UNITED
STATES SECURITIES AND EXCHANGE COMMISSION





WASHINGTON,
D.C. 20549





FORM
10-Q





(Mark
      One)þ
      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES
      EXCHANGE ACT OF 1934





For the
quarterly period ended March 31, 2010





OR





 ̈
      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES
      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 Website, if
any, every Interactive Data File required to be submitted and posted pursuant to
Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such
files).  Yes ̈No ̈





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





Large accelerated filer ̈
                    
                    Accelerated filer ̈Non-accelerated filer ̈
                    
                    Smaller reporting companyþ





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 May
10, 2010, there were 26,693,403shares outstanding of
registrant's common stock, par value $0.005 per share.








CLEVELAND
BIOLABS INC


10-Q


5/14/2010




TABLE
      OF CONTENTSPAGEPART
      I - FINANCIAL INFORMATIONITEM
      1:
                        Financial
      StatementsBalance
      Sheets as of March 31, 2010 and December 31, 2009
                        
                        3Statements
      of Operations For Three Months Ended March 31, 2010 and
    2009
                        
                        5Statements
      of Cash Flows For Three Months Ended March 31, 2010 and
    2009
                        
                        6Statement
      of Stockholders' Equity from January 1, 2009 to December 31, 2009 and to
      March 31, 2010
                        
                        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
                        
                        41ITEM
      4:
                        Controls
      and Procedures
                        
                        41PART
      II - OTHER INFORMATIONITEM
      1:
                        Legal
      Proceedings
                        
                        42ITEM
      2:
                        Unregistered
      Sales of Equity Securities and Use of Proceeds
                        
                        42ITEM
      3:
                        Defaults
      Upon Senior Securities
                        
                        42ITEM
      4:
                        Removed
      and Reserved
                        42ITEM
      5:
                        Other
      Information
                        
                        42ITEM
      6:
                        Exhibits
                        
                        42Signatures
                        
                        43





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.”








CLEVELAND
BIOLABS, INC.





BALANCE
SHEETS





March 31,
2010 (unaudited) and December 31, 2009








March 312010
                  
                  
                  December 31(unaudited)
                  
                  
                  2009ASSETSCURRENT
      ASSETSCash
      and equivalents
                  
                  $
                  5,214,287
                  
                  
                  $
                  963,100Accounts
      receivable:Trade
                  
                  
                  2,713,499
                  
                  
                  
                  3,391,347Other
      current assets
                  
                  
                  495,355
                  
                  
                  
                  381,030Total
      current assets
                  
                  
                  8,423,141
                  
                  
                  
                  4,735,477EQUIPMENTComputer
      equipment
                  
                  
                  328,238
                  
                  
                  
                  323,961Lab
      equipment
                  
                  
                  1,300,427
                  
                  
                  
                  1,159,478Furniture
                  
                  
                  376,882
                  
                  
                  
                  376,8822,005,547
                  
                  
                  
                  1,860,321Less
      accumulated depreciation
                  
                  
                  1,093,715
                  
                  
                  
                  995,408911,832
                  
                  
                  
                  864,913OTHER
      ASSETSIntellectual
      property
                  
                  
                  963,464
                  
                  
                  
                  929,976Deposits
                  
                  
                  23,482
                  
                  
                  
                  23,482986,946
                  
                  
                  
                  953,458TOTAL
      ASSETS
                  
                  $
                  10,321,919
                  
                  
                  $
                  6,553,848





See
accompanying notes


3




CLEVELAND
BIOLABS, INC.
 
 BALANCE
SHEETS
 
 March 31,
2010 (unaudited) and December 31, 2009


March 312010
                              
                              
                              December 31(unaudited)
                              
                              
                              2009LIABILITIES
      AND STOCKHOLDERS' EQUITYCURRENT
      LIABILITIESAccounts
      payable
                              
                              $
                              859,347
                              
                              
                              $
                              1,208,632Deferred
      revenue
                              
                              
                              2,325,472
                              
                              
                              
                              2,329,616Accrued
      expenses
                              
                              
                              1,400,348
                              
                              
                              
                              1,405,715Accrued
      warrant liability
                              
                              
                              13,025,477
                              
                              
                              
                              8,410,379Total
      current liabilities
                              
                              
                              17,610,644
                              
                              
                              
                              13,354,342STOCKHOLDERS'
      EQUITYPreferred
      stock, $.005 par valueAuthorized
      - 10,000,000 shares at March 31, 2010 and December 31,
2009Series
      D convertible preferred stock, Issued and outstanding 0 and 466.85 shares
      at March 31, 2010 and December 31, 2009, respectively
                              
                              
                              -
                              
                              
                              
                              2Common
      stock, $.005 par valueAuthorized
      - 80,000,000 shares at March 31, 2010 and December 31, 2009,
      respectivelyIssued
      and outstanding 26,655,230 and 20,203,508 shares at March 31, 2010 and
      December 31, 2009, respectively
                              
                              
                              133,276
                              
                              
                              
                              101,018Additional
      paid-in capital
                              
                              
                              65,629,942
                              
                              
                              
                              62,786,418Accumulated
      deficit
                              
                              
                              (73,051,943
                              )
                              
                              
                              (69,687,932
                              )Total
      stockholders' equity
                              
                              
                              (7,288,725
                              )
                              
                              
                              (6,800,494
                              )TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY
                              
                              $
                              10,321,919
                              
                              
                              $
                              6,553,848




See
accompanying notes


4





CLEVELAND
BIOLABS, INC.





STATEMENTS
OF OPERATIONS





Three
Months Ended March 31, 2010 and 2009 (unaudited)








Three Months EndedMarch 31
                    
                    
                    March 312010
                    
                    
                    2009(unaudited)
                    
                    
                    (unaudited)REVENUEGrant
      and Contract
                    
                    $
                    4,170,348
                    
                    
                    $
                    2,309,7314,170,348
                    
                    
                    
                    2,309,731OPERATING
      EXPENSESResearch
      and development
                    
                    
                    3,697,780
                    
                    
                    
                    2,502,881Selling,
      general and administrative
                    
                    
                    1,929,501
                    
                    
                    
                    1,121,890Total
      operating expenses
                    
                    
                    5,627,281
                    
                    
                    
                    3,624,771LOSS
      FROM OPERATIONS
                    
                    
                    (1,456,933
                    )
                    
                    
                    (1,315,040
                    )OTHER
      INCOMEInterest
      income
                    
                    
                    5,773
                    
                    
                    
                    5,308Sublease
      revenue
                    
                    
                    50,225
                    
                    
                    
                    4,505Total
      other income
                    
                    
                    55,998
                    
                    
                    
                    9,813OTHER
      EXPENSEWarrant
      issuance costs
                    
                    
                    231,980
                    
                    
                    
                    266,970Interest
      expense
                    
                    
                    -
                    
                    
                    
                    1,960Change
      in value of warrant liability
                    
                    
                    1,731,096
                    
                    
                    
                    1,384,7721,963,076
                    
                    
                    
                    1,653,702NET
      LOSS
                    
                    
                    (3,364,011
                    )
                    
                    
                    (2,958,929
                    )DIVIDENDS
      ON CONVERTIBLE PREFERRED STOCK
                    
                    
                    -
                    
                    
                    
                    (268,979
                    )NET
      LOSS AVAILABLE TO COMMON STOCKHOLDERS
                    
                    $
                    (3,364,011
                    )
                    
                    $
                    (3,227,908
                    )NET
      LOSS AVAILABLE TO COMMON STOCKHOLDERS PER SHARE OF COMMON STOCK - BASIC
      AND DILUTED
                    
                    $
                    (0.14
                    )
                    
                    $
                    (0.24
                    )WEIGHTED
      AVERAGE NUMBER OF SHARES USED IN CALCULATING NET LOSS PER SHARE, BASIC AND
      DILUTED
                    
                    
                    23,512,617
                    
                    
                    
                    13,607,114




See
accompanying notes


5





CLEVELAND
BIOLABS, INC.





STATEMENTS
OF CASH FLOWS





For the
Three Months Ended March 31, 2010 and 2009 (unaudited)







March
      31
                                
                                
                                March
      312010
                                
                                
                                2009(unaudited)
                                
                                
                                (unaudited)CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      loss
                                
                                $
                                (3,364,011
                                )
                                
                                $
                                (2,958,929
                                )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
                                
                                
                                98,307
                                
                                
                                
                                91,599Amortization
                                
                                
                                2,417
                                
                                
                                
                                -Noncash
      salaries and consulting expense
                                
                                
                                936,690
                                
                                
                                
                                274,101Warrant
      issuance costs
                                
                                
                                231,980
                                
                                
                                
                                266,970Change
      in value of warrant liability
                                
                                
                                1,731,096
                                
                                
                                
                                1,384,772Loss
      on abandoned patents
                                
                                
                                -
                                
                                
                                
                                23,984Changes
      in operating assets and liabilities:Accounts
      receivable - trade
                                
                                
                                677,848
                                
                                
                                
                                (495,470
                                )Accounts
      receivable - interest
                                
                                
                                -
                                
                                
                                
                                9,488Other
      current assets
                                
                                
                                (114,326
                                )
                                
                                
                                296,942Accounts
      payable
                                
                                
                                (349,285
                                )
                                
                                
                                (123,812
                                )Deferred
      revenue
                                
                                
                                (4,144
                                )
                                
                                
                                18,174Accrued
      expenses
                                
                                
                                (5,366
                                )
                                
                                
                                (175,908
                                )Total
      adjustments
                                
                                
                                3,205,217
                                
                                
                                
                                1,570,840Net
      cash used in operating activities
                                
                                
                                (158,794
                                )
                                
                                
                                (1,388,089
                                )CASH
      FLOWS FROM INVESTING ACTIVITIESSale
      of short-term investments
                                
                                
                                -
                                
                                
                                
                                1,000,000Purchase
      of equipment
                                
                                
                                (145,225
                                )
                                
                                
                                (35,525
                                )Costs
      of patents pending
                                
                                
                                (35,905
                                )
                                
                                
                                (39,402
                                )Net
      cash (used in) provided by investing activities
                                
                                
                                (181,130
                                )
                                
                                
                                925,073CASH
      FLOWS FROM FINANCING ACTIVITIESIssuance
      of preferred stock
                                
                                
                                -
                                
                                
                                
                                5,428,307Financing
      costs on preferred stock
                                
                                
                                -
                                
                                
                                
                                (720,175
                                )Issuance
      of common stock
                                
                                
                                5,000,002
                                
                                
                                
                                -Cash
      financing costs on common stock
                                
                                
                                (350,632
                                )
                                
                                
                                -Cash
      warrant issuance costs
                                
                                
                                (140,697
                                )
                                
                                
                                (266,970
                                )Dividends
                                
                                
                                -
                                
                                
                                
                                (549,766
                                )Exercise
      of stock options
                                
                                
                                52,837
                                
                                
                                
                                6,788Exercise
      of warrants
                                
                                
                                29,601
                                
                                
                                
                                -Net
      cash provided by financing activities
                                
                                
                                4,591,111
                                
                                
                                
                                3,898,184INCREASE
      IN CASH AND EQUIVALENTS
                                
                                
                                4,251,187
                                
                                
                                
                                3,435,168CASH
      AND EQUIVALENTS AT BEGINNING OF
                                
                                
                                963,100
                                
                                
                                
                                299,849PERIODCASH
      AND EQUIVALENTS AT END OF PERIOD
                                
                                $
                                5,214,287
                                
                                
                                $
                                3,735,017




See
accompanying notes


6





CLEVELAND
BIOLABS, INC.





STATEMENTS
OF CASH FLOWS





For the
Three Months Ended March 31, 2010 and 2009 (unaudited)







March
      31
                      
                      
                      March
      312010
                      
                      
                      2009(unaudited)
                      
                      
                      (unaudited)Supplemental
      disclosures of cash flow information:Cash
      paid during the period for interest
                      
                      $
                      -
                      
                      
                      $
                      1,960Cash
      paid during the period for income taxes
                      
                      $
                      -
                      
                      
                      $
                      -Supplemental
      schedule of noncash financing activities:Issuance
      of stock options to employees, consultants, and independent board
      members
                      
                      $
                      330,246
                      
                      
                      $
                      101,563Recapture
      of expense for nonvested options forfeited
                      
                      $
                      (38,787
                      )
                      
                      $
                      (37,878
                      )Issuance
      of shares to consultants and employees
                      
                      $
                      641,898
                      
                      
                      $
                      202,083Amortization
      of restricted shares to be issued to employees and
    consultants
                      
                      $
                      3,333
                      
                      
                      $
                      8,333Conversion
      of warrant liability to equity due to exercise of warrants
                      
                      $
                      64,615
                      
                      
                      $
                      -Noncash
      financing costs on common stock offering
                      
                      $
                      227,486
                      
                      
                      $
                      -Noncash
      warrant issuance costs
                      
                      $
                      91,283
                      
                      
                      $
                      -Conversion
      of preferred stock to common stock
                      
                      $
                      1,454,540
                      
                      
                      $
                      2,172,605Accrual
      of Series B preferred stock dividends
                      
                      $
                      -
                      
                      
                      $
                      268,979




7





Period
From January 1, 2009 to December 31, 2009 and to


March 31,
2010 (unaudited)





Stockholders' EquityCommon StockShares
                
                
                AmountBalance
      at January 1, 2009
                
                
                13,775,805
                
                
                $
                68,879Issuance
      of options
                
                
                -
                
                
                
                -Issuance
      of restricted shares
                
                
                291,532
                
                
                
                1,458Recapture
      of expense for nonvested options forfeited
                
                
                -
                
                
                
                -Restricted
      stock awards
                
                
                
                
                
                
                -Exercise
      of options
                
                
                194,675
                
                
                
                973Conversion
      of Series B Preferred Shares to Common
                
                
                4,693,530
                
                
                
                23,468Dividends
      on Series B Preferred shares
                
                
                -
                
                
                
                -Issuance
      of shares - Series D financing
                
                
                -
                
                
                
                -Allocation
      of financing proceeds to fair value of Series D warrants
                
                
                -
                
                
                
                -Fees
      associated with Series D Preferred offering
                
                
                -
                
                
                
                -Conversion
      of Series D Preferred Shares to Common
                
                
                572,353
                
                
                
                2,862Exercise
      of warrants
                
                
                675,613
                
                
                
                3,378Net
      Loss
                
                
                -
                
                
                
                -Balance
      at December 31, 2009
                
                
                20,203,508
                
                
                $
                101,018Issuance
      of options
                
                
                -
                
                
                
                -Issuance
      of shares
                
                
                190,062
                
                
                
                950Recapture
      of expense for nonvested options forfeited
                
                
                -
                
                
                
                -Restricted
      stock awards
                
                
                -
                
                
                
                -Exercise
      of options
                
                
                40,862
                
                
                
                204Issuance
      of shares - February 2010 financing
                
                
                1,538,462
                
                
                
                7,692Allocation
      of financing proceeds to fair value of warrants
                
                
                -
                
                
                
                -Fees
      associated with February 2010 offering
                
                
                -
                
                
                
                -Conversion
      of Series D Preferred Shares to Common
                
                
                4,576,979
                
                
                
                22,885Exercise
      of warrants
                
                
                105,357
                
                
                
                527Net
      Loss
                
                
                -
                
                
                
                -Balance
      at March 31, 2010
                
                
                26,655,230
                
                
                $
                133,276


8





CLEVELAND
BIOLABS, INC.





STATEMENTS
OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS





Period
From January 1, 2009 to December 31, 2009 and to


March 31,
2010 (unaudited)





Stockholders' EquityPreferred StockSeries B
                    
                    
                    Amount
                    
                    
                    Series D
                    
                    
                    AmountBalance
      at January 1, 2009
                    
                    
                    3,160,974
                    
                    
                    $
                    15,805
                    
                    
                    
                    -
                    
                    
                    $
                    -Issuance
      of options
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Issuance
      of restricted shares
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Recapture
      of expense for nonvested options forfeited
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Restricted
      stock awards
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Exercise
      of options
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Conversion
      of Series B Preferred Shares to Common
                    
                    
                    (3,160,974
                    )
                    
                    
                    (15,805
                    )
                    
                    
                    -
                    
                    
                    
                    -Dividends
      on Series B Preferred shares
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Issuance
      of shares - Series D financing
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    543
                    
                    
                    
                    3Allocation
      of financing proceeds to fair value of Series D warrants
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Fees
      associated with Series D Preferred offering
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Conversion
      of Series D Preferred Shares to Common
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (76
                    )
                    
                    
                    (1
                    )Exercise
      of warrantsNet
      Loss
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Balance
      at December 31, 2009
                    
                    
                    -
                    
                    
                    $
                    -
                    
                    
                    
                    467
                    
                    
                    $
                    2Issuance
      of options
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Issuance
      of shares
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Recapture
      of expense for nonvested options forfeited
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Restricted
      stock awards
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Exercise
      of options
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Issuance
      of shares - February 2010 financing
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Allocation
      of financing proceeds to fair value of warrants
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Fees
      associated with February 2010 offering
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Conversion
      of Series D Preferred Shares to Common
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (467
                    )
                    
                    
                    (2
                    )Exercise
      of warrantsNet
      Loss
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Balance
      at March 31, 2010
                    
                    
                    -
                    
                    
                    $
                    -
                    
                    
                    
                    -
                    
                    
                    $
                    -


9





CLEVELAND
BIOLABS, INC.





STATEMENTS
OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS





Period
From January 1, 2009 to December 31, 2009 and to


March 31,
2010 (unaudited)





Stockholders'
      EquityAdditional
                                
                                
                                Other
                                
                                
                                
                                
                                
                                
                                
                                
                                ComprehensivePaid-in
                                
                                
                                Comprehensive
                                
                                
                                Accumulated
                                
                                
                                
                                
                                
                                IncomeCapital
                                
                                
                                Income/(Loss)
                                
                                
                                Deficit
                                
                                
                                Total
                                
                                
                                (Loss)Balance
      at January 1, 2009
                                
                                $
                                56,699,750
                                
                                
                                $
                                -
                                
                                
                                $
                                (56,246,172
                                )
                                
                                $
                                538,261Issuance
      of options
                                
                                
                                1,784,240
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                1,784,240Issuance
      of restricted shares
                                
                                
                                991,612
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                993,070Recapture
      of expense for nonvested options forfeited
                                
                                
                                (50,197
                                )
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                (50,197
                                )Restricted
      stock awards
                                
                                
                                33,333
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                33,333Exercise
      of options
                                
                                
                                361,884
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                362,857Conversion
      of Series B Preferred Shares to Common
                                
                                
                                (7,663
                                )
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -Dividends
      on Series B Preferred shares
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                (615,351
                                )
                                
                                
                                (615,351
                                )Issuance
      of shares - Series D financing
                                
                                
                                5,428,304
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                5,428,307Allocation
      of financing proceeds to fair value of Series D warrants
                                
                                
                                (3,016,834
                                )
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                (3,016,834
                                )Fees
      associated with Series D Preferred offering
                                
                                
                                (720,175
                                )
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                (720,175
                                )Conversion
      of Series D Preferred Shares to Common
                                
                                
                                (2,861
                                )
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                -Exercise
      of warrants
                                
                                
                                1,285,026
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                1,288,404Net
      Loss
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                (12,826,409
                                )
                                
                                
                                (12,826,409
                                )
                                
                                $
                                (12,826,409
                                )Balance
      at December 31, 2009
                                
                                $
                                62,786,418
                                
                                
                                $
                                -
                                
                                
                                $
                                (69,687,932
                                )
                                
                                $
                                (6,800,494
                                )Issuance
      of options
                                
                                
                                330,246
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                330,246Issuance
      of shares
                                
                                
                                640,948
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                641,898Recapture
      of expense for nonvested options forfeited
                                
                                
                                (38,787
                                )
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                (38,787
                                )Restricted
      stock awards
                                
                                
                                3,333
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                3,333Exercise
      of options
                                
                                
                                52,633
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                52,837Issuance
      of shares - February 2010 financing
                                
                                
                                4,992,310
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                5,000,002Allocation
      of financing proceeds to fair value of warrants
                                
                                
                                (2,629,847
                                )
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                (2,629,847
                                )Fees
      associated with February 2010 offering
                                
                                
                                (578,118
                                )
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                (578,118
                                )Conversion
      of Series D Preferred Shares to Common
                                
                                
                                (22,883
                                )
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                -Exercise
      of warrants
                                
                                
                                93,689
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                94,216Net
      Loss
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                (3,364,011
                                )
                                
                                
                                (3,364,011
                                )
                                
                                $
                                (3,364,011
                                )Balance
      at March 31, 2010
                                
                                $
                                65,629,942
                                
                                
                                $
                                -
                                
                                
                                $
                                (73,051,943
                                )
                                
                                $
                                (7,288,725
                                )




See
accompanying notes


10


CLEVELAND
BIOLABS, INC.




NOTES
TO FINANCIAL STATEMENTS




Note
1. Organization




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





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 and on a going concern basis which contemplates the
realization of assets and the liquidation of liabilities in the ordinary course
of business. The Company has incurred substantial losses from operations which
raises a question about its ability to continue as a going
concern.  The Company sustained a net loss of $3,364,011 for the three
months ended March 31, 2010 and $12,826,409 for the fiscal year ended
December 31, 2009.





The
Company continues to explore investment and licensing arrangements and also
plans to submit proposals for government contracts and grants over the next two
years totaling over $10 million and have three applications totaling nearly
$43 million that are pending approval. Many of the proposals will be submitted
to government agencies that have awarded contracts and grants to the Company in
the recent past.  Finally, the Company has implemented cost containment
efforts that permit the incurrence of those costs that are properly funded,
either through a government contract or grant or other capital sources. It
is expected that the successful implementation of the financing and cost
containment efforts identified above will allow the Company to continue to
realize its assets and liquidate its liabilities in the ordinary course of
business.





Note 2. Summary of Significant
Accounting Policies





A.
            Basis
      of Presentation - The information at March 31, 2010 and for the three
      months ended March 31, 2010 and March 31, 2009, 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, 2009, 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 March 31, 2010 and December 31,
    2009.





E.
            Equipment
      - Equipment is stated at cost and depreciated over the estimated useful
      lives of the assets (generally five years) using the straight-line method.
      Leasehold improvements are depreciated on the straight-line method over
      the shorter of the lease term or the estimated useful lives of the assets.
      Expenditures for maintenance and repairs are charged to expense as
      incurred. Major expenditures for renewals and betterments are capitalized
      and depreciated. Depreciation expense was $98,307 and $91,599 for the
      three months ended March 31, 2010 and 2009,
  respectively.





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


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 from the initial application date or the anticipated useful life
      of the patent. If the patent application is not approved, the costs
      associated the patent application will be expensed as part of selling,
      general and administrative expenses at that time. Capitalized intellectual
      property is reviewed annually for
impairment.





A portion
of this intellectual property is owned by the Cleveland Clinic Foundation
(“CCF”) and granted to the Company through an exclusive licensing agreement. As
part of the licensing agreement, CBLI agrees to bear the costs associated with
the preparation, filing and maintenance of patent applications relating to this
intellectual property. Gross capitalized patents and patents pending costs were
$711,538 and $688,355 for ten patent applications as of March 31, 2010 and
December 31, 2009, respectively. One of the CCF patent applications was approved
by several nations and is being amortized on a straight-line basis over the
weighted average estimated remaining life of approximately fifteen years. The
remainder of the CCF patent applications are still pending approval. The Company
recognized $2,417, and $0 in amortization expense for the three months ended
March 31, 2010 and 2009, respectively.





The
Company also has submitted patent applications as a result of intellectual
property exclusively developed and owned by the Company. Gross capitalized
patents pending costs were $210,034 and $199,371 for four patent applications as
of March 31, 2010 and December 31, 2009, respectively. The patent applications
are still pending approval.





The
Company has also submitted two patent applications as a result of the
collaborative research agreement with the Roswell Park Cancer Institute
(“RPCI”).  As part of this collaborative agreement, CBLI agrees to
bear the costs associated with the preparation, filing and maintenance of patent
applications related to the intellectual property being
developed.  Gross capitalized patents pending costs were $10,399 and
$8,340 for two patent applications as of March 31, 2010 and December 31, 2009,
respectively. The patent applications are still pending approval.





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





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





As of March 31, 2010WeightedAverageAccumulated
                    
                    
                    Net
      Intangible
                    
                    
                    AmortizationIntangible Assets
                    
                    Cost
                    
                    
                    Amortization
                    
                    
                    Asset
                    
                    
                    Period (Years)Patents
                    
                    $
                    150,888
                    
                    
                    $
                    6,991
                    
                    
                    $
                    143,897
                    
                    
                    
                    14.7Patent
      Applications
                    
                    
                    819,567
                    
                    
                    
                    -
                    
                    
                    
                    819,567
                    
                    
                    n.a.$
                    970,455
                    
                    
                    $
                    6,991
                    
                    
                    $
                    963,464





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





2010
                  
                  $
                  9,8012011
                  
                  $
                  9,8012012
                  
                  $
                  9,8012013
                  
                  $
                  9,8012014
                  
                  $
                  9,801





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


12


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





The
Series D Private Placement warrants carry a seven-year term and are exercisable
for common shares of the Company at $1.60 per share.  The Company has
a balance in accrued warrant liability of $10,725,784 and $8,410,379 at March
31, 2010 and December 31, 2009 for these warrants, respectively.





The 2010
Common Stock Equity Offering warrants carry a five-year term and are exercisable
six months after the grant date for common shares of the Company at $4.50 per
share.  The Company has a balance in accrued warrant liability of
$2,299,693 and $0 at March 31, 2010 and December 31, 2009 for these warrants,
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 hierarchy for the inputs used to measure fair
value.  The fair value hierarchy prioritizes the valuation inputs into
three broad levels as follows: Level 1 inputs are quoted prices (unadjusted) in
active markets for identical assets or liabilities; Level 2 inputs are quoted
prices for similar assets and liabilities in active markets or inputs that are
observable for the asset or liability, either directly or indirectly; and Level
3 inputs are unobservable inputs in which little or no market data exists,
therefore requiring a company to develop its own assumptions.  The
Company does not have any significant assets or liabilities measured at fair
value using Level 1 or Level 2 inputs as of March 31, 2010 and December 31,
2009.





The
Company carries its Series D Private Placement warrants at fair value totaling
$10,725,784 and $8,410,379 as of March 31, 2010 and December 31, 2009,
respectively.  The Company carries its 2010 Common Stock Equity
Offering warrants at fair value totaling $2,299,693 and $0 as of March 31, 2010
and December 31, 2009, respectively.  The Company used Level 3 inputs
for valuation of the warrants, and their fair values were determined using the
Black-Scholes option pricing model based on the following
assumptions:





Preferred
      D Warrant
                    
                    
                    2010
      Offering WarrantValue
      at
                    
                    
                    Value
      atMarch 31, 2010
                    
                    
                    March 31, 2010Stock
      price
                    
                    $
                    3.56
                    
                    
                    $
                    3.56Exercise
      price
                    
                    $
                    1.60
                    
                    
                    $
                    4.50Term
      in years
                    
                    
                    2.99
                    
                    
                    
                    2.67Volatility
                    
                    
                    100.87
                    %
                    
                    
                    104.53
                    %Annual
      rate of quarterly dividends
                    
                    
                    -
                    
                    
                    
                    -Discount
      rate- bond equivalent yield
                    
                    
                    1.60
                    %
                    
                    
                    1.41
                    %





Fair
      Value
                      
                      Fair
      Value Measurements atAs
      of
                      
                      March
      31, 2010March 31, 2010
                      
                      Using Fair Value HierarchyLiabilities
                      
                      
                      
                      Level 1
                      
                      Level 2
                      
                      Level 3Series
      D Preferred Warrant liability
                      
                      $
                      10,725,784
                      
                      
                      
                      
                      
                      $
                      10,725,7842010
      Offering Warrant liability
                      
                      $
                      2,299,693
                      
                      
                      
                      
                      
                      $
                      2,299,693Total
                      
                      $
                      13,025,477
                      
                      
                      
                      
                      
                      $
                      13,025,477





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


13


The
Company recognized a fair value measurement loss of $2,380,019 and $1,384,772 on
the Series D Private Placement warrants for the three months ended March 31,
2010 and March 31, 2009, respectively.  The Company recognized a fair
value measurement gain of $648,923 and $0 on the 2010 Common Stock Equity
Offering warrants for the three months ended March 31, 2010 and March 31, 2009,
respectively.  In total, the Company recognized a fair value
measurement loss of $1,731,096 and $1,384,772 for the three months ended March
31, 2010 and March 31, 2009, respectively.





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





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.





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.





For the
three months ended March 31, 2010, the Company recognized $4,144 as revenue
resulting in a balance of deferred revenue of $2,325,472 at March 31, 2010. At
December 31, 2009, the balance in deferred revenue was $2,329,616.





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.


14





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 extends the expiration date of the Plan to April 29,
      2018.  As of March 31, 2010 there were 2,634,682 stock options
      and 527,594 shares granted under the Amended Plan and 83,104 shares
      forfeited leaving 920,828 shares of stock to be awarded under the Amended
      Plan.





During
the three months ended March 31, 2010, the Company issued 144,029 stock
options and 20,338 shares of common stock for the following:





·
            63,029
      stock options issued to employees and consultants under the Company’s
      incentive bonus plan.


·
            60,000
      stock options to two new employees as part of their
      compensation.


·
            16,000
      stock options to a consultant for payment of corporate strategy consulting
      services rendered.


·
            5,000
      stock options to two consultants for payment of accounting services
      rendered.


·
            60,724
      shares of common stock to three consultants for payment of corporate
      strategy consulting services rendered.  The shares were valued
      at $219,922.


·
            28,388
      shares of common stock to five consultants for payment of financial and
      investor relations consulting services rendered.  The shares
      were valued at $77,569.





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





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


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


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


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


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


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


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




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 March 31, 2010 and March 31, 2009, the Company granted
144,029 and 0 stock options, respectively. The Company recognized a total of
$330,246 and $101,563 in expense related to stock options for the three months
ended March 31, 2010 and March 31, 2009, respectively.  The Company
also recaptured $38,787 and $37,878 of previously recognized expense due to the
forfeiture of non-vested stock options during the three months ended March 31,
2010 and March 31, 2009, respectively.


15





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





2010
      YTD
                            
                            
                            2009Risk-free
      interest rate
                            
                            
                            2.37-2.75
                            %
                            
                            
                            1.87-2.74
                            %Expected
      dividend yield
                            
                            
                            0
                            %
                            
                            
                            0
                            %Expected
      life
                            
                            5-6
      years
                            
                            
                            5-6
      yearsExpected
      volatility
                            
                            85.35-89.44
                            %
                            
                            
                            84.13-90.06
                            %




The
weighted average, estimated grant date fair values of stock options granted
during the three months ended March 31, 2010 and March 31, 2009 were $2.67 and
$0, respectively.




The
following tables summarize the stock option activity for the three months ended
March 31, 2010 and March 31, 2009, respectively.




Weighted
                    
                    WeightedAverage
                    
                    AverageExercise
                    
                    RemainingPrice
      per
                    
                    ContractualShares
                    
                    
                    Share
                    
                    Term
      (in Years)Outstanding,
      December 31, 2009
                    
                    
                    2,517,007
                    
                    
                    $
                    5.46Granted
                    
                    
                    144,029
                    
                    
                    $
                    3.73Exercised
                    
                    
                    40,862
                    
                    
                    $
                    1.95Forfeited,
      Canceled
                    
                    
                    51,927
                    
                    
                    $
                    7.07Outstanding,
      March 31, 2010
                    
                    
                    2,568,247
                    
                    
                    $
                    5.39
                    
                    7.91Exercisable,
      March 31, 2010
                    
                    
                    2,260,372
                    
                    
                    $
                    5.18
                    
                    7.85




Weighted
                        
                        WeightedAverage
                        
                        AverageExercise
                        
                        RemainingPrice per
                        
                        ContractualShares
                        
                        
                        Share
                        
                        Term (in Years)Outstanding,
      December 31, 2008
                        
                        
                        1,948,874
                        
                        
                        $
                        6.17Granted
                        
                        
                        -
                        
                        
                        
                        n/aExercised
                        
                        
                        10,132
                        
                        
                        $
                        0.67Forfeited,
      Canceled
                        
                        
                        3,313
                        
                        
                        $
                        4.00Outstanding,
      March 31, 2009
                        
                        
                        1,935,429
                        
                        
                        $
                        6.20
                        
                        8.29Exercisable,
      March 31, 2009
                        
                        
                        1,664,779
                        
                        
                        $
                        5.60
                        
                        8.24




The
Company also recognized $641,898 and $202,083 in expense for shares issued under
the Amended Plan during the three months ended March 31, 2010 and March 31,
2009, respectively.   The Company issued a total of 190,062
shares and 80,000 shares during the three months ended March 31, 2010 and March
31, 2009, respectively.  In addition, the Company recognized $3,333
and $8,333 in compensation expense related to the amortization of restricted
shares during the three months ended March 31, 2010 and March 31, 2009,
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.


16




The
calculation of basic and diluted net loss per share is as follows:





Three Months EndedMarch 31, 2010
                  
                  
                  March 31, 2009Net
      loss available to common stockholders
                  
                  $
                  (3,364,011
                  )
                  
                  $
                  (3,227,908
                  )Net
      loss per share, basic and diluted
                  
                  $
                  (0.14
                  )
                  
                  $
                  (0.24
                  )Weighted-average
      shares used in computing net loss per share, basic and
    diluted
                  
                  
                  23,512,617
                  
                  
                  
                  13,607,114




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





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




Common
      Equivalent Securities
                    
                    March
      31, 2010
                    
                    
                    March
      31, 2009Preferred
      Shares
                    
                    
                    -
                    
                    
                    
                    8,084,185Warrants
                    
                    
                    9,910,763
                    
                    
                    
                    9,201,874Options
                    
                    
                    2,568,247
                    
                    
                    
                    1,935,429Total
                    
                    
                    12,479,010
                    
                    
                    
                    19,221,488







R.
            Concentrations
      of Risk - Grant and contract revenue was comprised wholly from grants and
      contracts issued by federal and state governments and accounted for 100.0%
      and 100.0% of total revenue for the three months ended March 31, 2010 and
      March 31, 2009, 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 the Company 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 provide safety
and liquidity.





S.
            Foreign
      Currency Exchange Rate Risk - The Company has entered into a manufacturing
      agreement to produce one of its drug compounds with a foreign third party
      and is required to make payments in the foreign currency. As a result, the
      Company's financial results could be affected by changes in foreign
      currency exchange rates. Currently, the Company's exposure primarily
      exists with the Euro. As of March 31, 2010, the Company is obligated to
      make payments under the agreements of 466,667 Euros. As of March 31, 2010,
      the Company has not purchased any forward contracts for Euros and,
      therefore, at March 31, 2010, had foreign currency commitments of $630,934
      for Euros given prevailing currency exchange spot
  rates.





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


17




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





Note
3. Stock Transactions




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





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





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




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





If the
Company did not meet certain milestones, the Conversion Price would, unless the
closing price of the Common Stock was greater than $3.69 on the date the
Milestone is missed, be reduced to 80% of the Conversion Price in effect on that
date (“Milestone Adjustment”).  In addition to the Milestone
Adjustment, on August 13, 2009 ( “Initial Adjustment Date”), the Conversion
Price was reduced to 95% of the then Conversion Price, and on each three month
anniversary of the Initial Adjustment Date, the then Conversion Price was to be
reduced by $0.05 (subject to adjustment) until maturity or converted as
described below.  The Conversion Price was 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 exceeded 300% of the then effective Conversion Price and
various other equity conditions were satisfied, the Company could cause the
Series D Preferred to automatically convert into shares of Common
Stock.





At any
time after February 13, 2012, the Company could, 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.


18




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





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





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





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 exists.  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.




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




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


19




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





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





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





On March
2, 2010, the Company issued 1,538,462shares of common stock
and Common Stock Purchase Warrants to purchase an aggregate of 1,015,384shares of Common Stock,
for an aggregate purchase price of $5,000,000 (the “2010 Common Stock Equity
Offering”). These warrants are exercisable commencing six months following
issuance and expire on March 2, 2015.  The placement agent also
received additional warrants to purchase 123,077 shares of Common
Stock.




The fair
value of the 1,138,461 warrants issued with the 2010 Common Stock Equity
Offering was $2,948,617 and was computed using the Black-Scholes option pricing
model using the following assumptions:





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




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




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.


20




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 March 31, 2010, $350,000 in
milestone payments have been made under one of these agreements. There are no
milestone payments or royalties on net sales accrued for any of the three
agreements as of March 31, 2010 and December 31, 2009.




From time
to time, the Company may have certain contingent liabilities that arise in the
ordinary course of business. The Company accrues for liabilities when it is
probable that future expenditures will be made and such expenditures can be
reasonably estimated. For all periods presented, the Company is not a party to
any pending 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 $91,625 and
$86,719 for the three months ended March 31, 2010 and March 31, 2009,
respectively.




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




OperatingLeases2010
                    
                    
                    343,6562011
                    
                    
                    311,8032012
                    
                    
                    144,3752013
                    
                    
                    -$
                    799,834




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 three months ended
March 31, 2010 and March 31, 2009:




Weighted
      AverageOptions
                      
                      
                      Exercise Price Per ShareOutstanding,
      December 31, 2009
                      
                      
                      2,517,007
                      
                      
                      $
                      5.46Granted
                      
                      
                      144,029
                      
                      
                      $
                      3.73Exercised
                      
                      
                      40,862
                      
                      
                      $
                      1.95Forfeited,
      Canceled
                      
                      
                      51,927
                      
                      
                      $
                      7.07Outstanding,
      March 31, 2010
                      
                      
                      2,568,247
                      
                      
                      $
                      5.39


Weighted AverageOptions
                  
                  
                  Exercise Price Per ShareOutstanding,
      December 31, 2008
                  
                  
                  1,948,874
                  
                  
                  $
                  6.17Granted
                  
                  
                  -
                  
                  
                  
                  n/aExercised
                  
                  
                  10,132
                  
                  
                  $
                  0.67Forfeited,
      Canceled
                  
                  
                  3,313
                  
                  
                  $
                  4.00Outstanding,
      March 31, 2009
                  
                  
                  1,935,429
                  
                  
                  $
                  6.20


21




The
Company has entered into warrant agreements with strategic partners, consultants
and investors with exercise prices ranging from $1.60 to $10.00. 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:




Weighted Average
                  
                  
                  Number of CommonWarrants
                  
                  
                  Exercise Price Per Share
                  
                  
                  Shares Exerciseable IntoOutstanding,
      December 31, 2009
                  
                  
                  6,956,673
                  
                  
                  $
                  3.71
                  
                  
                  
                  8,641,893Granted
                  
                  
                  1,138,461
                  
                  
                  $
                  4.50
                  
                  
                  
                  1,138,461Exercise
      Price Adjustment
                  
                  
                  
                  
                  
                  $
                  (0.14
                  )
                  
                  
                  272,127Exercised
                  
                  
                  101,795
                  
                  
                  $
                  1.44
                  
                  
                  
                  136,000Forfeited,
      Canceled
                  
                  
                  3,973
                  
                  
                  $
                  1.39
                  
                  
                  
                  5,718Outstanding,
      March 31, 2010
                  
                  
                  7,989,366
                  
                  
                  $
                  3.85
                  
                  
                  
                  9,910,763




Weighted Average
                  
                  
                  Number of CommonWarrants
                  
                  
                  Exercise Price Per Share
                  
                  
                  Shares Exerciseable IntoOutstanding,
      December 31, 2008
                  
                  
                  3,453,268
                  
                  
                  $
                  8.86
                  
                  
                  
                  3,453,268Granted
                  
                  
                  4,265,122
                  
                  
                  $
                  1.20
                  
                  
                  
                  4,265,122Exercise
      Price Adjustment
                  
                  
                  
                  
                  
                  $
                  (3.07
                  )
                  
                  
                  1,483,484Exercised
                  
                  
                  -
                  
                  
                  
                  n/a
                  
                  
                  
                  -Forfeited,
      Canceled
                  
                  
                  -
                  
                  
                  
                  n/a
                  
                  
                  
                  -Outstanding,
      March 31, 2009
                  
                  
                  7,718,390
                  
                  
                  $
                  8.92
                  
                  
                  
                  9,201,874




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





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





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




Note
5. Subsequent Events




No
material subsequent events have occurred since the balance sheet date of March
31, 2010.


22


Item2.  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, 2009. This management's
discussion and analysis of financial condition and results of operations should
be read in conjunction with our financial statements and the related notes
included elsewhere in this filing and in our Annual Report on Form 10-K for the
year ended December 31, 2009.





OVERVIEW




Cleveland
BioLabs, Inc. is a biotechnology company focused on developing biodefense,
tissue protection and cancer treatment drugs based on the concept of modulation
of cell death for therapeutic benefit. We were incorporated in Delaware and
commenced business operations in June 2003. We have devoted substantially all of
our resources to the identification, development and commercialization of new
types of drugs for protection of normal tissues from exposure to radiation and
other stresses, such as toxic chemicals and cancer treatments. Our pipeline
includes products from two primary families of compounds: protectans and
curaxins. We are developing protectans as drug candidates that protect healthy
tissues from acute stresses such as radiation, chemotherapy and ischemia
(pathologies that develop as a result of blocking blood flow to a part of the
body). Curaxins are being 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. Our common stock
is listed on the NASDAQ Capital Market under the symbol “CBLI.”




Technology





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





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





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





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





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





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





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


23




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




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





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 - 24 months.
Another drug candidate, Curaxin CBLC102, demonstrated activity and safety in a
Phase IIa clinical trial concluded in late 2008.




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 and complete
      submission of the Biologic License Application, or BLA, with the FDA in
      mid-2011.




·
            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, or 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, or
      AFRRI.




·
            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.




RESEARCH
AND DEVELOPMENT




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




There are
significant risks and uncertainties inherent in the preclinical and clinical
studies associated with our R&D projects. As a result, the costs to complete
such projects, as well as the period in which net cash outflows from such
programs are expected to be incurred, may not be reasonably estimated. From our
inception to March 31, 2010, we spent $61,286,175 on R&D.


24




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





The
testing, marketing and manufacturing of any product for use in the U.S. will
require approval from the FDA. We cannot predict with any certainty the amount
of time necessary to obtain such FDA approval and whether any such approval will
ultimately be granted. Preclinical and clinical trials may reveal that one or
more products are ineffective or unsafe, in which event further development of
such products could be seriously delayed or terminated. Moreover, obtaining
approval for certain products may require testing on human subjects of
substances whose effects on humans are not fully understood or documented.
Delays in obtaining FDA or any other necessary regulatory approvals of any
proposed 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
U.S. that perform roles similar to that of the FDA, uncertainties similar to
those stated above will also exist.





PRODUCTS
IN DEVELOPMENT





Protectans





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





Nine sets
of patent applications have been filed over the past six years around various
aspects and qualities of the protectan family of compounds. The first patent
covering the method of protecting a mammal from radiation using flagellin or its
derivatives was granted by the U.S. Patent and Trademark Office (US Patent No.
7,638,485 titled "Modulating Apoptosis") and the European Patent Office
(European Publication Number FP 1706133, titled "Methods of Protecting Against
Radiation Using Flagellin."). This patent was also granted by the nine member
countries of the Eurasian Patent Organization, and the Ukraine. We believe
that with the patent applications filed to date in the U.S. and internationally
around various properties of protectan compounds, we have protected the
potentially broad uses of our protectan technology.





We spent
approximately $13,738,983 and $8,995,500 on R&D for protectans for all
applications in the fiscal years ended December 31, 2009 and 2008, respectively.
For the quarters ended March 31, 2010 and 2009 we spent $3,592,570 and
$2,234,621, respectively. From our inception to March 31, 2010, we spent
$45,843,949 on research and development 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, or ARS, in defense scenarios, and
protection from acute organ failure. Protectan CBLB502 is administered through
intramuscular injection.





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


25




We spent
approximately $13,732,416 and $8,021,040 on R&D for Protectan CBLB502 in the
fiscal years ended December 31, 2009 and 2008, respectively. For the quarters
ended March 31, 2010 and 2009 we spent $3,592,570, and $2,229,467 respectively
on research and development for Protectan CBLB502. From our inception to March
31, 2010, we spent $40,703,112 on research and development 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, or 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.





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





We have
successfully established current Good Manufacturing Practices, or 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. The 50 participants in the study were assessed for
adverse side effects over a 28-day time period and blood samples were obtained
to assess the effects of Protectan CBLB502 on various biomarkers. Data from
these subjects indicates that Protectan CBLB502 was well tolerated and that
normalized biomarker results corresponded to previously demonstrated activity in
animal models of ARS. A pattern of biomarker production was observed consistent
with those patterns seen in animals during mitigation of radiation-induced
injury by dosing with Protectan CBLB502.




In
January 2010, we began dosing in the second human safety study for CBLB502. This
safety study will include a total of 100 healthy volunteers randomized among
four dosing regimens of CBLB502. Our goal is for dosing and data analysis of
this trial to be concluded in mid-2010. We would then anticipate moving forward
with the double-blind definitive safety study in a larger group of healthy
volunteers. We believe the addition of the intermediate 100-subject trial will
be very beneficial for both the potential commercialization of CBLB502 and our
regulatory process towards FDA licensure.




Participants
in the 100-subject study will be assessed for adverse side effects and blood
samples will be obtained to assess the effects of CBLB502 on various biomarkers.
The primary objectives of this study are to gather additional data on safety,
pharmacokinetics, and cytokine biomarkers in a larger and broader subject
population in order to finalize an appropriate dose to take forward and
determine the size of a definitive human safety study. We are working towards
completing a BLA filing for FDA licensure of Protectan CBLB502 for non-medical
applications in the mid-2011.





The
Defense Threat Reduction Agency of the U.S. Department of Defense, or DoD,
awarded us a $1.3 million grant in March 2007, to fund “development leading to
the acquisition” of Protectan CBLB502 as a radiation countermeasure, in
collaboration with AFRRI, which has also received significant independent
funding for work on Protectan CBLB502.





In March
2008, the DoD, awarded us a contract valued at up to $8.9 million over eighteen
months through the Chemical Biological Medical Systems Joint Project Management
Office Broad Agency Announcement, or BAA, for selected tasks in the advanced
development of Protectan CBLB502 as a Medical Radiation Countermeasure, or MRC,
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, or NIAID, of the National Institutes of Health,
or 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


26




In
September 2008, the Biomedical Advanced Research and Development Authority, or
BARDA, of the Department of Health and Human Services, or 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 has since awarded the second and third milestone options under the
contract for $1.47 million and $0.46 million, respectively. 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.





We spent
approximately $13,676,289 and $7,264,813 on R&D for the non-medical
applications of Protectan CBLB502 in the fiscal years ended December 31, 2009
and 2008, respectively. For the quarters ended March 31, 2010 and 2009 we spent
$3,592,570 and $2,173,341 respectively on research and development for
biodefense applications of Protectan CBLB502. From our inception to March
31, 2010, we spent $38,870,056 on research and development for the biodefense
applications of Protectan CBLB502.





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





In
February 2010, we responded to a Request for Proposal, or RFP, issued by the DoD
for the advanced development, FDA licensure and delivery of a MRC. As stated in
the RFP, the ultimate goal of the MRC project is to select, develop, and
manufacture a FDA-approved drug/biologic to increase survival and decrease
incapacity such that forces can maintain operational effectiveness within a
contaminated area following radiation exposure. The solicitation specifically
sought a drug/biologic intended for use following exposure to ionizing radiation
to prevent/reduce the extent of radiation injury, specifically targeting the GI
tract that is safe and efficacious when administered at least four hours
following the radiation exposure and has a minimal logistical burden in terms of
storage, delivery and administration. Potential candidates were required to
submit data demonstrating safety in humans and efficacy in animal models as
required to obtain an FDA license under the animal efficacy rule. A further
requirement was evidence of progress toward achieving cGMP compliance as part of
their technical proposal. If awarded, exercise of contract options could result
in purchase and delivery of products to meet the initial requirements
established by the DoD in order to protect service members exposed to ionizing
radiation.




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


Regulatory
Status





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


27


As part
of this expedited approval process, the FDA has indicated that it intends to
engage in a highly interactive review of Investigational New Drug, or IND,
applications, New Drug Applications, or NDA and Biologic License Applications,
or BLA and to provide for accelerated review and licensure of certain medical
products for counterterrorism applications, including granting eligible
applications “Fast Track” status. Based on concurrence from the FDA reached
during a December 2009 meeting, we will be applying for Fast Track status. Fast
Track status will allow us to have additional interactions with the FDA,
including extra in-person meetings and faster review of our BLA filing, which
will expedite implementation of the CBLB502 development plan and preparation and
approval of the BLA.





In cases
where priority review is given to Fast Track applications, the applicant is
permitted to submit applications on a rolling basis.





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




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





·
            Conducting
      pivotal animal efficacy studies with the cGMP manufactured drug candidate.
      We expect to complete these studies in 2010. The studies have an
      approximate cost of $2,500,000 and are covered by a government development
      contract.




·
            Performing
      a second Phase I safety study in approximately 100 healthy human
      volunteers started in January 2010. This study has an approximate cost of
      $1,400,000 and is covered by a government development
    contract




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





·
            Filing
      a BLA which we expect to complete in the mid-2011.  At the
      present time, the costs of the filing cannot be approximated with any
      level of certainty.





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





Medical
Applications





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





Protectan
CBLB502 has demonstrated the ability to reduce the toxicities of a
chemotherapeutic drug, cisplatin (Platinol), broadly used for the treatment of
ovarian, endometrial, head and neck, lung, stomach and other types of cancer in
animal models. Cisplatin treatment was used in the study as an example of
chemotherapy-associated toxicity. Cisplatin injected at toxic doses is known to
induce myelosuppression (suppression of bone marrow) and nephrotoxicity (kidney
damage). The prospect of increasing patients' tolerance to chemotherapeutic
drugs and optimizing treatment regimens would be a significant improvement in
cancer treatment. It 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.


28


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





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





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




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





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





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




·
            Submitting
      an amendment to our CBLB502 IND application and receiving allowance from
      the FDA. We expect to submit the amendment in 2010. We estimate that the
      approximate cost of filing will be less than $100,000 which is covered by
      a government grant.





·
            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 at an approximate
      cost of $1,500,000 which is covered by a government development
      grant.




·
            Performing
      an additional Phase II efficacy study on a larger number of cancer
      patients. At the present time, the costs and the scope of this study
      cannot be approximated with any level of
  certainty.





·
            Performing
      a Phase III human clinical study on a large number of cancer patients and
      filing a BLA with the FDA. At the present time, the costs and scope of
      these steps cannot be approximated with any level of
      certainty.





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





Protectan
CBLB612





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


29




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





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





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





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





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





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





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





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




·
              Conducting
      pivotal animal safety studies with cGMP-manufactured
    CBLB612;
  ·
              Submitting
      an IND application and receiving approval from the FDA to conduct clinical
      trials;
 
 ·
              Performing
      a Phase I dose-escalation human
study;
  30
  ·
              Performing
      Phase II and Phase III human efficacy studies using the dose of CBLB612
      selected from the previous studies previously shown to be safe in humans
      and efficacious in animals; and
 
 ·
              Filing
      a New Drug Application.




Because
of the uncertainties of the scope of the remaining clinical studies, we cannot
currently estimate when any development efforts may be completed or the cost of
completion. Nor can we estimate when we may realize any cash flow from the
development of Protectan CBLB612.





We spent
approximately $6,567 and $974,459 on R&D for Protectan CBLB612 in the fiscal
years ended December 31, 2009 and December 31, 2008, respectively. For the
quarters ended March 31, 2010 and 2009, we spent $0 and $5,153 respectively on
R&D for Protectan CBLB612. From our inception to March 31, 2010, we
spent $3,136,941 on research and development for Protectan CBLB612. Further
development and extensive testing will be required to determine its technical
feasibility and commercial viability.





Curaxins





Curaxins
are small molecules that are intended to destroy tumor cells by simultaneously
targeting two regulators of apoptosis. Our initial test results indicate that
curaxins may be effective against a number of malignancies, including RCC,
soft-tissue sarcoma, and hormone-refractory prostate cancer.





The
original focus of our drug development program was to develop drugs to treat one
of the most treatment-resistant types of cancer, RCC. Unlike many cancer types
that frequently mutate or delete p53, one of the major tumor suppressor genes,
RCC belongs to a rare category of cancers that typically maintain a wild type
form of this protein. Nevertheless, RCC cells are resistant to apoptosis,
suggesting that in spite of its normal structure, p53 is functionally disabled.
The work of our founders has shown that p53 function is indeed inhibited in RCC
by an unknown dominant factor. We have established a drug discovery program to
identify small molecules that selectively destroy tumor cells by restoring the
normal function to functionally impaired p53 in RCC. This program yielded a
series of chemicals with the desirable properties named curaxins (CBLC100
series). We have isolated three chemical classes of curaxins. One of them
includes relatives of 9-aminoacridine, the compound that is the core structure
of many existing drugs. Pre-existing information about this compound has allowed
us to bypass the preclinical development and Phase I studies and bring one of
our drug candidates into Phase IIa clinical trials, saving years of R&D
efforts and improving the probability of success.





One of
the most important outcomes of this drug discovery program was the
identification of the mechanism by which curaxins deactivate NF-kB. This
mechanism of action makes curaxins potent inhibitors of the production and the
activity of NF-kB not only in its stimulated form, but also in its basal form.
The level of active NF-kB is usually also increased in cancer cells. Moreover,
due to curaxin-dependent functional conversion of NF-kB-DNA complexes, the cells
with the highest basal or induced NF-kB activity are supposed to be the most
significantly affected by curaxins. Clearly, this paradoxical activity makes
deactivation of NF-kB by curaxins more advantageous compared to conventional
strategies targeting NF-kB activators.





The
discovery of the mechanism of action of curaxins allowed us to predict and later
experimentally verify that curaxins could be used for treatment of multiple
forms of cancers, including hormone-refractory prostate cancer, hepatocellular
carcinoma, multiple myeloma, acute lymphocytic leukemia, acute myeloid leukemia,
soft-tissue sarcomas and several others.





A
significant milestone in the curaxin program was achieved with a breakthrough in
deciphering the finer details of the mechanism of action of these
compounds.  Successful identification of the exact cellular moiety
that binds to curaxins has provided a mechanistic explanation for the
unprecedented ability of these compounds to simultaneously target several signal
transduction pathways.





This
additional mechanistic knowledge enabled us to discover additional advantages of
curaxins and to rationally design treatment regimens and drug combinations,
which have since been validated in experimental models.  In addition,
this understanding further strengthens our intellectual property position for
this exciting class of principally new anticancer drugs.





Nine sets
of patent applications have been filed around the curaxin family of
compounds.





We spent
approximately $592,690 and $3,233,872 on R&D for curaxins overall in the
fiscal years ended December 31, 2009 and 2008, respectively. For the
quarters ended March 31, 2010 and 2009, we spent $71,033 and $268,261
respectively on R&D for curaxins. From our inception to March 31, 2010,
we spent $12,305,286 on research and development for
curaxins.


31


In
December 2009, we entered into a joint venture, Incuron, with Bioprocess Capital
Ventures, or BCV, a Russian Federation venture capital fund, to develop our
curaxin compounds for cancer applications. According to the terms of the
agreement, we will transfer the rights of curaxin anticancer molecules to the
new joint venture, and BCV will contribute approximately $18 million over three
payments to support development of the compounds. The first payment of $5.7
million is due in May 2010 following formation of the Incuron entity, which was
announced in April 2010.The ensuing payments are based upon achievement of predetermined
development milestones. The first milestone payment of $6.4 million shall be
made upon approval to begin clinical trials on oncology patients with a selected
lead curaxin compound, or upon progression of a clinical program of CBLC102. The
second milestone payment shall be made upon completion of at least one Phase
I/II trial in cancer patients. We will serve as a subcontractor to Incuron to
support certain mechanistic studies and oversee clinical
development.





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
launched a Phase II study with CBLC102 in January 2007 to provide proof of
safety and of anti-neoplastic activity in cancer patients and establish a
foundation for clinical trials of our new proprietary curaxin molecules, which
have been designed and optimized for maximum anticancer effects, as well as for
additional treatment regimens based on ongoing research into the precise
molecular mechanisms of action of curaxins. Thirty-one patients were
enrolled in the Phase II study of CBLC102 as a monotherapy in late stage,
hormone-refractory taxane-resistant prostate cancer.  All patients had
previously received hormonal treatment for advanced prostate cancer and 28 of
the 31 had also previously received chemotherapy.  One patient had a
partial response, while 50% of the patients exhibited a decrease or
stabilization in PSA velocity, a measure of the speed of prostate cancer
progression.  CBLC102 was well tolerated and there were no serious
adverse events attributed to the drug.  The trial demonstrated
indications of activity and a remarkable safety profile in one of the most
difficult groups of cancer patients.





The
indications of activity and remarkable safety demonstrated in the CBLC102 Phase
II trial, in conjunction with new mechanistic discoveries, point to additional
potential treatment paradigms including combination therapies with existing
drugs or prospective use as a cancer prevention agent.  Additional
potential uses for CBLC102 will be explored in conjunction with our strategic
partners at RPCI and through the Incuron joint venture.





New
insights into the mechanism of action of Curaxin CBLC102 were published in one
of the world’s leading cancer journals, Oncogene (Guo et al., Oncogene, 2009,
28:1151-1161).The
published study uncovered additional molecular mechanisms underlying the
anticancer activity of CBLC102, which was previously known to involve
simultaneous targeting of two key regulators of the controlled cell death
process (p53 and NF-kB). It has now been shown that treatment of cancer cells
with CBLC102 results in the inhibition of the molecular pathway (PI3K/Akt/mTOR)
that is important for cancer cell survival and is considered to be a highly
relevant anticancer treatment target.




Another
breakthrough discovery related to the mechanism of action of CBLC102 was
published in an international health science journal, Cell Cycle (Neznanov et
al., Cell Cycle 8:23, 1-11; December 1, 2009). This study examined the ability
of CBLC102 to inhibit heat shock response, a major adaptive pro-survival pathway
that rescues cells from stressful conditions involving accumulation of misfolded
proteins (known as proteotoxic stress). Tumor cells typically become dependent
on constitutive activity of this salvaging mechanism making them selectively
susceptible to its inhibitors, especially if applied in combination with certain
cancer therapies provoking proteotoxic stress.




The
potential use of Curaxins as adjuvants to cancer therapies inducing proteotoxic
stress, such as bortezomib (Velcade(R)) or thermotherapy, opens a whole new
avenue of potential treatment options that may broaden the spectrum of
responding tumors by cutting off an escape mechanism.




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





We
anticipate that additional clinical efficacy studies will be required before we
are able to apply for FDA licensure. Because of the uncertainties of the scope
of the remaining clinical studies, we cannot currently estimate when any
development efforts may be completed or the cost of completion. Nor can we
estimate when we may realize any cash flow from the development of Curaxin
CBLC102.


32




We spent
approximately $262,637 and $1,741,194 on R&D for Curaxin CBLC102 in the
fiscal years ended December 31, 2009 and 2008, respectively. For the quarters
ended March 31, 2010 and 2009, we spent $35,201 and $147,177 respectively on
research and development for Curaxin CBLC102. From our inception to March
31, 2010, we spent $6,764,320 on research and development 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 through the
Incuron joint venture.





Six sets
of patent applications have been filed for other curaxins.





We spent
approximately $330,053 and $1,492,678 on R&D for other curaxins in the
fiscal years ended December 31, 2009 and 2008, respectively. For the quarters
ended March 31, 2010 and 2009, we spent $35,803 and $121,084 respectively on
R&D for other curaxins. From our inception to March 31, 2010, we spent
$5,540,965 on research and development 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 $2,958,929 for the three
months ended March 31, 2009 to $3,364,011 for the three months ended March 31,
2010, an increase of $405,082 or 13.7%. We incurred non-cash charges of
depreciation and amortization of $100,724 and $91,599, non-cash salaries and
consulting fees of $936,690 and $274,101, a change in the value of warrants of
$1,731,096 and $1,384,772 for the three months ended March 31, 2010 and 2009,
respectively.  Excluding these non-cash charges, our net loss
decreased $612,956 or 50.7% from $1,208,457 for the three months ended March 31,
2009 to $595,501 for three months ended March 31, 2010. This decrease was due to
increased government funding and our cost containment efforts that include
incurring R&D costs that are predominantly supported through government
funding or direct investment and reducing general and administrative
costs.





Equity
Overview





On March
16, 2007, we consummated a transaction with various accredited investors
pursuant to which we agreed to sell to the investors, in a private placement, an
aggregate of approximately 4,288,712 shares of Series B Convertible Preferred
Stock and Series B Warrants to purchase approximately 2,144,356 shares of our
common stock pursuant to a securities purchase agreement of the same
date. The Series B Warrants expire on March 15, 2012 and had an initial per
share exercise price of $10.36. The aggregate purchase price paid by the
investors for the Series B Preferred and Series B Warrants was approximately
$30,000,000. Also issued in the transaction as partial compensation for services
rendered by the placement agents were Series C Warrants, which had an initial
per share exercise price of $11.00 and were originally exercisable for 267,074
shares of common stock. The Series C Warrants also expire on March 15, 2012.
Afterrelated fees
and expenses, we received net proceeds of approximately $29,000,000. On
September 16, 2009, the outstanding Series B Preferred shares reached their
termination date and, in accordance with their terms, were automatically
converted into shares of common stock.




On
February 13, 2009, March 20, 2009, and March 27, 2009, we entered into purchase
agreements with various accredited investors, pursuant to which we agreed to
sell to these investors an aggregate of 542.84 shares of Series D Convertible
Preferred Stock and Series D Warrants to purchase an aggregate of 3,877,386
shares of the Company’s common stock.  The warrants have a seven-year
term and a per share exercise price of $1.60. Each share of Series D Preferred
was convertible into the number of shares of common stock equal to (1) the
stated value of the share ($10,000), divided by (2) the then-current conversion
price (initially $1.40, but subject to adjustment as described
below). At the initial conversion price of $1.40, each share of Series D
Preferred was convertible into approximately 7,143 shares of common
stock. The aggregate purchase price paid by the investors for the Series D
Preferred and the warrants was approximately $5,428,307 (representing $10,000
for each share together with a warrant).  After related fees and
expenses, we received net proceeds of approximately $4,460,000. In consideration
for its services as exclusive placement agent, Garden State Securities received
cash compensation and warrants to purchase an aggregate of approximately 387,736
shares of common stock.


33




The
conversion price of the Series D Preferred was subject to certain automatic
adjustments, pursuant to which it reduced from $1.40 to $1.33 on August 13, 2009
and from $1.33 to $1.28 on November 13, 2009. On December 31, 2009, the
conversion price of the Series D Preferred reduced from $1.28 to $1.02 because
the Company failed to meet a particular development milestone by the end of
2009. At the conversion price of $1.02, each shares of Series D Preferred was
convertible into approximately 9,804 shares of common stock. Upon completion of
the Series D Preferred transaction and upon each adjustment to the conversion
price of the Series D Preferred, the exercise prices of the Company’s Series B
Warrants and Series C Warrants, and the exercise price of certain other warrants
issued prior to the Company’s initial public offering, were reduced pursuant to
weighted-average anti-dilution provisions. In addition to the adjustment to the
exercise prices of these warrants, the aggregate number of shares issuable upon
exercise of these warrants increased on each such occasion.




On
February 9, 2010, all outstanding shares of Series D Preferred automatically
converted into approximately 4,576,979 shares of common stock at the conversion
price of $1.02, as a result of the Company’s closing sales price being above a
certain level for 20 consecutive trading days as well as the satisfaction of
certain other conditions.





On
February 25, 2010, we entered into a Securities Purchase Agreement with various
accredited investors, pursuant to which we agreed to sell an aggregate of
1,538,462 shares of our common stock and warrants to purchase an aggregate
of 1,015,384 shares of our common stock, for an aggregate purchase price of
$5,000,000. The transaction closed on March 2, 2010. After related fees and
expenses, the Company received net proceeds totaling approximately $4,500,000.
The Company intends to use the proceeds of the private placement for working
capital purposes. The common stock was sold at a price of $3.25 per share,
and the warrants have an exercise price of $4.50 per share, subject to future
adjustment for various events, such as stock splits or dilutive issuances. The
warrants are exercisable commencing six months following issuance and expire on
March 2, 2015. For its services as placement agent, Rodman & Renshaw, LLC
received gross cash compensation in the amount of approximately $350,000, and it
and its designees collectively received warrants to purchase
123,077 shares of common stock. The common stock and the shares of common
stock underlying the warrants issued to the purchasers and Rodman & Renshaw
have not been and will not be registered under the Securities Act of
1933.





Immediately
after the completion of this transaction on March 2, 2010, pursuant to
weighted-average anti-dilution provisions:




·
              the
      exercise price of the  Series B Warrants reduced from $6.37 to
      $5.99, and the aggregate number of shares of common stock issuable upon
      exercise of the Series B Warrants increased from 3,847,276 to 4,091,345;
      and
 
 ·
              the
      exercise price of the Series C Warrants reduced from $6.76 to $6.35, and
      the aggregate number of shares of common stock issuable upon exercise of
      the Series C Warrants increased from 434,596 to
  462,654.




Critical
Accounting Policies





Our
management's discussion and analysis of our financial condition and results of
operations is based upon our financial statements, which have been prepared in
accordance with 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 SEC, are those that
are most important to the portrayal of our financial condition and results of
operations and require our most difficult and subjective judgments and estimates
of matters that are inherently uncertain. While all decisions regarding
accounting policies are important, we believe that our policies regarding
revenue recognition, R&D expenses, intellectual property related costs,
stock-based compensation expense and fair value measurements could be considered
critical, and are discussed in more detail below.





Revenue
Recognition





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


34




Grant
revenue is recognized using two different methods depending on the type of
grant. Cost reimbursement grants require us to submit proof of costs incurred
that are invoiced by us to the government agency, which then pays the invoice.
In this case, grant revenue is recognized during the period that the costs were
incurred.





Fixed-cost
grants require no proof of costs and are paid as a request for payment is
submitted for expenses. The grant revenue under these fixed cost grants is
recognized using a percentage-of-completion method, which uses assumptions and
estimates. These assumptions and estimates are developed in coordination with
the principal investigator performing the work under the fixed-cost grants to
determine key milestones, expenses incurred, and deliverables to perform a
percentage-of-completion analysis to ensure that revenue is appropriately
recognized. Critical estimates involved in this process include total costs
incurred and anticipated to be incurred during the remaining life of the
grant.





The
Company recognizes revenue related to the funds received from the State of New
York under the sponsored research agreement with RPCI 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.





Government
contract revenue is recognized as allowable R&D expenses are incurred during
the period and according to the terms of the contract.





Commercial
revenue is recognized when the service or development is delivered or upon
complying with the relevant terms of the commercial agreement including
licensing agreements granting the rights to further develop technology leading
to commercialization in certain territories.





Research
and Development Expenses





R&D
costs are expensed as incurred. These expenses consist primarily of our
proprietary R&D efforts, including salaries and related expenses for
personnel, costs of materials used in our R&D costs of facilities and costs
incurred in connection with our third-party collaboration efforts. Pre-approved
milestone payments made by us to third parties under contracted R&D
arrangements are expensed when the specific milestone has been achieved. As of
March 31, 2010, $50,000 has been paid to the Cleveland Clinic for milestone
payments relating to the filing of an IND with the FDA for Curaxin CBLC102,
$250,000 has been paid to the Cleveland Clinic as a result of commencing Phase
II clinical trials for Curaxin CBLC102 and $50,000 has been paid to the
Cleveland Clinic relating to the filing of an IND with the FDA for Protectan
CBLB502. Once a drug receives regulatory approval, we will record any subsequent
milestone payments in identifiable intangible assets, less accumulated
amortization, and amortize them evenly over the remaining agreement term or the
expected drug life cycle, whichever is shorter. We expect our R&D expenses
to increase as we continue to develop our drug candidates.





Intellectual
Property Related Costs





We
capitalize costs associated with the preparation, filing and maintenance of our
intellectual property rights. Capitalized intellectual property is reviewed
annually for impairment. If a patent application is approved, costs paid by us
associated with the preparation, filing and maintenance of the patent will be
amortized on a straight line basis over the shorter of 20 years from the initial
application date or the anticipated useful life of the patent. If the patent
application is not approved, costs paid by us associated with the preparation,
filing and maintenance of the patent will be expensed as part of selling,
general and administrative expenses at that time.





Through
December 31, 2009, we capitalized $929,976 in expenditures less amortization
associated with the preparation, filing and maintenance of certain of our
patents, which were incurred through the year ended December 31, 2009. We
capitalized an additional $35,905 and amortized an additional $2,417 for the
three months ended March 31, 2010, resulting in a balance of capitalized
intellectual property totaling $963,464.





Stock-based
Compensation





All
stock-based compensation, including grants of employee stock options, is
recognized in the statement of operations based on its 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




The
Company granted 144,029 and 0 stock options during the three months ended March
31, 2010 and March 31, 2009, respectively. The Company recognized a total
of $330,246 and $101,563 in expense related to options for the three months
ended March 31, 2010 and March 31, 2009, respectively.  The Company
also recaptured $37,787 and $37,878 of previously recognized expense due to the
stock option forfeitures for the three months ended March 31, 2010 and March 31,
2009, respectively. The weighted average, estimated grant date fair values of
stock options granted during the quarters ended March31, 2010 and 2009 was $2.67
and $0, respectively.





The
Company also recognized a total of $641,898 and $202,083 in expense for shares
issued and a total of $3,333 and $8,333 in expense related to the amortization
of restricted shares for the three months ended March 31, 2010 and March 31,
2009, respectively





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 2 inputs as of March
31, 2010.





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 using Level 3 inputs for its valuation methodology totaling $10,725,784
and $8,410,379 as of March 31, 2010 and December 31, 2009,
respectively.  The Company recognized a fair value measurement loss of
$2,380,019 and $1,384,772 for the three months ended March 31, 2010 and 2009,
respectively.





The
Company carries the warrants issued in conjunction with the 2010 Common Stock
Equity Offering at fair value using Level 3 inputs for its valuation methodology
totaling $2,299,693 and $0 as of March 31, 2010 and December 31, 2009,
respectively.  The Company recognized a fair value measurement gain of
$648,923 and $0 for the three months ended March 31, 2010 and 2009,
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.





Recently
Issued Accounting Pronouncements





See Note
2U to financial statements in Item 1.





Results
of Operations





The
following table sets forth our statement of operations data for the three months
ended March 31, 2010 and 2009 and the years ended December 31, 2009 and 2008 and
should be read in conjunction with our financial statements and the related
notes appearing elsewhere in this annual report on Form 10-K.





Quarter
                            
                            Quarter
                            
                            Year Ended
                            
                            Year EndedEnded
                            
                            Ended
                            
                            December 31,
                            
                            December 31,31-Mar-10
                            
                            31-Mar-09
                            
                            2009
                            
                            2008(unaudited)
                            
                            (unaudited)Revenues
                            
                            $
                            4,170,348
                            
                            
                            $
                            2,309,731
                            
                            
                            $
                            14,345,908
                            
                            
                            $
                            4,705,597Operating
      expenses
                            
                            
                            5,627,281
                            
                            
                            
                            3,624,771
                            
                            
                            
                            20,728,837
                            
                            
                            
                            19,050,965Other
      expense (income)
                            
                            
                            1,912,851
                            
                            
                            
                            1,647,237
                            
                            
                            
                            6,463,208
                            
                            
                            
                            (59,597
                            )Net
      interest expense (income)
                            
                            
                            (5,773
                            )
                            
                            
                            (3,348
                            )
                            
                            
                            (19,728
                            )
                            
                            
                            (259,844
                            )Net
      income (loss)
                            
                            $
                            (3,364,011
                            )
                            
                            $
                            (2,958,929
                            )
                            
                            $
                            (12,826,409
                            )
                            
                            $
                            (14,025,927
                            )


36




The
following table summarizes R&D expenses for the three months ended March 31,
2010 and 2009 and the years ended December 31, 2009 and 2008 and since
inception:





Quarter
                
                
                Quarter
                
                
                Year Ended
                
                
                Year Ended
                
                
                TotalEnded
                
                
                Ended
                
                
                December 31,
                
                
                December 31,
                
                
                Since31-Mar-10
                
                
                31-Mar-09
                
                
                2009
                
                
                2008
                
                
                Inception(unaudited)
                
                
                (unaudited)Research
      and development
                
                $
                3,697,780
                
                
                $
                2,502,881
                
                
                $
                14,331,673
                
                
                $
                13,160,812
                
                
                $
                64,286,175General
                
                $
                34,206
                
                
                $
                -
                
                
                $
                -
                
                
                $
                931,441
                
                
                $
                5,140,837Protectan
      CBLB502 - non-medical applications
                
                $
                3,592,570
                
                
                $
                2,173,341
                
                
                $
                13,676,289
                
                
                $
                7,264,813
                
                
                $
                38,870,056Protectan
      CBLB502 - medical applications
                
                $
                -
                
                
                $
                56,127
                
                
                $
                56,127
                
                
                $
                756,227
                
                
                $
                1,833,056Protectan
      CBLB612
                
                $
                -
                
                
                $
                5,153
                
                
                $
                6,567
                
                
                $
                974,459
                
                
                $
                3,136,941Curaxin
      CBLC102
                
                $
                35,201
                
                
                $
                147,177
                
                
                $
                262,637
                
                
                $
                1,741,194
                
                
                $
                6,764,320Other
      Curaxins
                
                $
                35,803
                
                
                $
                121,084
                
                
                $
                330,053
                
                
                $
                1,492,678
                
                
                $
                5,540,965




Three
Months Ended March 31, 2010 Compared to Three Months Ended March 31,
2009




Revenue




Revenue
increased from $2,309,731 for the three months ended March 31, 2009 to
$4,170,348 for the three months ended March 31, 2010 representing an increase of
$1,860,617 or 80.6% resulting primarily from an increase in revenue from various
federal grants and contracts including the Department of Defense and BARDA
contracts.




See the
table below for further details regarding the sources of our government grant
and contract revenue:




Agency
                                            
                                            Program
                                            
                                            Amount
                                            
                                            Period of
                                              Performance
                                            
                                            Revenue
                                              2010
                                              (thru
                                              March.31)
                                            
                                            
                                            Revenue
                                              2009
                                              (thru
                                              March.31)
                                            
                                            
                                            Revenue
                                              2009(unaudited)
                                            
                                            
                                            (unaudited)DoD
                                            
                                            DTRA
      Contract
                                            
                                            $
                                            1,263,836
                                            
                                            03/2007-02/2009
                                            
                                            $
                                            -
                                            
                                            
                                            $
                                            1,024
                                            
                                            
                                            $
                                            183,613NY
      State/RPCI
                                            
                                            Sponsored
      Research Agreement
                                            
                                            $
                                            3,000,000
                                            
                                            03/2007-02/2012
                                            
                                            $
                                            4,144
                                            
                                            
                                            $
                                            24,660
                                            
                                            
                                            $
                                            35,696DoD
                                            
                                            DOD
      Contract
                                            
                                            $
                                            9,590,000
                                            
                                            05/2008
      - 09/2009
                                            
                                            $
                                            383,122
                                            
                                            
                                            $
                                            1,180,463
                                            
                                            
                                            $
                                            4,843,303HHS
                                            
                                            BARDA
      Contract
                                            
                                            $
                                            15,600,000
                                            
                                            09/2008-09/2011
                                            
                                            $
                                            2,972,852
                                            
                                            
                                            $
                                            702,188
                                            
                                            
                                            $
                                            5,374,535NIH
                                            
                                            NIAID
      Grant
                                            
                                            $
                                            1,232,695
                                            
                                            09/2008-08/2010
                                            
                                            $
                                            560
                                            
                                            
                                            $
                                            401,396
                                            
                                            
                                            $
                                            1,021,095NIH
                                            
                                            NIAID
      GO Grant
                                            
                                            $
                                            5,300,000
                                            
                                            09/2009-08/2011
                                            
                                            $
                                            809,670
                                            
                                            
                                            $
                                            -
                                            
                                            
                                            $
                                            1,237,666Totals
                                            
                                            $
                                            4,170,348
                                            
                                            
                                            $
                                            2,309,731
                                            
                                            
                                            $
                                            12,695,908





We
anticipate our revenue over the next year to be derived mainly from government
grants and contracts. In addition, it is common in our industry for companies to
enter into licensing agreements with large pharmaceutical companies. To the
extent we enter into such licensing arrangements, we may receive additional
revenue from licensing fees.




Operating
Expenses




Operating
expenses have historically consisted of costs relating to R&D and general
and administrative expenses. R&D expenses have consisted mainly of
supporting our R&D teams, process development, sponsored research at the
Roswell Park Cancer Institute 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.


37


Operating
expenses increased from $3,624,771 for the three months ended March 31, 2009 to
$5,627,281 for the three months ended March 31, 2010, an increase of $2,002,510
or 55.2%. We recognized a total of $936,690 of non-cash, stock-based
compensation for the three months ended March 31, 2010 compared to $274,101
for the three months ended March 31, 2009. If these non-cash,
stock-based compensation expenses were excluded, operating expenses would have
increased from $3,350,670 for the three months ended March 31, 2009 to
$4,690,591 for the three months ended March 31, 2010. This represents an
increase in operating expenses of $1,339,921 or 40.0% as explained
below.




Research
and development costs increased from $2,502,881 for the three months ended
March 31, 2009 to $3,697,780 for the three months ended March 31, 2010. This
represents a decrease of $1,194,899 or 47.7%. We recognized a total of
$140,190 of R&D non-cash, stock based compensation for the three months
ended March 31, 2010 compared to $45,958 for the three months ended March 31,
2009. Without the non-cash, stock-based compensation, the R&D expenses
increased from $2,456,923 for the three months ended March 31, 2009 to
$3,557,590 for the three months ended March 31, 2010; an increase of $1,100,667
or 44.8%. The higher research and development expenses were a result of
increased costs to support the increase in grant and contract
revenue.




Selling,
general and administrative costs increased from $1,121,980 for the
three months ended March 31, 2009 to $1,929,501 for the three months ended
March 31, 2010. This represents an increase of $807,611 or 72.0%. We
recognized a total of $796,500 of non-cash, stock-based compensation under
selling, general and administrative costs for the three months ended March 31,
2010 compared to $228,143 for the three months ended March 31, 2009. Without the
non-cash, stock-based compensation, the selling, general and administrative
expenses increased from $893,747 for the three months ended March 31, 2009 to
$1,133,001 for the three months ended March 31, 2010; an increase of $239,254 or
26.8.%. The higher general and administrative expenses were incurred as a
result of a refundable tax credit received from the state of New York in 2009
that was not received in 2010.




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.





Year
Ended December 31, 2009 Compared to Year Ended December 31, 2008





Revenue





Revenue
increased from $4,705,597 for the year ended December 31, 2008 to $14,345,908
for the year ended December 31, 2009, representing an increase of 9,640,311 or
204.9%, resulting primarily from an increase in revenue from U.S. government
contracts and grants, as well as the licensing agreement with
Hisun.





See the
table below for further details regarding the sources of our government grant
and contract revenue:





Agency
                    
                    Program
                    
                    Amount
                    
                    Period of
                      Performance
                    
                    Revenue
                      2009
                    
                    
                    Revenue
                      2008DoD
                    
                    DTRA
      Contract
                    
                    $
                    1,263,836
                    
                    03/2007-02/2009
                    
                    $
                    183,613
                    
                    
                    $
                    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
                    
                    $
                    35,696
                    
                    
                    $
                    305,298NIH
                    
                    NCI
      Contract
                    
                    $
                    750,000
                    
                    09/2006-08/2008
                    
                    $
                    -
                    
                    
                    $
                    219,618DoD
                    
                    DOD
      Contract
                    
                    $
                    8,900,000
                    
                    05/2008-09/2009
                    
                    $
                    4,843,303
                    
                    
                    $
                    2,938,357HHS
                    
                    BARDA
      Contract
                    
                    $
                    15,800,000
                    
                    09/2008-09/2011
                    
                    $
                    5,374,535
                    
                    
                    $
                    219,412NIH
                    
                    NIAID
      Grant
                    
                    $
                    1,232,695
                    
                    09/2008-02/2010
                    
                    $
                    1,021,095
                    
                    
                    $
                    211,040NIH
                    
                    NIAID
      GO Grant
                    
                    $
                    5,329,543
                    
                    09/2009-09/2011
                    
                    $
                    1,237,666
                    
                    
                    $
                    -Totals
                    
                    $
                    12,695,908
                    
                    
                    $
                    4,585,597




Operating
Expenses





Operating
expenses increased from $19,050,965 for the year ended December 31, 2008 to
$20,728,837 for the year ended December 31, 2009. This represents an increase of
$1,677,872 or 8.8%. We recognized a total of $1,527,600 of non-cash, stock-based
compensation for the year December 31, 2008 compared to $2,760,446 for the year
ended December 31, 2008. If these non-cash, stock-based compensation expenses
were excluded, operating expenses would have increased from $17,523,365 for the
year ended December 31, 2008 to $17,968,391 for the year ended December 31,
2009. This represents an increase in operating expenses of $445,026 or
2.5%.





This
increase resulted primarily from an increase in R&D expenses from
$13,160,812 for the year ended December 31, 2008 to $14,331,673 for the year
ended December 31, 2009, an increase of $1,170,861 or 8.9%. The increased
R&D expenses were incurred primarily as a result of increasing the non-cash,
stock-based compensation and additional R&D costs incurred to support the
revenue increase.  We recognized a total of $632,253 of non-cash
compensation for R&D stock based compensation for the year ended December
31, 2008 compared to $1,074,048 for the year ended December 31, 2009. Without
the non-cash, stock-based compensation, the R&D expenses increased from
$12,528,559 for the year ended December 31, 2008 to $13,257,625 for the year
ended December 31, 2009; an increase of $729,066 or 5.8%.


38




In
addition, selling, general and administrative expenses increased from $5,890,153
for the year ended December 31, 2008 to $6,397,164, for the year ended December
31, 2009. This represents an increase of $507,011 or 8.6%. These higher selling,
general and administrative expenses were incurred as a result of an increase in
the non-cash, stock-based compensation for the selling, general
and administrative area of the Company partially offset by cost containment
efforts.  We recognized a total of $895,347 of non-cash, stock-based
compensation for general and administrative compensation for the year ended
December 31, 2008 compared to $1,686,398 for the year ended December 31,
2009.  Without the non-cash stock based compensation, the general and
administrative expenses decreased from $4,994,806 for the year ended December
31, 2008 to $4,710,766 for the year ended December 31, 2009; a decrease of
$284,040 or 5.7%.





Until we
introduce a product to the market, expenses in the categories mentioned above
will be the largest component of our income statement.





Liquidity
and Capital Resources





We have
incurred annual operating losses since our inception, and, as of March 31, 2010,
we had an accumulated deficit of $73,051,943.  Our principal sources
of liquidity have been cash provided by sales of our securities, government
grants and contracts and licensing agreements. Our principal uses of cash have
been R&D and working capital. We expect our future sources of liquidity to
be primarily government contracts and grants, equity financing, licensing fees
and milestone payments in the event we enter into licensing agreements with
third parties, and research collaboration fees in the event we enter into
research collaborations with third parties, which to date we have
not.




Net cash
used in operating activities totaled $158,794 for the three months ended March
31, 2010, compared to $1,388,089 used in operating activities for the three
months ended March 31, 2009. Net cash used in operating activities totaled
$4,244,944 for the year ended December 31, 2009, compared to $12,121,102 used in
operating activities for the same period in 2008. This decrease in cash used in
operating activities resulted from an increase in contract and grant revenues
and cost containment efforts combined with focusing our R&D efforts on
projects where grant and contract funding was awarded.




Net cash
used in investing activities was $181,130 for the three months ended March 31,
2010 and net cash provided by investing activities was $925,073 for the three
months ended March 31, 2009. Net cash provided by investing activities was
$626,536 for the year ended December 31, 2009, compared to net cash used in
investing activities of $558,407 for the same period in 2008. The decrease in
cash provided by investing activities resulted primarily from the liquidation of
a short-term investment in 2009 as compared to 2010.




Net cash
provided by financing activities totaled $4,591,111 for the three months ended
March 31, 2010, compared to net cash provided by financing activities of
$3,898,184 for the three months ended March 31, 2009. Net cash provided by
financing activities totaled $4,281,659 for the year ended December 31, 2009,
compared to $1,232,831 used by financing activities for the same period in 2008.
The increase in cash provided by financial activities was attributed to the 2010
Common Stock Equity Offering as compared to the Series D Preferred and Series D
Warrants offering during the same period in 2009.




Under our
exclusive license agreement with the Cleveland Clinic Foundation, or CCF, we may
be responsible for making milestone payments to CCF in amounts ranging from
$50,000 to $4,000,000. The milestones and corresponding payments for Protectan
CBLB502 and Curaxin CBLC102 are set forth above under “Item 1 – Description of
Business – Collaborative Research Agreements – Cleveland Clinic
Foundation.”





Our
agreement with CCF also provides for payment by us to CCF of royalty payments
calculated as a percentage of the net sales of the drug candidates ranging from
1-2%, and sublicense royalty payments calculated as a percentage of the
royalties received from the sublicenses ranging from 5-35%. However, any royalty
payments and sublicense royalty payments assume that we will be able to
commercialize our drug candidates, which are subject to numerous risks and
uncertainties, including those associated with the regulatory approval process,
our R&D process and other factors. Accrued milestone payments, royalty
payments and sublicense royalty payments are payable upon achievement of the
milestone.





We
believe that although existing cash resources will be sufficient to finance our
currently planned operations beyond the next twelve months, these amounts will
not be sufficient to meet our longer-term cash requirements, including our cash
requirements for the commercialization of certain of our drug candidates
currently in development. We may be required to issue equity or debt securities
or enter into other financial arrangements, including relationships with
corporate and other partners, in order to raise additional capital. Depending
upon market conditions, we may not be successful in raising sufficient
additional capital for our long-term requirements. In such event, our business,
prospects, financial condition and results of operations could be materially
adversely affected.


39




Impact
of Inflation





We
believe that our results of operations are not dependent upon moderate changes
in inflation rates.





Impact
of Exchange Rate Fluctuations





We
believe that our results of operations are somewhat dependent upon changes in
foreign currency exchange rates. We have entered into agreements with foreign
third parties to produce one of our drug compounds and are required to make
payments in the foreign currency. As a result, our financial results could be
affected by changes in foreign currency exchange rates. As of March 31, 2010, we
are obligated to make payments under these agreements of 466,667 Euros. We have
established means to purchase forward contracts to hedge against this
risk.





Off-Balance
Sheet Arrangements





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


40




Item
3: Quantitative and Qualitative Disclosures About Market Risk





We are
exposed to certain market risks, including changes to interest rates, foreign
currency exchange rates and equity investment prices. To reduce the volatility
related to these exposures, we may enter into various derivative hedging
transactions pursuant to our investment and risk management policies. There are
inherent risks that may only be partially offset by our hedging programs should
there be unfavorable movements in interest rates, foreign currency exchange
rates, or equity investment prices.





Interest Rate Risk. Our
interest income is sensitive to changes in the general level of domestic
interest rates, particularly since our investments are classified as short-term
held to maturity.  Due to our intention to hold our investments to
maturity, we have concluded that there is no material interest rate risk
exposure.





Our
revolving credit facility also would have been affected by fluctuations in
interest rates as it is based on prime minus 1%. As of March 31, 2010, we had
not drawn on this facility.





Foreign Currency Risk. As of
March 31, 2010, we have agreements with third parties that require payment in
the foreign currency. As a result, our financial results could be affected by
changes in foreign currency exchange rates. Currently, the Company’s exposure
primarily exists with the Euro.  As a consequence, movements in
exchange rates could cause our foreign currency denominated expenses to
fluctuate as a percentage of net revenue, affecting our profitability and cash
flows. At this time, our exposure to foreign currency fluctuations is not
material.





In
addition, the indirect effect of fluctuations in interest rates and foreign
currency exchange rates could have a material adverse effect on our business
financial condition and results of operations. For example, currency exchange
rate fluctuations could affect international demand for our products in the
future. Furthermore, interest rate and currency exchange rate fluctuations may
broadly influence the U.S. and foreign economies resulting in a material adverse
effect on our business, financial condition and results of operations. As a
result, we cannot give any assurance as to the effect that future changes in
foreign currency rates will have on our financial position, results of
operations or cash flows.




Item
4: Controls and Procedures





Effectiveness
of Disclosure





Our
management, with the participation of our Chief Executive Officer and Chief
Financial Officer, evaluated the effectiveness of our disclosure controls and
procedures as of March 31, 2010 as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, as amended, or 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 March 31, 2010, our
Chief Executive Officer and Chief Financial Officer concluded that, as of such
date, our disclosure controls and procedures were effective to assure that
information required to be declared by us in reports that we file or submit
under the Exchange Act is (1) recorded, processed, summarized, and reported
within the periods specified in the SEC’s rules and forms and (2) accumulated
and communicated to our management, including our Chief Executive Officer and
Chief Financial Officer, as appropriate, to allow timely decisions regarding
required disclosure.





Changes
in Internal Control over Financial Reporting





There was
no change in our internal control over financial reporting (as defined in Rules
13a-15(f) and 15(d)-15(f) under the Exchange Act) during the fiscal quarter
ended March 31, 2010 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial
reporting.


41


PART
II - Other Information





Item
1. Legal Proceedings





As
of March 31, 2010, we were not a party to any litigation or other legal
proceeding.





Item
2. Unregistered Sales of Equity Securities and Use of Proceeds





(a)
Previously reported on Forms 8-K and 8-K/A, each filed with the Securities and
Exchange Commission on February 26, 2010.





(b) Not
applicable.





(c)
None.





Item
3. Defaults Upon Senior Securities





None.





Item
4. Removed and Reserved





Item
5. Other Information





None.





Item
6. Exhibits





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





Exhibit
              Number
            
            Description of 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


42


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:
      May 14, 2010
                  By:
                  /s/
      MICHAEL FONSTEINMichael
      FonsteinChief
      Executive Officer(Principal
      Executive Officer)Dated:
      May 14, 2010
                  By:
                  /s/
      JOHN A. MARHOFER, JR.John
      A. Marhofer, Jr.Chief
      Financial Officer(Principal
      Financial
Officer)


43