
non-qualified stock option agreement.  These options vest immediately
and allow for the purchase of 60,000 shares of common stock at an exercise price
of $3.48 per share.  These options expire on June 25,
2019.




On June
26, 2009, the Company also issued 62,540 shares of common stock to several key
consultants and an employee of the Company.




On August
12, 2009, the Company issued 65,221 stock options to various employees and
consultants under non-qualified stock option agreements under an employee bonus
program. These options vest immediately and allow for the purchase of 65,221
shares of common stock at an exercise price of $4.57 per share.  These
options expire on August 11, 2019.




On August
14, 2009, the Company issued 3,623 shares of common stock to a key consultant of
the Company.




On
September 4, 2009, the Company issued 22,149 shares of common stock to a key
consultant of the Company.




For the
nine months ending September 30, 2009, 3,160,974 Series B Preferred Shares were
converted into 4,693,530 shares of common stock. As discussed above, the
outstanding Series B Preferred shares converted into common stock on September
16, 2009 and at September 30, 2009, there were 0 outstanding Series B Preferred
for which $0 in dividends had been accrued.





For the
nine months ending September 30, 2009, 47.59 Series D Preferred Shares were
converted into 357,820 shares of common stock. At September 30, 2009, there were
495.25 outstanding Series D Preferred which are convertible into 3,723,695
shares of common stock.





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. In addition, as
described in Note 3, the Company may be required to deposit funds in the Sinking
Fund if it receives certain sublicense income.





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 of September 30, 2009, $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, 2009 and December 31, 2008.


20


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 material 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,
in these matters.




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 related
operating leases. The operating lease expenses recognized were $95,120 and
$83,213 for the three months ended September 30, 2009 and 2008,
respectively.  The operating lease expenses recognized were $268,557
and $249,267 for the nine months ended September 30, 2009 and 2008,
respectively.





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





OperatingLeases2009  Remaining
      Quarter
                        
                        $
                        94,4432010
                        
                        
                        343,6562011
                        
                        
                        311,8032012
                        
                        
                        144,3752013
                        
                        
                        -$
                        894,277





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 except for 18,000 options that expire on December
31, 2012, subject to the terms applicable in the agreement.





The
following tables summarize the stock option activity for the nine months ended
September 30, 2009 and September 30, 2008:





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





Weighted AverageOptions
                  
                  
                  Exercise Price Per ShareOutstanding,
      December 31, 2007
                  
                  
                  1,011,740
                  
                  
                  $
                  7.29Granted
                  
                  
                  958,380
                  
                  
                  $
                  4.89Exercised
                  
                  
                  42,534
                  
                  
                  $
                  1.04Forfeited,
      Canceled
                  
                  
                  -
                  
                  
                  
                  n/aOutstanding,
      September 30, 2008
                  
                  
                  1,927,586
                  
                  
                  $
                  6.23





The
Company has entered into warrant agreements with strategic partners, consultants
and investors with original exercise prices ranging from $1.13 to $11.00. These
awards 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:


21




Weighted
      AverageWarrants
                    
                    
                    Exercise Price Per ShareOutstanding,
      December 31, 2008
                    
                    
                    3,453,268
                    
                    
                    $
                    8.92Granted
                    
                    
                    4,265,122
                    
                    
                    $
                    1.60Exercise
      Price Adjustment
                    
                    
                    
                    
                    
                    $
                    (3.35
                    )Exercised
                    
                    
                    291,444
                    
                    
                    $
                    1.17Forfeited,
      Canceled
                    
                    
                    -
                    
                    
                    
                    n/aOutstanding,
      September 30, 2009
                    
                    
                    7,426,946
                    
                    
                    $
                    3.70


Weighted
      AverageWarrants
                  
                  
                  Exercise Price Per ShareOutstanding,
      December 31, 2007
                  
                  
                  3,453,268
                  
                  
                  $
                  8.92Granted
                  
                  
                  -
                  
                  
                  
                  n/aExercised
                  
                  
                  -
                  
                  
                  
                  n/aForfeited,
      Canceled
                  
                  
                  -
                  
                  
                  
                  n/aOutstanding,
      September 30, 2008
                  
                  
                  3,453,268
                  
                  
                  $
                  8.92





Immediately
after the completion of the Series D Private Placement, pursuant to
weighted-average anti-dilution provisions, 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, respectively,
from the original exercise prices of $10.36 and $11.00. 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, 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 weighted average exercise
price reduction for these existing warrants at the completion of the Series D
Private Placement was $3.07.





On August
13, 2009, as a result of the quarterly reduction in the conversion price of the
Series D Preferred from $1.40 to $1.33, the exercise price of the Company’s
Series B Warrants and Series C Warrants were adjusted per the terms of the
Series D Private Placement to $6.73 and $7.13, respectively from the adjusted
exercise prices of $6.79 and $7.20.  In addition to the adjustment to
the exercise prices of the Series B Warrants, Series C Warrants, the aggregate
number of shares issuable upon exercise of the Series B Warrants and the Series
C Warrants increased to 3,641,479and 412,042, from
3,609,261and
408,032, respectively. Certain other warrants issued prior to the Company’s
initial private placement offering were also adjusted pursuant to anti-dilution
provisions contained in those warrants such that their per share exercise price
reduced from $1.48 to $1.47. For these warrants issued prior to the Company’s
initial public offering, the aggregate number of shares of Common Stock issuable
increased from 379,792 to 382,130.  The weighted average exercise
price reduction for these existing warrants at the completion of the Series D
Private Placement increased $0.28 to $3.35.





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 is not currently a party to any pending legal actions. 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, in these
matters.





Note
5. Subsequent Events





No
material subsequent events have occurred since the balance sheet date of
September 30, 2009.


22


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 in the Company's other SEC filings, including its Annual
Report on Form 10-K for the year ended December 31, 2008. 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, 2008.





OVERVIEW





CBLI was
incorporated in Delaware and commenced business operations in June 2003 as a
development-stage, biotechnology company, with a very specific and targeted
focus on discovery and development of drugs that control cell death. 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. CBLI’s 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 developed as a result of blocking blood
flow to a part of the body). Curaxins are being developed 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. After our initial
public offering, our common stock was listed on the NASDAQ Capital Market under
the symbol “CBLI” and on the Boston Stock Exchange under the symbol “CFB.” Our
trading symbol on the Boston Stock Exchange was later changed to “CBLI.” On
August 28, 2007, trading of our common stock transferred from the NASDAQ Capital
Market to the NASDAQ Global Market. In September 2007, we ceased our listing on
the Boston Stock Exchange.  On November 28, 2008, trading of our
common stock transferred from the NASDAQ Global Market back to the NASDAQ
Capital Market. The Company believes that it meets current listing requirements
for the NASDAQ Capital Market as set forth by NASDAQ.





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 including
      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.


23





·
            Curaxins
      - small molecules designed to kill tumor cells by simultaneously targeting
      multiple 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 100% or even
50% of all cancer patients. This means that there likely will be a need for
additional anticancer drugs for each type of cancer.





These
drug candidates demonstrate the value of our scientific foundation. Based on the
expedited approval process currently available for non-medical applications such
as protection from exposure to radiation, our most advanced drug candidate,
Protectan CBLB502, may be approved for such applications within 18 months.
Another drug candidate, Curaxin CBLC102, demonstrated activity and safety in a
Phase IIa clinical trial concluded in late 2008.





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 estimable. From our
inception to September 30, 2009, we spent $53,859,313 on R&D.





Our
ability to complete our R&D on schedule is, however, subject to a number of
risks and uncertainties. Factors affecting our R&D include, but are not
limited to:





·
            the
      number and outcome of clinical studies we are planning to conduct; for
      example, our  R&D expenses may increase based on the number
      of late-stage clinical studies that we may be required to
      conduct;





·
            the
      performance of our R&D collaborators; if any research collaborator
      fails to commit sufficient resources, our preclinical or clinical
      development programs related to this collaboration could be delayed or
      terminated;





·
            the
      ability to maintain and/or obtain licenses; we may have to develop
      alternatives to avoid infringing upon the patents of others, potentially
      causing increased costs and delays in product
  development;





·
            the
      number of products entering development from late-stage research; there is
      no guarantee that internal research efforts will succeed in generating
      sufficient data for us to make a positive development decision or that an
      external candidate will be available on terms acceptable to us, and some
      promising candidates may not yield sufficiently positive pre-clinical
      results to meet our stringent development
  criteria;





·
            the
      number of new grants and contracts awarded in the future; if the
      availability of research grants and contracts were curtailed, our ability
      to fund future R&D and implement technological improvements would be
      diminished, which would negatively impact our ability to fund R&D
      efforts;





·
            in-licensing
      activities, including the timing and amount of related development funding
      or milestone payments; for example, we may enter into agreements requiring
      us to pay a significant up-front fee for the purchase of in-process
      R&D that we may record as  R&D expense;
    or





·
            future
      levels of revenue; R&D as a percentage of future potential revenues
      can fluctuate with the changes in future levels of revenue and lower
      revenues can lead to less spending on R&D
  efforts.





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.





Many of
our projects are in the early stages of drug development which carry their own
set of risks. Projects that appear promising in the early phases of development
may fail to reach the market for several reasons including:


24





·
            pre-clinical
      or clinical study results that may show the product to be less effective
      than desired (e.g., the study failed to meet its primary objectives) or to
      have harmful or problematic side
effects;





·
            failure
      to receive the necessary regulatory approvals or a delay in receiving such
      approvals. Among other things, such delays may be caused by slow
      enrollment in clinical studies, length of time to achieve study endpoints,
      additional time requirements for data analysis or a New Drug
      Application/Biologic License Application preparation, discussions with the
      Food and Drug Administration (“FDA”), an FDA request for additional
      pre-clinical or clinical data or unexpected safety or manufacturing
      issues;





·
            manufacturing
      costs, pricing or reimbursement issues, or other factors that make the
      product not economical; and





·
            the
      proprietary rights of others and their competing products and technologies
      that may prevent the product from being
  commercialized.





The
testing, marketing and manufacturing of any product for use in the United States
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 product and failure 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
United States that perform roles similar to that of the FDA, uncertainties
similar to those stated above will also exist.





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 of the potential military
      and defense implications of such a drug, the normally lengthy FDA approval
      process for these non-medical applications is substantially abbreviated
      resulting in a large cost savings to us. We expect to complete development
      of Protectan CBLB502 for these non-medical applications by the end of
      2010.





·
            Leveraging our relationship
      with leading research and clinical development institutions. The
      Cleveland Clinic, one of the top research medical facilities in the world,
      is one of our co-founders. In addition to providing us with drug leads and
      technologies, the Cleveland Clinic will share valuable expertise with us
      as development efforts are performed on our drug candidates. In January
      2007, we entered into a strategic research partnership with Roswell Park
      Cancer Institute (“RPCI”) in Buffalo, New York. This partnership will
      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
      retail and marketing resources. In an effort to improve our responsiveness
      to military and defense needs, we have established a collaborative
      relationship with the Armed Forces Radiobiology Research
      Institute.





·
            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 of over 1,000,000
  compounds.


25


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 are anti-apoptotic factors
developed by microorganisms of human microflora throughout millions of years of
co-evolution with mammalian host.  We are using the same strategy that
was applied for the discovery of antibiotics, one of the biggest medical
achievements of the 20th
century.  We have established a technological process for screening of
such factors, named protectans, 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).





Eleven
sets of patent applications have been filed around the protectan family of
compounds including two for the general aspects and qualities of the protectan
family.





For the
three months ended September 30, 2009 and 2008, we spent $3,268,615 and
$2,295,574, respectively on R&D for protectans.  For the nine months
ended September 30, 2009 and 2008, we spent $10,028,839 and $6,064,505,
respectively.   We spent $8,995,500 overall in the fiscal year
ended December 31, 2008 and from our inception to September 30, 2009, we spent
$36,537,338 on R&D for 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 typhimurium and
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.





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.





Seven
sets of patent applications have been filed for Protectan CBLB502.  In
August 2009, we received a Notice of Allowance from the U.S. Patent and
Trademark Office for a patent application titled "Modulating Apoptosis." Allowed
claims cover the method of protecting a mammal from radiation using flagellin or
its derivatives.





For the
three months ended September 30, 2009 and 2008, we spent $3,267,201 and
$2,007,124, respectively on R&D for Protectan CBLB502.  For the nine
months ended September 30, 2009 and 2008, we spent $10,022,272 and
$5,189,400, respectively.   We spent $8,021,040 in the fiscal
year ended December 31, 2008 and from our inception to September 30, 2009,
we spent $33,400,397 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 other
radioprotectant known to us, is the ability to effectively protect not only the
hematopoietic system, but also the gastrointestinal (“GI tract”) which 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 and 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.


26


Protectan
CBLB502 is being developed under the FDA's animal efficacy rule to treat
radiation injury following exposure to radiation from nuclear or radiological
weapons, or from nuclear accident. This approval pathway requires demonstration
of efficacy in two animal species and safety and drug metabolism testing in a
representative sample of healthy human volunteers. Protectan CBLB502 has
demonstrated activity as a radioprotectant in several animal species, including
non-human primates. Human safety studies are the only stage of human testing
required for approval in this indication.




We have
successfully established cGMP quality manufacturing for Protectan CBLB502 and
have completed an initial Phase I human safety study for Protectan CBLB502 in
ARS. The initial human Phase I safety and tolerability study involved single
injections of Protectan CBLB502 in ascending-dose cohorts of six healthy
volunteers each. 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 Protectan CBLB502 on various biomarkers.




Data from
50 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.




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 the GMP manufactured drug candidate.
      We expect to complete these studies in mid 2010. The studies have an
      approximate cost of $2,500,000 and are covered by a government development
      contract.





·
            Performing
      a second Phase IIa safety study in approximately 100 healthy human
      volunteers planned to start in November 2009. This study has an
      approximate cost of $1,200,000 and is covered by a government development
      contract





·
            Performing
      a Phase IIb 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. We estimate completion of this study in late 2010
      at an approximate cost of $5,300,000 based on 500 subjects tested in four
      locations. This study is also covered by a government development
      contract.





·
            Filing
      a Biologic License Application (“BLA”) which we expect to complete in late
      2010.   At the present time, the costs of the filing cannot
      be approximated with any level of
certainty.





In March
2008, the U.S. Department of Defense (“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 to treat radiation injury following exposure to
radiation from nuclear or radiological weapons. 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.





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, the Biomedical Advanced Research and Development Authority
(“BARDA”) of the Department of Health and Human Services (“HHS”) awarded 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. 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 by $2.3
million to $15.6 million and awarded the first milestone option of $6.3 million.
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.





In May
2009, a Sources Sought Notice was issued by the Chemical Biological Medical
Systems Medical Identification and Treatment Systems Joint Product Management
Office of the DoD seeking identification of sources having the capability to
develop, through FDA approval and production, the following chemical,
radiological and nuclear therapeutics:





·
            An
      aerosolized atropine drug delivery system to treat lingering effects of
      nerve agent intoxication related to muscarinic
  stimulation.





·
            A
      radiological/nuclear therapeutic medical countermeasure to be administered
      following exposure to ionizing radiation that will decrease incapacity and
      prolong survival by treating the gastrointestinal sub-syndrome of
      ARS.


27





·
            Amyl
      nitrate as an adjunct to current military cyanide treatment
      regimen.





In May
2009, we responded to the Sources Sought Notice to continue to develop CBLB502
as a radiological/nuclear therapeutic medical countermeasure to be administered
following exposure to ionizing radiation that will decrease incapacity and
prolong survival by treating the gastrointestinal sub-syndrome of
ARS.





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.





For the
three months ended September 30, 2009 and 2008, we spent $3,267,201 and
$1,846,094, respectively on R&D for non-medical applications of Protectan
CBLB502.  For the nine months ended September 30, 2009 and 2008, we
spent $9,966,145 and $4,638,905, respectively. We spent $7,264,813 in the fiscal
year ended December 31, 2008 and from our inception to September 30, 2009,
we spent $31,567,341 on R&D for the non-medical applications of Protectan
CBLB502.





Protectan
CBLB502 is a candidate for procurement by the DoD, HHS/BARDA and several other
countries facing even more imminent threats. The HHS opportunity substantially
expands the potential market, as its mandate is to protect the U.S. civilian
population in the event of a radiological emergency, involving stockpiling of
radiation countermeasures for mass distribution. Our contract awards from the
DoD and BARDA emphasize the government’s focus on acquiring adequate protection
against nuclear and radiation threats for military and civilian populations.
Upon FDA approval, our Protectan CBLB502 may be well positioned to fulfill both
of these needs, with its demonstrated unprecedented efficacy and survival
benefits in animal models, unique ability to address both hematopoietic and
gastrointestinal damage in animal models, broad window of efficacy relative to
radiation exposure in animal models, 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 as soon as the FDA approves the BLA. Future sales to U.S. government
agencies will depend, in part, on our ability to meet federal contract
requirements. Also, if the U.S. government makes significant future contract
awards for the supply of its emergency stockpile to our competitors, our
business will be harmed and it is unlikely that we will be able to ultimately
commercialize our competitive product.





Medical
Applications





While our
current focus remains on its military and other 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.





Specifically,
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 paradigm shift in cancer
treatment. It is estimated 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 patients in early 2010 for the medical indication of
CBLB502. 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.





In other
studies, we have demonstrated the potential of Protectan CBLB502 to be
applicable to ischemic conditions. Our researchers, in collaboration with
investigators from Cleveland Clinic, 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.


28





Moreover,
studies funded by a grant from the DoD and conducted at the Cleveland Clinic,
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
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 application and receiving
      allowance from the FDA. We expect to submit the amendment in early
      2010. We estimate that the cost of filing will be
  nominal.





·
            Performing
      a Phase I/II human efficacy study on a small number of head and neck
      cancer patients. We expect to complete this study two years from the
      receipt of allowance from the FDA of the IND amendment expected in early
      2010 at an approximate cost of
$1,500,000.





·
            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 the scope of
      these steps cannot be approximated with any level of
      certainty.





For the
three months ended September 30, 2009 and 2008, we spent $0 and $161,030,
respectively on R&D for the medical applications of Protectan
CBLB502.  For the nine months ended September 30, 2009 and 2008, we
spent $56,127 and $550,495, respectively.  We spent $756,227 in the
fiscal year ended December 31, 2008 and from our inception to September 30,
2009, we spent $1,833,056 on R&D for the medical applications of Protectan
CBLB502.




Protectan
CBLB612





While the
bulk of our R&D has focused on Protection 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.





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.,
Thousand Oaks, California), 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) (a recently FDA
approved stem cell mobilizer from Genzyme Corporation (Cambridge,
Massachusetts)), 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.


29


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 (SCID),
Wiskott-Aldrich syndrome, and Chediak-Higashi syndrome.





With
efficacy and non-GLP safety 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.





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. Under the terms of the license agreement, we will
receive upfront 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 will retain all rights to CBLB612
in the rest of the world





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





·
            Conducting
      pivotal animal safety studies with GMP-manufactured
    CBLB612.





·
            Submitting
      an IND application and receiving approval from the
  FDA.





·
            Performing
      a Phase I dose-escalation human
study.





·
            Performing
      a Phase II and Phase III human efficacy study using the dose of CBLB612
      selected from the previous studies previously shown to be safe in humans
      and efficacious in animals.





·
            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.





For the
three months ended September 30, 2009 and 2008, we spent $1,414 and $288,450,
respectively on R&D for Protectan CBLB612.  For the nine months
ended September 30, 2009 and 2008, we spent $6,567 and $875,105,
respectively.  We spent $974,459 in the fiscal year ended December 31,
2008 and from our inception to September 30, 2009, we spent $3,136,941
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.





30


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.





Seven
sets of patent applications have been filed around the curaxin family of
compounds including four for the general aspects and qualities of the curaxin
family.





For the
three months ended September 30, 2009 and 2008, we spent $58,995 and $886,852,
respectively on R&D for curaxins.  For the nine months ended
September 30, 2009 and 2008, we spent $573,753 and $2,726,527,
respectively.  We spent $3,233,872 in the fiscal year ended December
31, 2008 and from our inception to September 30, 2009, we spent $12,215,345
on R&D for curaxins.





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 the Cleveland Clinic 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 have
an agreement with Regis Technologies, Inc., a GMP manufacturer, to produce
sufficient quantities of Curaxin CBLC102 according to the process previously
used for the production of this drug when it was in common use.





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.


31





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.





We
anticipate that additional clinical efficacy studies will be required before we
are able to apply for FDA approval. 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.





Two sets
of patent applications have been filed for Curaxin CBLC102.





For the
three months ended September 30, 2009 and 2008, we spent $34,074 and $466,088,
respectively on R&D for Curaxin CBLC102.  For the nine months
ended September 30, 2009 and 2008, we spent $252,209 and $1,431,077,
respectively. We spent $1,741,194 in the fiscal year ended December 31,
2008 and from our inception to September 30, 2009, we spent $6,718,691 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
intellectual property protection 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 upon achieving
sufficient funding for completing pre-clinical development and a Phase I
study.





One set
of patent applications has been filed for Curaxin CBLC137.





For the
three months ended September 30, 2009 and 2008, we spent $24,920 and $420,764,
respectively on R&D for other curaxins.  For the nine months ended
September 30, 2009 and 2008, we spent $321,544 and $1,295,449,
respectively.  We spent $1,492,678 in the fiscal year ended December
31, 2008 and from our inception to September 30, 2009, we spent $5,496,654 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 $2,830,980 for the three
months ended September 30, 2008 to $5,189,279 for the three months ended
September 30, 2009, an increase of $2,358,299 or 83.3%. We incurred non-cash
charges of depreciation of $87,531 and $82,252, non-cash salaries and consulting
fees of $410,402 and $379,760 and a change in the value of Series D warrants of
$4,111,578 and $0 for the three months ended September 30, 2009 and 2008,
respectively.  Excluding these non-cash charges, our net loss
decreased $1,789,200 or 75.5% from $2,368,968 for the three months ended
September 30, 2008 to $579,768 for three months ended September 30, 2009. 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.





Including
several non-cash charges, our net loss increased from $10,608,581 for the nine
months ended September 30, 2008 to $14,624,938 for the nine months ended
September 30, 2009, an increase of $4,016,357 or 37.9%.  We incurred
non-cash charges of depreciation of $268,074 and $239,339, non-cash salaries and
consulting fees of $2,113,965 and $1,150,692 and a change in value of Series D
warrants of $9,565,276 and $0 for the nine months ended September 30, 2009 and
2008, respectively.  Excluding these non-cash charges, our net loss
decreased $6,540,927 or 71.0% from $9,218,550 for the nine months ended
September 30, 2008 to $2,677,623 for nine months ended September 30, 2009. This
decrease was due to increased government funding and our cost containment
efforts.


32





EQUITY
FINANCING




On March
16, 2007, we consummated a transaction with various accredited investors
pursuant to which we agreed to sell to the investors and issue to the placement
agent as compensation, in a private placement, an aggregate of 4,579,010 shares
of Series B Convertible Preferred Stock, par value $0.005 per share, and Series
B and Series C Warrants to purchase approximately 2,632,602 shares of our common
stock pursuant to a Securities Purchase Agreement of the same date. As of
September 30, 2009, all of the 4,579,010 shares of Series B Preferred were
converted into shares of Common Stock and $2,739,339 in dividends earned were
paid.





On
February 13, 2009, March 20, 2009, and March 27, 2009, we entered into Purchase
Agreements with various purchasers, pursuant to which we agreed to sell to the
purchasers an aggregate of 542.84 shares of Series D Preferred and Warrants to
purchase an aggregate of 3,877,386 shares of the Company’s Common
Stock.  The Warrants have a seven-year term and an exercise price of
$1.60. At the time of its issuance, each share of Series D Preferred was
currently convertible into approximately 7,519 shares of Common Stock, subject
to the adjustment as described below.





The
aggregate purchase price paid by the purchasers 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.  We intend to use
the proceeds for working capital purposes.





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. Each share of Series D Preferred
is convertible into a number of shares of Common Stock equal to (1) the stated
value of the share ($10,000), divided by (2) the Conversion Price ($1.33),
subject to adjustment as discussed below).





At the
time of its issuance, the Series D Preferred ranked junior to our Series B
Preferred and senior to all our shares of Common Stock and other capital stock.
As of September 16, 2009, all of the outstanding Series B Preferred converted
according to its own terms into shares of Common Stock and therefore, no Series
B Preferred are outstanding.





If we do
not meet certain milestones, the Conversion Price will, unless the closing price
of the Common Stock is greater than $3.69 on the date the Milestone is missed,
be reduced to 80% of the Conversion Price in effect on that date.  In
addition to the Milestone Adjustment, on August 13, 2009, the Conversion Price
was reduced to 95% of the then Conversion Price. On each three month anniversary
of August 13, 2009, the then Conversion Price shall be reduced by $0.05
until maturity.  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.





If the
closing price for each of any 20 consecutive trading days after the effective
date of the initial registration statement filed pursuant to the Registration
Rights Agreement exceeds 300% of the then effective Conversion Price and various
other equity conditions are satisfied, the Series D Preferred will automatically
convert into shares of Common Stock.





At any
time after February 13, 2012, we may, if various equity conditions are
satisfied, elect either to redeem any outstanding Series D Preferred in cash or
to convert any outstanding Series D Preferred into shares of Common Stock at the
conversion rate then in effect.





If we
receive any cash funds after February 13, 2009, from fees, royalties or revenues
as a result of the license of any of our intellectual property, cash funds from
development grants from any government agency for the development of anti-cancer
applications of any of our curaxin compounds or anti-cancer or biodefense
applications for our CBLB502 compound  or we allocate cash proceeds to
our escrow account,  then we must deposit 40% of the intellectual
property proceeds, 20% of the governmental grant proceeds and any cash proceeds
into an escrow account.  At any time after the later of the Effective
Date and the six-month anniversary of the initial contribution by us to the
Sinking Fund, but no more than once in every six-month period, we will be
required to use the funds then in the escrow account to redeem outstanding
shares of Series D Preferred, from the holders on a pro rata basis, at a premium
of 15% to the stated value through February 13, 2010, and 20%
thereafter.




Upon
completion of the Series D Preferred transaction, 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 respectively, from
the original exercise prices of $10.36 and $11.00.In addition to the
adjustment to the exercise prices of the Series B Warrants and the Series C
Warrants, the aggregate number of shares issuable upon exercise of the Series B
Warrants and the Series C Warrants increased to 3,609,300and 408,036,
respectively, from 2,365,528and 267,074. 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 and the
aggregate number of shares of Common Stock issuable increased from approximately
281,042 to approximately 379,792.


33





As
mentioned above, 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 on
August 13, 2009 (the “Adjustment”). The Adjustment caused the number of shares
of Common Stock into which the 542.84 outstanding shares of Series D Preferred
can be converted to increase from 3,877,386 to 4,081,445 .At September 30, 2009
approximately 37.59 shares of Series D Preferred were converted into 357,820
shares of Common Stock and there were approximately 495.25 remaining outstanding
Series D Preferred shares convertible into approximately 3,723,695 shares of
Common Stock.





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 be reduced from $6.79 to $6.73,
      and 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;
      and





·
            the
      exercise price of the Series C Warrants to be reduced 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 are also
affected by the Adjustment causing their exercise price to reduce from $1.48 to
$1.47 and the aggregate number of shares of Common Stock issuable to increase
from 343,537 to 345,855. At September 30, 2009, 36,425 of these warrants were
exercised for 26,329 shares of Common Stock in cashless exercises.





On
November 13, 2009, the Conversion Price of the Series D Preferred will
automatically reduce from $1.33 to $1.28 (the “Second Adjustment”). The Second
Adjustment causes the number of shares of Common Stock into which the 470.25
outstanding shares of Series D Preferred can 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 be reduced from $6.73 to $6.68,
      and 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;
      and





·
            the
      exercise price of the Series C Warrants to be reduced 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 are also
affected by the Second Adjustment causing their exercise price to reduce from
$1.47 to $1.46 and the aggregate number of shares of Common Stock issuable to
increase from 111,447 to 112,210.




Critical
Accounting Policies and the Use of Estimates





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 generally accepted accounting principles in the U.S., or 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 Securities and
Exchange Commission (“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. For additional information, see
our audited consolidated financial statements and notes thereto which are
included in our Annual Report on Form 10-K for the year ended December 31, 2008,
which contain accounting policies and estimates and other disclosures required
by accounting principles generally accepted in the United
States.


34





Revenue
Recognition





Our
revenue sources consist of government grants, government contracts and a
commercial 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 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.





We
recognize revenue related to the funds received in 2007 from the State of New
York under the sponsored research agreement with RPCI.  This results
in the recognition of revenue as allowable costs are incurred. 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 as the services are performed and the prepaid asset is
recognized as expense.





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.




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, 2009, $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 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, 2008, we capitalized $733,051 in expenditures associated with the
preparation, filing and maintenance of certain of our patents, which were
incurred through the year ended December 31, 2008. We capitalized an additional
$151,555 and wrote off $23,984 of previously capitalized expenditures relating
to these costs incurred for the nine months ended September 30, 2009, resulting
in a balance of capitalized intellectual property totaling
$860,622.




Stock-based
Compensation





All
stock-based compensation, including grants of employee stock options, are
recognized in the statement of operations based on their fair
values.





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 the Company along with that of similar
high-growth, publicly-traded, biotechnology companies due to the limited trading
history of the Company. Compensation expense is recognized using the
straight-line amortization method for all stock-based awards.


35





During
the nine months ended September 30, 2009, the Company granted 723,276 stock
options. The Company recognized a total of $1,527,719 in expense related to
options for the nine months ended September 30, 2009.  The Company
also recaptured $37,878 of previously recognized expense due to the stock option
forfeitures. During the nine months ended September 30, 2008, the Company
granted 958,380 stock options pursuant to stock award agreements. We recognized
a total of $1,929,433 in expense related to options for the nine months ended
September 30, 2008.  The weighted average, estimated grant date fair
values of stock options granted during the nine months ended September 30, 2009
and 2008 was $1.89 and $3.17, respectively.





For the
nine months ended September 30, 2009 the Company also recognized a total of
$599,217 expense for shares issued under the Plan and a total of $24,907 in
expense related to the amortization of restricted
shares.





Fair
Value Measurement





The
Company values its 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.  The Company does not have any significant assets or
liabilities measured at fair value using Level 1 or Level 3 inputs as of
September 30, 2009.




The
Company analyzed all financial instruments with features of both liabilities and
equity.





The
Company carries the warrants issued in the Series D Private Placement at fair
value totaling $12,582,110 and $0 as of September 30, 2009 and December 31,
2008, respectively.  The Company recognized a fair value measurement
loss of $4,111,578 and $0 for the three months ended September 30, 2009 and
2008, respectively.  The Company recognized a fair value measurement
loss of $9,565,276 and $0 for the nine months ended September 30, 2009 and 2008,
respectively.





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


36


Results
of Operations





Our
operating results for the past three fiscal years have been nominal. The
following table sets forth our statement of operations data for the three and
nine months ended September 30, 2009 and 2008, and the years ended December 31,
2008 and December 31, 2007, 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, 2008.


Quarter
                              
                              
                              Quarter
                              
                              
                              Nine
      Months
                              
                              
                              Nine
      Months
                              
                              
                              Year
      Ended
                              
                              
                              Year
      EndedEnded
                              
                              
                              Ended
                              
                              
                              Ended
                              
                              
                              Ended
                              
                              
                              December
      31,
                              
                              
                              December
      31,30-Sep-09
                              
                              
                              30-Sep-08
                              
                              
                              30-Sep-09
                              
                              
                              30-Sep-08
                              
                              
                              2008
                              
                              
                              2007(unaudited)
                              
                              
                              (unaudited)
                              
                              
                              (unaudited)
                              
                              
                              (unaudited)Revenues
                              
                              $
                              3,223,094
                              
                              
                              $
                              1,851,419
                              
                              
                              $
                              9,717,803
                              
                              
                              $
                              3,202,119
                              
                              
                              $
                              4,705,597
                              
                              
                              $
                              2,018,558Operating
      expenses
                              
                              
                              4,314,178
                              
                              
                              
                              4,725,572
                              
                              
                              
                              14,548,186
                              
                              
                              
                              14,145,311
                              
                              
                              
                              19,050,965
                              
                              
                              
                              27,960,590Other
      expense (income)
                              
                              
                              4,100,241
                              
                              
                              
                              6,277
                              
                              
                              
                              9,811,898
                              
                              
                              
                              (90,018
                              )
                              
                              
                              (59,597
                              )
                              
                              
                              2,058,236Net
      interest expense (income)
                              
                              
                              (2,046
                              )
                              
                              
                              (49,450
                              )
                              
                              
                              (17,343
                              )
                              
                              
                              (244,593
                              )
                              
                              
                              (259,844
                              )
                              
                              
                              (1,003,766
                              )Net
      income (loss)
                              
                              $
                              (5,189,279
                              )
                              
                              $
                              (2,830,980
                              )
                              
                              $
                              (14,624,938
                              )
                              
                              $
                              (10,608,581
                              )
                              
                              $
                              (14,025,927
                              )
                              
                              $
                              (26,996,502
                              )




The
following table summarizes R&D expenses for the three and nine months ended
September 30, 2009 and 2008 and the years ended December 31, 2008 and 2007 and
since inception:





Quarter
                
                
                Quarter
                
                
                Nine
      Months
                
                
                Nine
      Months
                
                
                Year
      Ended
                
                
                TotalEnded
                
                
                Ended
                
                
                Ended
                
                
                Ended
                
                
                December
      31,
                
                
                Since30-Sep-09
                
                
                30-Sep-08
                
                
                30-Sep-09
                
                
                30-Sep-08
                
                
                2008
                
                
                Inception(unaudited)
                
                
                (unaudited)
                
                
                (unaudited)
                
                
                (unaudited)Research
      and development
                
                $
                3,327,609
                
                
                $
                3,485,430
                
                
                $
                10,602,591
                
                
                $
                9,719,519
                
                
                $
                13,160,812
                
                
                $
                53,859,313General
                
                $
                -
                
                
                $
                303,004
                
                
                $
                -
                
                
                $
                928,488
                
                
                $
                931,441
                
                
                $
                5,106,630Protectan
      CBLB502 - non-medical applications
                
                $
                3,267,201
                
                
                $
                1,846,094
                
                
                $
                9,966,145
                
                
                $
                4,638,905
                
                
                $
                7,264,813
                
                
                $
                31,567,341Protectan
      CBLB502 - medical applications
                
                $
                -
                
                
                $
                161,030
                
                
                $
                56,127
                
                
                $
                550,495
                
                
                $
                756,227
                
                
                $
                1,833,056Protectan
      CBLB612
                
                $
                1,414
                
                
                $
                288,450
                
                
                $
                6,567
                
                
                $
                875,105
                
                
                $
                974,459
                
                
                $
                3,136,941Curaxin
      CBLC102
                
                $
                34,074
                
                
                $
                466,088
                
                
                $
                252,209
                
                
                $
                1,431,077
                
                
                $
                1,741,194
                
                
                $
                6,718,691Other
      Curaxins
                
                $
                24,920
                
                
                $
                420,764
                
                
                $
                321,544
                
                
                $
                1,295,449
                
                
                $
                1,492,678
                
                
                $
                5,496,654


37


Three
Months Ended September 30, 2009 Compared to Three Months Ended September 30,
2008





Revenue





Revenue
increased from $1,851,419 for the three months ended September 30, 2008 to
$3,223,094 for the three months ended September 30, 2009 representing an
increase of $1,371,675 or 74.1% 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 for these periods:





Agency
                                            
                                            Program
                                            
                                            Amount
                                            
                                            Period of
                                              Performance
                                            
                                            Revenue
                                              2009
                                              (July 1 thru
                                              Sept.30)
                                            
                                            
                                            Revenue
                                              2008
                                              (Julyl 1 thru
                                              Sept.30)
                                            
                                            
                                            Revenue
                                              2008(unaudited)
                                            
                                            
                                            (unaudited)DoD
                                            
                                            DTRA
      Contract
                                            
                                            $
                                            1,263,836
                                            
                                            03/2007-02/2009
                                            
                                            $
                                            80,079
                                            
                                            
                                            $
                                            -
                                            
                                            
                                            $
                                            613,901NIH
                                            
                                            Phase
      II NIH SBIR program
                                            
                                            $
                                            750,000
                                            
                                            07/2006-06/2008
                                            
                                            $
                                            -
                                            
                                            
                                            $
                                            -
                                            
                                            
                                            $
                                            77,971NY
      State/RPCI
                                            
                                            Sponsored
      Research Agreement
                                            
                                            $
                                            3,000,000
                                            
                                            03/2007-02/2012
                                            
                                            $
                                            3,679
                                            
                                            
                                            $
                                            84,792
                                            
                                            
                                            $
                                            305,298NIH
                                            
                                            NCI
      Contract
                                            
                                            $
                                            750,000
                                            
                                            09/2006-08/2008
                                            
                                            $
                                            -
                                            
                                            
                                            $
                                            71,363
                                            
                                            
                                            $
                                            219,618DoD
                                            
                                            DOD
      Contract
                                            
                                            $
                                            9,590,000
                                            
                                            05/2008
      - 09/2009
                                            
                                            $
                                            1,313,900
                                            
                                            
                                            $
                                            1,635,868
                                            
                                            
                                            $
                                            2,938,357HHS
                                            
                                            BARDA
      Contract
                                            
                                            $
                                            15,600,000
                                            
                                            09/2008-09/2011
                                            
                                            $
                                            1,172,088
                                            
                                            
                                            $
                                            2,115
                                            
                                            
                                            $
                                            219,412NIH
                                            
                                            NIAID
      Grant
                                            
                                            $
                                            1,232,695
                                            
                                            09/2008-08/2010
                                            
                                            $
                                            392,369
                                            
                                            
                                            $
                                            57,281
                                            
                                            
                                            $
                                            211,040NIH
                                            
                                            NIAID
      GO Grant
                                            
                                            $
                                            5,300,000
                                            
                                            09/2009-08/2011
                                            
                                            $
                                            260,979
                                            
                                            
                                            $
                                            -
                                            
                                            
                                            $
                                            -Totals
                                            
                                            $
                                            3,223,094
                                            
                                            
                                            $
                                            1,851,419
                                            
                                            
                                            $
                                            4,585,597





We
anticipate our revenue over the next year to be derived mainly from government
contracts and grants. 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 Cleveland Clinic, 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 anticipated in connection with our
compliance with ongoing reporting and accounting requirements of the SEC and the
expansion of our business.





Operating
expenses decreased from $4,725,572 for the three months ended September 30, 2008
to $4,314,178 for the three months ended September 30, 2009, a decrease of
$411,394 or 8.7%.  We recognized a total of $410,402 of non-cash,
stock-based compensation for the three months ended September 30, 2009 compared
to $379,760 for the three months ended September 30, 2008.  If these
non-cash, stock-based compensation expenses were excluded, operating expenses
would have decreased from $4,345,812 for the three months ended September 30,
2008 to $3,903,773 for the three months ended September 30,
2009.  This represents a decrease in operating expenses of $442,036 or
10.2% as explained below.





R&D
costs decreased from $3,485,430 for the three months ended September 30, 2008 to
$3,327,609 for the three months ended September 30, 2009. This represents a
decrease of $157,821 or 4.5%. We recognized a total of $230,977 of R&D
non-cash, stock based compensation for the three months ended September 30, 2009
compared to $201,848 for the three months ended September 30,
2008.  Without the non-cash, stock-based compensation, the R&D
expenses decreased from $3,283,582 for the three months ended September 30, 2008
to $3,096,632 for the three months ended September 30, 2009; a decrease of
$186,950 or 5.7%.   This reduction in R&D expenses is due
largely to incurring primarily only those R&D costs that are properly funded
by government contracts and grants.




Selling,
general and administrative costs decreased from $1,240,142 for the three months
ended September 30, 2008 to $986,569 for the three months ended September 30,
2009.  This represents a decrease of $253,573 or 20.4%.  We
recognized a total of $179,425 of non-cash, stock-based compensation under
selling, general and administrative costs for the three months ended September
30, 2009 compared to $177,912 for the three months ended September 30, 2008.
Without the non-cash, stock-based compensation, the selling, general and
administrative expenses decreased from $1,062,230 for the three months ended
September 30, 2008 to $807,144 for the three months ended September 30, 2009; a
decrease of $255,086 or 24.0%.  The lower general and administrative
expenses were incurred as a result of cost containment efforts.


38





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.





Other
Expenses





Other
expenses increased from $8,933 for the three months ended September 30, 2008 to
$4,111,578 for the three months ended September 30, 2009, an increase of
$4,102,645 or 45,926.8%.  We recognized $4,111,578 of non-cash expense
for the change in value of the Series D warrants for the three months ended
September 30, 2009 compared to $8,933 related to the company relocation for the
three months ended September 30, 2008.  This change in the value of
the Series D warrants occurred as a result of the change in the fair value of
the warrants using the Black-Scholes valuation model.





Nine
Months Ended September 30, 2009 Compared to Nine Months Ended September 30,
2008





Revenue





Revenue
increased from $3,202,119 for the nine months ended September 30, 2008 to
$9,717,803 for the nine months ended September 30, 2009 representing an increase
of $6,515,684 or 203.5% 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 for these periods:





Agency
                              
                              Program
                              
                              Amount
                              
                              Period of
                                Performance
                              
                              Revenue
                                2009
                                (thru
                                September 30)
                              
                              
                              Revenue
                                2008
                                (thru
                                September 30)
                              
                              
                              Revenue
                                2008(unaudited)
                              
                              
                              (unaudited)DoD
                              
                              DTRA
      Contract
                              
                              $
                              1,263,836
                              
                              03/2007-02/2009
                              
                              $
                              183,613
                              
                              
                              $
                              613,901
                              
                              
                              $
                              613,901NY
      State/RPCI
                              
                              Sponsored
      Research Agreement
                              
                              $
                              3,000,000
                              
                              03/2007-02/2012
                              
                              $
                              28,338
                              
                              
                              $
                              239,503
                              
                              
                              $
                              305,298NIH
                              
                              Phase
      II NIH SBIR program
                              
                              $
                              750,000
                              
                              07/2006-06/2008
                              
                              $
                              3,679
                              
                              
                              $
                              77,971
                              
                              
                              $
                              77,971NIH
                              
                              NCI
      Contract
                              
                              $
                              750,000
                              
                              09/2006-08/2008
                              
                              $
                              -
                              
                              
                              $
                              228,579
                              
                              
                              $
                              219,618DOD
                              
                              DOD
      Contract
                              
                              $
                              9,590,000
                              
                              05/2008
      - 09/2009
                              
                              $
                              4,636,335
                              
                              
                              $
                              1,862,769
                              
                              
                              $
                              2,938,357HHS
                              
                              BARDA
      Contract
                              
                              $
                              15,600,000
                              
                              09/2008-09/2011
                              
                              $
                              3,649,347
                              
                              
                              $
                              2,115
                              
                              
                              $
                              219,412NIH
                              
                              NIAID
      Grant
                              
                              $
                              1,232,695
                              
                              09/2008-02/2010
                              
                              $
                              955,512
                              
                              
                              $
                              57,281
                              
                              
                              $
                              211,040NIH
                              
                              NIAID
      Grant
                              
                              $
                              5,300,000
                              
                              09/2009-08/2011
                              
                              
                              260,979
                              
                              
                              $
                              -
                              
                              
                              $
                              -Totals
                              
                              $
                              9,717,803
                              
                              
                              $
                              3,082,119
                              
                              
                              $
                              4,585,597





Operating
Expenses





Operating
expenses increased from $14,145,311 for the nine months ended September 30, 2008
to $14,548,186 for the nine months ended September 30, 2009, an increase of
$402,875 or 2.8%.  We recognized a total of $2,113,965 of non-cash,
stock-based compensation for the nine months ended September 30, 2009 compared
to $1,150,692 for the nine months ended September 30, 2008.  If these
non-cash, stock-based compensation expenses were excluded, operating expenses
would have decreased from $12,994,619 for the nine months ended September 30,
2008 to $12,434,221 for the nine months ended September 30,
2009.  This represents a decrease in operating expenses of $560,398 or
4.3% as explained below.





R&D
costs increased from $9,719,519 for the nine months ended September 30, 2008 to
$10,602,591 for the nine months ended September 30, 2009. This represents an
increase of $883,072 or 9.1%. We recognized a total of $895,397 of R&D
non-cash, stock based compensation for the nine months ended September 30, 2009
compared to $416,750 for the nine months ended September 30,
2008.  Without the non-cash, stock-based compensation, the R&D
expenses increased from $9,302,769 for the nine months ended September 30, 2008
to $9,707,194 for the nine months ended September 30, 2008; an increase of
$404,425 or 4.3%.  The higher R&D expenses were a result of
additional subcontractor expenses incurred to support the additional
revenue.




Selling,
general and administrative costs decreased from $4,425,792 for the nine months
ended September 30, 2008 to $3,945,595 for the nine months ended September 30,
2009.  This represents a decrease of $480,197 or 10.8%.  We
recognized a total of $1,218,568 of non-cash, stock-based compensation
under selling, general and administrative costs for the nine months ended
September 30, 2009 compared to $733,942 for the nine months ended September 30,
2008. Without the non-cash, stock-based compensation, the selling, general and
administrative expenses decreased from $3,691,850 for the nine months ended
September 30, 2008 to $2,727,027 for the nine months ended September 30, 2009; a
decrease of $964,823 or 26.1%.  The lower general and administrative
expenses were incurred as a result of cost containment efforts.


39





Other
Expenses





Other
expenses increased from $142,638 for the nine months ended September 30, 2008 to
$9,834,206 for the nine months ended September 30, 2009, an increase of
9,689,608 or 6,794.5%.  We recognized $9,565,276 of non-cash expense
for the change in value of the Series D warrants and $266,970 for warrant
issuance costs related to the Series D offering for the nine months ended
September 30, 2009 compared to $142,638 related to the company
relocation for the nine months ended September 30, 2008.  This
change in the value of the Series D warrants occurred as a result of the change
in the fair value of the warrants using the Black-Scholes valuation
model.





Liquidity
and Capital Resources





We have
incurred annual operating losses since our inception, and, as of September 30,
2009, we had an accumulated deficit of $71,486,462. Our principal sources of
liquidity have been cash provided by sales of our securities and government
grants, contracts and agreements. Our principal uses of cash have been R&D
and working capital. We expect our future sources of liquidity to be primarily
government 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.





Net cash
used in operating activities totaled $3,092,572 for the nine months ended
September 30, 2009, compared to $8,903,451 used in operating activities for the
nine months ended September 30, 2008. The decrease in cash used was primarily
attributable to cost containment efforts as well as increased government
funding.





Net cash
provided by investing activities was $800,052 for the nine months ended
September 30, 2009 and net cash used in investing activities was $416,537 for
the nine months ended September 30, 2008. The increase in cash provided by
investing activities resulted primarily from the sale of a short term
investment.





Net cash
provided by financing activities totaled $4,090,263 for the nine months ended
September 30, 2009, compared to net cash used in financing activities of
$1,226,032 for the nine months ended September 30, 2008.  The increase
in cash provided by financing activities was attributed to the issuance of the
Series D Preferred Shares and Warrants as compared to the cash used in financing
activities to pay dividends on the Series B preferred during the first six
months of 2008.





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 below:





File
      IND application for Protectan CBLB502  (completed February
      2008)
                  
                  $
                  50,000Complete
      Phase I studies for Protectan CBLB502
                  
                  $
                  100,000File
      NDA application for Protectan CBLB502
                  
                  $
                  350,000Receive
      regulatory approval to sell Protectan CBLB502
                  
                  $
                  1,000,000File
      IND application for Curaxin CBLC102 (completed May 2006)
                  
                  $
                  50,000Commence
      Phase II clinical trials for Curaxin CBLC102 (completed January
      2007)
                  
                  $
                  250,000Commence
      Phase III clinical trials for Curaxin CBLC102
                  
                  $
                  700,000File
      NDA application for Curaxin CBLC102
                  
                  $
                  1,500,000Receive
      regulatory approval to sell Curaxin CBLC102
                  
                  $
                  4,000,000





As of
September 30, 2009, we have paid $50,000 for the milestone payment relating to
the filing of the IND application for Curaxin CBLC102, $250,000 for commencing
Phase II clinical trials for Curaxin CBLC102 and $50,000 for the filing of an
IND application for Protectan CBLB502.  The $50,000 milestone payment
for Curaxin CBLC102 was made May 3, 2007, the $250,000 milestone was paid on
August 21, 2007 and the $50,000 milestone for Protectan CBLB502 was made on
August 27, 2008 as per the terms of the agreement.





Our
agreement with the 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. Each of the above milestone payments,
royalty payments and sublicense royalty payments was accrued until CCF owns less
than five percent of our common stock on a fully-diluted basis or we receive
more than $30,000,000 in funding and/or revenues from sources other than CCF,
which have occurred with the completion of the private offering in March
2007.


40




To meet
our longer term cash requirements, we may be required to issue equity or debt
securities or enter into other financial arrangements, including relationships
with corporate and other partners. 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.





The
recent decline in the market value of certain securities backed by residential
mortgage loans has led to a large liquidity crisis affecting the broader U.S.
housing market, the financial services industry and global financial markets.
Investors holding many of these and related securities have experienced
substantial decreases in asset valuations and uncertain secondary market
liquidity. Furthermore, credit rating authorities have, in many cases, been slow
to respond to the rapid changes in the underlying value of certain securities
and pervasive market illiquidity, regarding these securities. As a result, this
“credit crisis” may have a potential impact on our ability to raise sufficient
equity capital or substantially raise the cost of additional
capital.




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 moderate
changes in foreign currency exchange rates. We have entered into a manufacturing
agreement with a foreign third party to produce one of its drug compounds and
are required to make payments in the foreign currency. Currently, our exposure
primarily exists with the Euro. As of September 30, 2009, the Company is
obligated to make payments under the agreements of 2,441,500 Euros. As of
September 30, 2009, the Company has not purchased any forward contracts for
Euros and, therefore, at September 30, 2009, had foreign currency commitments of
$3,575,100 for Euros given prevailing currency exchange spot rates.





Off-Balance
Sheet Arrangements





We have
not entered into any off-balance sheet arrangements.




41




Item
3: Quantitative and Qualitative Disclosures About Market Risk





Not
applicable.





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 of September 30, 2009 as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”). 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, 2009,
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





No change
in our internal control over financial reporting (as defined in Rules 13a-15(f)
and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended
September 30, 2009 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial
reporting.


42


PART
II - Other Information





Item
1. Legal Proceedings





As
of September 30, 2009, 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. Submission of Matters to a Vote of Security Holders





None.





Item
5. Other Information





As
mentioned above, 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 will automatically reduce from $1.33 to $1.28 on
November 13, 2009. This adjustment will cause the number of shares of Common
Stock into which the 470.25 outstanding shares of Series D Preferred can 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, this adjustment
will cause:




·
            the
      exercise price of the Series B Warrants to be reduced from $6.73 to $6.68,
      and 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;
      and





·
            the
      exercise price of the Series C Warrants to be reduced 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 are also
affected by this adjustment causing their exercise price to reduce from $1.47 to
$1.46 and the aggregate number of shares of Common Stock issuable to increase
from 111,447 to 112,210.




Item 6. Exhibits




(a) The
following exhibits are included as part of this report:





Exhibit
                Number
              
              Description of Document31.1
              
              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




43




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 12, 2009
              By:
              /s/ MICHAEL FONSTEINMichael
      Fonstein
                Chief
      Executive Officer
                (Principal
      Executive Officer)Dated:
      November 12, 2009
              By:
              /s/ JOHN A. MARHOFER,
JR.John
      A. Marhofer, Jr.
                Chief
      Financial Officer
                (Principal
      Financial Officer)




44