UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM
10-Q




(Mark
One)








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




For the
quarterly period ended June 30, 2010
  OR
 o
                  TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934


For
      the transition period from _____________ to
  _____________





Commission
      file number 001-32954
              
              CLEVELAND BIOLABS,
      INC.
              (Exact
      name of registrant as specified in its
charter)





DELAWARE
            
            20-0077155(State
      or other jurisdiction of incorporation or organization)
            
            (I.R.S.
      Employer Identification No.)





73
      High Street, Buffalo, New York
            
            14203(Address
      of principal executive offices)
            
            (Zip
      Code)





(Registrant’s
      telephone number, including area code)(716)
      849-6810
              
              _______________________________________________
              (Former
      name, former address and former fiscal year,
              if
      changed since last report)





Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.


Yes xNo  ̈





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).


Yes  ̈No  ̈





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





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




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





As of
August 10, 2010, there were 26,952,949shares outstanding of
registrant's common stock, par value $0.005 per share.










CLEVELAND BIOLABS INC. AND SUBSIDIARY
 10-Q
 8/16/2010
  TABLE OF
CONTENTS


PAGEPART
      I - FINANCIAL INFORMATIONITEM
      1:
              Consolidated
      Financial StatementsConsolidated
      Balance Sheets as of June 30, 2010 and December 31, 2009
              
              
              3Consolidated
      Statements of Operations For Three and Six Months Ended June 30, 2010 and
      2009
              
              
              5Consolidated
      Statements of Cash Flows For Six Months Ended June 30, 2010 and
      2009
              
              
              6Consolidated
      Statement of Stockholders' Equity from January 1, 2009 to December 31,
      2009 and to June 30, 2010
              
              
              8Consolidated
      Statement of Comprehensive Income for the Three and Six Months Ended June
      30, 2010 and 2009
              
              
              11Consolidated
      Notes to Financial Statements
              
              
              12ITEM
      2:
              Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations
              
              
              26ITEM
      3:
              Quantitative
      and Qualitative Disclosures About Market Risk
              
              
              44ITEM
      4T:
              Controls
      and Procedures
              
              
              44PART
      II - OTHER INFORMATIONITEM
      1:
              Legal
      Proceedings
              
              
              45ITEM
      2:
              Unregistered
      Sales of Equity Securities and Use of Proceeds
              
              
              45ITEM
      3:
              Defaults
      Upon Senior Securities
              
              
              45ITEM
      4:
              Removed
      and Reserved
              
              
              45ITEM
      5:
              Other
      Information
              
              
              45ITEM
      6:
              Exhibits
              
              
              45Signatures
              
              
              
              46


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


2




CLEVELAND BIOLABS, INC. AND
      SUBSIDIARYCONSOLIDATED BALANCE
      SHEETSJune 30, 2010 (unaudited) and
      December 31, 2009
  June 302010
              
              
              December 31(unaudited)
              
              
              2009ASSETSCURRENT
    ASSETSCash and
      equivalents
              
              $
              4,558,244
              
              
              $
              963,100Short-term
      investments
              
              
              1,378,408
              
              
              
              -Accounts
      receivable:Trade
              
              
              4,537,666
              
              
              
              3,391,347Interest
              
              
              1,057
              
              
              
              -Other current
      assets
              
              
              337,953
              
              
              
              381,030Total
      current assets
              
              
              10,813,328
              
              
              
              4,735,477EQUIPMENTComputer
      equipment
              
              
              333,263
              
              
              
              323,961Lab
      equipment
              
              
              1,400,375
              
              
              
              1,159,478Furniture
              
              
              376,882
              
              
              
              376,8822,110,520
              
              
              
              1,860,321Less accumulated
      depreciation
              
              
              1,188,404
              
              
              
              995,408922,116
              
              
              
              864,913OTHER
ASSETSIntellectual
      property
              
              
              1,015,916
              
              
              
              929,976Deposits
              
              
              23,482
              
              
              
              23,4821,039,398
              
              
              
              953,458TOTAL
ASSETS
              
              $
              12,774,842
              
              
              $
              6,553,848


See
accompanying notes




3




CLEVELAND BIOLABS, INC. AND
      SUBSIDIARYCONSOLIDATED BALANCE
      SHEETSJune 30, 2010 (unaudited) and
      December 31, 2009
  June 302010
              
              
              December 31(unaudited)
              
              
              2009LIABILITIES
      AND STOCKHOLDERS' EQUITYCURRENT
      LIABILITIESAccounts
      payable
              
              $
              1,075,592
              
              
              $
              1,208,632Deferred
      revenue
              
              
              2,321,259
              
              
              
              2,329,616Accrued
      expenses
              
              
              453,773
              
              
              
              1,405,715Accrued warrant
      liability
              
              
              12,676,631
              
              
              
              8,410,379Total
      current liabilities
              
              
              16,527,255
              
              
              
              13,354,342STOCKHOLDERS'
      EQUITYPreferred stock, $.005
      par valueAuthorized
      - 10,000,000 shares at June 30, 2010and
      December 31, 2009Series D
      convertible preferred stock,Issued and
      outstanding 0 and 466.85shares
      at June 30, 2010 and December 31, 2009,
respectively
              
              
              -
              
              
              
              2Common stock, $.005
      par valueAuthorized
      - 80,000,000 shares at June 30, 2010 andDecember
      31, 2009, respectivelyIssued and
      outstanding 26,940,256 and 20,203,508shares
      at June 30, 2010 and December 31, 2009,
respectively
              
              
              134,701
              
              
              
              101,018Additional
      paid-in capital
              
              
              68,303,926
              
              
              
              62,786,418Accumulated
      other comprehensive income (loss)
              
              
              (100,288
              )
              
              
              -Accumulated
      deficit
              
              
              (75,491,603
              )
              
              
              (69,687,932
              )Total
      Cleveland BioLabs, Inc. stockholders' equity
              
              
              (7,153,264
              )
              
              
              (6,800,494
              )Noncontrolling
      Interest in stockholders equity
              
              
              3,400,851
              
              
              
              -Total stockholders
      equity
              
              
              (3,752,413
              )
              
              
              -TOTAL LIABILITIES AND
      STOCKHOLDERS' EQUITY
              
              $
              12,774,842
              
              
              $
              6,553,848


See
accompanying notes


4


CLEVELAND BIOLABS, INC. AND
      SUBSIDIARYCONSOLIDATED STATEMENT OF
      OPERATIONSThree and Six Months Ending June
      30, 2010 and 2009
(unaudited)
  Three Months
      Ended
              
              
              Six Months
      EndedJune 30
              
              
              June 30
              
              
              June 30
              
              
              June 302010
              
              
              2009
              
              
              2010
              
              
              2009(unaudited)
              
              
              (unaudited)
              
              
              (unaudited)
              
              
              (unaudited)REVENUESGrant and
      contract
              
              $
              4,210,763
              
              
              $
              4,184,978
              
              
              $
              8,381,111
              
              
              $
              6,494,7094,210,763
              
              
              
              4,184,978
              
              
              
              8,381,111
              
              
              
              6,494,709OPERATING
      EXPENSESResearch and
      development
              
              
              4,170,115
              
              
              
              4,772,100
              
              
              
              7,867,895
              
              
              
              7,274,982Selling, general and
      administrative
              
              
              2,661,200
              
              
              
              1,837,136
              
              
              
              4,590,701
              
              
              
              2,959,026Total
      operating expenses
              
              
              6,831,315
              
              
              
              6,609,236
              
              
              
              12,458,596
              
              
              
              10,234,008LOSS FROM
      OPERATIONS
              
              
              (2,620,552
              )
              
              
              (2,424,258
              )
              
              
              (4,077,485
              )
              
              
              (3,739,299
              )OTHER
INCOMEInterest
      income
              
              
              7,639
              
              
              
              11,949
              
              
              
              13,412
              
              
              
              17,257Sublease
      revenue
              
              
              50,205
              
              
              
              4,505
              
              
              
              100,430
              
              
              
              9,011Total
      other income
              
              
              57,844
              
              
              
              16,454
              
              
              
              113,842
              
              
              
              26,268OTHER
    EXPENSEWarrant issuance
      costs
              
              
              -
              
              
              
              -
              
              
              
              231,980
              
              
              
              266,970Interest
      expense
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              1,960Change in value of
      warrant liability
              
              
              (33,800
              )
              
              
              4,068,926
              
              
              
              1,697,296
              
              
              
              5,453,699Total
      other expense
              
              
              (33,800
              )
              
              
              4,068,926
              
              
              
              1,929,276
              
              
              
              5,722,629NET LOSS
              
              $
              (2,528,908
              )
              
              $
              (6,476,730
              )
              
              $
              (5,892,919
              )
              
              $
              (9,435,660
              )LESS: (INCOME)/LOSS ATTRIBUTABLE
      TONONCONTROLLING
      INTERESTS
              
              
              89,248
              
              
              
              -
              
              
              
              89,248
              
              
              
              -NET LOSS ATTRIBUTABLE TO
      CLEVELANDBIOLABS,
      INC.
              
              $
              (2,439,660
              )
              
              $
              (6,476,730
              )
              
              $
              (5,803,671
              )
              
              $
              (9,435,660
              )DIVIDENDS ON CONVERTIBLE PREFERRED
      STOCK
              
              
              -
              
              
              
              (222,472
              )
              
              
              -
              
              
              
              (491,451
              )NET LOSS AVAILABLE TO COMMON
      STOCKHOLDERS
              
              
              (2,439,660
              )
              
              
              (6,699,202
              )
              
              
              (5,803,671
              )
              
              
              (9,927,111
              )NET LOSS AVAILABLE TO COMMON
      SHAREHOLDERSPER SHARE OF COMMON STOCK - BASIC
      ANDDILUTED
              
              $
              (0.09
              )
              
              $
              (0.45
              )
              
              $
              (0.23
              )
              
              $
              (0.69
              )WEIGHTED AVERAGE NUMBER OF SHARES
      USEDIN CALCULATING NET LOSS PER SHARE,
      BASIC ANDDILUTED
              
              
              26,734,076
              
              
              
              14,789,062
              
              
              
              25,132,246
              
              
              
              14,342,277


See
accompanying notes




5






CLEVELAND BIOLABS, INC. AND
      SUBSIDIARYCONSOLIDATED STATEMENTS OF CASH
      FLOWSFor the Six Months Ended June 30,
      2010 and 2009 (unaudited)
  June 30
              
              
              June 302010
              
              
              2009(unaudited)
              
              
              (unaudited)CASH FLOWS FROM OPERATING
      ACTIVITIESNet
    loss
              
              $
              (5,892,919
              )
              
              $
              (9,435,660
              )Adjustments to reconcile net
      loss to net cashused in operating
      activities:Depreciation
              
              
              192,996
              
              
              
              180,543Amortization
              
              
              6,681
              
              
              
              -Noncash
      salaries and consulting expense
              
              
              3,193,103
              
              
              
              1,703,564Warrant
      issuance costs
              
              
              231,980
              
              
              
              266,970Change in
      value of warrant liability
              
              
              1,697,296
              
              
              
              5,453,699Loss on
      abandoned patents
              
              
              -
              
              
              
              23,984Changes in
      operating assets and liabilities:Accounts
      receivable - trade
              
              
              (1,146,318
              )
              
              
              (1,991,978
              )Accounts
      receivable - interest
              
              
              (1,057
              )
              
              
              9,488Other
      current assets
              
              
              43,078
              
              
              
              323,361Accounts
      payable
              
              
              (133,040
              )
              
              
              (143,893
              )Deferred
      revenue
              
              
              (8,357
              )
              
              
              (28,338
              )Accrued
      expenses
              
              
              (951,944
              )
              
              
              (213,740
              )Total
      adjustments
              
              
              3,124,418
              
              
              
              5,583,660Net
      cash used in operating activities
              
              
              (2,768,501
              )
              
              
              (3,852,000
              )CASH FLOWS FROM INVESTING
      ACTIVITIESPurchase of short-term
      investments
              
              
              (1,378,408
              )
              
              
              -Sale of short-term
      investments
              
              
              -
              
              
              
              1,000,000Purchase of
      equipment
              
              
              (250,199
              )
              
              
              (48,393
              )Costs of patents
      pending
              
              
              (92,621
              )
              
              
              (72,897
              )Net
      cash (used in) provided by investing activities
              
              
              (1,721,228
              )
              
              
              878,710CASH FLOWS FROM FINANCING
      ACTIVITIESIssuance of preferred
      stock
              
              
              -
              
              
              
              5,428,307Financing costs on preferred
      stock
              
              
              -
              
              
              
              (720,175
              )Issuance of common
      stock
              
              
              5,000,002
              
              
              
              -Contribution from
      noncontrolling interest to subsidiary
              
              
              3,509,402
              
              
              
              -Cash financing costs on
      common stock
              
              
              (350,632
              )
              
              
              -Cash warrant issuance
      costs
              
              
              (140,697
              )
              
              
              (266,970
              )Dividends
              
              
              -
              
              
              
              (612,799
              )Exercise of stock
      options
              
              
              99,645
              
              
              
              152,802Exercise of
      warrants
              
              
              86,744
              
              
              
              -Net
      cash provided by financing activities
              
              
              8,204,464
              
              
              
              3,981,165EFFECT OF EXCHANGE RATE CHANGE ON
      CASH AND EQUIVALENTS
              
              
              (119,591
              )
              
              
              -INCREASE IN CASH AND
      EQUIVALENTS
              
              
              3,595,144
              
              
              
              1,007,875CASH AND EQUIVALENTS AT BEGINNING
      OF
              
              
              963,100
              
              
              
              299,849PERIODCASH AND EQUIVALENTS AT END OF
      PERIOD
              
              $
              4,558,244
              
              
              $
              1,307,724
     6
  CLEVELAND BIOLABS, INC. AND
      SUBSIDIARYCONSOLIDATED STATEMENTS OF CASH
      FLOWSFor the Six Months Ended June 30,
      2010 and 2009 (unaudited)
  June 30
              
              
              June 302010
              
              
              2009(unaudited)
              
              
              (unaudited)Supplemental disclosures of cash
      flow information:Cash paid during
      the period for interest
              
              $
              -
              
              
              $
              1,960Cash paid during
      the period for income taxes
              
              $
              -
              
              
              $
              -Supplemental schedule of noncash
      financing activities:Issuance of stock
      options to employees, consultants, and
              
              $
              1,952,271
              
              
              $
              1,221,026independent
      board membersRecapture of expense
      for nonvested options forfeited
              
              $
              (38,787
              )
              
              $
              (37,878
              )Issuance of shares to
      consultants and employees
              
              $
              1,272,989
              
              
              $
              503,842Amortization of
      restricted shares to be issued to employees and
      consultants
              
              $
              6,630
              
              
              $
              16,574Conversion of warrant
      liability to equity due to exercise of warrants
              
              $
              379,661
              
              
              $
              -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
              
              
              $
              7,521,305Accrual of Series B
      preferred stock dividends
              
              $
              -
              
              
              $
              491,451








7




CLEVELAND BIOLABS, INC. AND
SUBSIDIARY




CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS' EQUITYPeriod
      From January 1, 2009 to December 31, 2009 and toJune
      30, 2010 (unaudited)


Stockholders'
      EquityCommon
      StockShares
              
              
              AmountBalance
      at January 1, 2009
              
              
              13,775,805
              
              
              $
              68,879Issuance
      of options
              
              
              -
              
              
              
              -Issuance
      of restricted shares
              
              
              291,532
              
              
              
              1,458Recapture
      of expense for nonvested options forfeited
              
              
              -
              
              
              
              -Restricted
      stock awards
              
              
              
              
              
              
              -Exercise
      of options
              
              
              194,675
              
              
              
              973Conversion
      of Series B Preferred Shares to Common
              
              
              4,693,530
              
              
              
              23,468Dividends
      on Series B Preferred shares
              
              
              -
              
              
              
              -Issuance
      of shares - Series D financing
              
              
              -
              
              
              
              -Allocation
      of financing proceeds to fair value of Series D warrants
              
              
              -
              
              
              
              -Fees
      associated with Series D Preferred offering
              
              
              -
              
              
              
              -Conversion
      of Series D Preferred Shares to Common
              
              
              572,353
              
              
              
              2,862Exercise
      of warrants
              
              
              675,613
              
              
              
              3,378Net
      Loss
              
              
              -
              
              
              
              -Balance
      at December 31, 2009
              
              
              20,203,508
              
              
              $
              101,018Issuance
      of options
              
              
              -
              
              
              
              -Issuance
      of shares
              
              
              375,865
              
              
              
              1,879Recapture
      of expense for nonvested options forfeited
              
              
              -
              
              
              
              -Restricted
      stock awards
              
              
              -
              
              
              
              -Exercise
      of options
              
              
              63,541
              
              
              
              318Issuance
      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
              
              
              181,901
              
              
              
              910Noncontrolling
      interest capital contribution to Incuron, LLC
              
              
              -
              
              
              
              -Net
      Loss
              
              
              -
              
              
              
              -Other
      comprehensive incomeForeign
      currency translation
              
              
              -
              
              
              
              -Comprehensive
      lossBalance
      at June 30, 2010
              
              
              26,940,256
              
              
              $
              134,701




See
accompanying notes


8








CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS' EQUITYPeriod
      From January 1, 2009 to December 31, 2009 and toJune
      30, 2010 (unaudited)


Stockholders'
      EquityPreferred
      StockSeries
      B
              
              
              Amount
              
              
              Series
      D
              
              
              AmountBalance
      at January 1, 2009
              
              
              3,160,974
              
              
              $
              15,805
              
              
              
              -
              
              
              $
              -Issuance
      of options
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Issuance
      of restricted shares
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Recapture
      of expense for nonvested options forfeited
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Restricted
      stock awards
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Exercise
      of options
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Conversion
      of Series B Preferred Shares to Common
              
              
              (3,160,974
              )
              
              
              (15,805
              )
              
              
              -
              
              
              
              -Dividends
      on Series B Preferred shares
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Issuance
      of shares - Series D financing
              
              
              -
              
              
              
              -
              
              
              
              543
              
              
              
              3Allocation
      of financing proceeds to fair value of Series D warrants
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Fees
      associated with Series D Preferred offering
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Conversion
      of Series D Preferred Shares to Common
              
              
              
              
              
              
              
              
              
              
              (76
              )
              
              
              (1
              )Exercise
      of 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 warrants
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Noncontrolling
      interest capital contribution to Incuron, LLC
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Net
      Loss
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Other
      comprehensive incomeForeign
      currency translation
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Comprehensive
      lossBalance
      at June 30, 2010
              
              
              -
              
              
              $
              -
              
              
              
              -
              
              
              $
              -




See
accompanying notes




9








CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS' EQUITYPeriod
      From January 1, 2009 to December 31, 2009 and toJune
      30, 2010 (unaudited)


Stockholders'
      EquityAdditional
              
              
              OtherPaid-in
              
              
              Comprehensive
              
              
              Accumulated
              
              
              NoncontrollingCapital
              
              
              Income/(Loss)
              
              
              Deficit
              
              
              Interests
              
              
              TotalBalance
      at January 1, 2009
              
              $
              56,699,750
              
              
              $
              -
              
              
              $
              (56,246,172
              )
              
              $
              -
              
              
              $
              538,261Issuance
      of options
              
              
              1,784,240
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              1,784,240Issuance
      of restricted shares
              
              
              991,612
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              993,070Recapture
      of expense for nonvested options forfeited
              
              
              (50,197
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (50,197
              )Restricted
      stock awards
              
              
              33,333
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              33,333Exercise
      of options
              
              
              361,884
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              362,857Conversion
      of Series B Preferred Shares to Common
              
              
              (7,663
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Dividends
      on Series B Preferred shares
              
              
              -
              
              
              
              -
              
              
              
              (615,351
              )
              
              
              -
              
              
              
              (615,351
              )Issuance
      of shares - Series D financing
              
              
              5,428,304
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              5,428,307Allocation
      of financing proceeds to fair value of Series D warrants
              
              
              (3,016,834
              )
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (3,016,834
              )Fees
      associated with Series D Preferred offering
              
              
              (720,175
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (720,175
              )Conversion
      of Series D Preferred Shares to Common
              
              
              (2,861
              )
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              -Exercise
      of warrants
              
              
              1,285,026
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,288,404Net
      Loss
              
              
              -
              
              
              
              -
              
              
              
              (12,826,409
              )
              
              
              -
              
              
              
              (12,826,409
              )Balance
      at December 31, 2009
              
              $
              62,786,418
              
              
              $
              -
              
              
              $
              (69,687,932
              )
              
              $
              -
              
              
              $
              (6,800,494
              )Issuance
      of options
              
              
              1,952,271
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              1,952,271Issuance
      of shares
              
              
              1,271,110
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              1,272,989Recapture
      of expense for nonvested options forfeited
              
              
              (38,787
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (38,787
              )Restricted
      stock awards
              
              
              6,630
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              6,630Exercise
      of options
              
              
              99,327
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              99,645Issuance
      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
              
              
              465,495
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              466,405Noncontrolling
      interest capital contribution to Incuron, LLC
              
              
              -
              
              
              
              
              
              
              
              -
              
              
              
              3,509,402
              
              
              
              3,509,402Net
      Loss
              
              
              -
              
              
              
              -
              
              
              
              (5,803,671
              )
              
              
              (89,248
              )
              
              
              (5,892,919
              )Other
      comprehensive incomeForeign
      currency translation
              
              
              -
              
              
              
              (100,288
              )
              
              
              -
              
              
              
              (19,303
              )
              
              
              (119,591
              )Comprehensive
      lossBalance
      at June 30, 2010
              
              $
              68,303,926
              
              
              $
              (100,288
              )
              
              $
              (75,491,603
              )
              
              $
              3,400,851
              
              
              $
              (3,752,413
              )




See
accompanying notes




10




CLEVELAND
      BIOLABS, INC. AND SUBSIDIARYCONSOLIDATED
      STATEMENT OF COMPREHENSIVE INCOMEThree
      and Six Months Ending June 30, 2010 and 2009
  (unaudited)
  Three
      Months Ended
              
              
              Six
      Months EndedJune
      30
              
              
              June
      30
              
              
              June
      30
              
              
              June
      302010
              
              
              2009
              
              
              2010
              
              
              2009(unaudited)
              
              
              (unaudited)
              
              
              (unaudited)
              
              
              (unaudited)Net
      loss including noncontrolling interests
              
              $
              (2,528,908
              )
              
              $
              (6,476,730
              )
              
              $
              (5,892,919
              )
              
              $
              (9,435,660
              )Other
      comprehensive income (net of income taxes)Foreign
      exchange translation adjustment
              
              
              (119,591
              )
              
              
              -
              
              
              
              (119,591
              )
              
              
              -Comprehensive
      income including noncontrolling interests
              
              
              (2,648,499
              )
              
              
              (6,476,730
              )
              
              
              (6,012,510
              )
              
              
              (9,435,660
              )Comprehensive
      (income)/loss attributable to noncontrolling interests
              
              
              108,551
              
              
              
              -
              
              
              
              108,551
              
              
              
              -Comprehensive
      Income attributable to Cleveland BioLabs, Inc.
              
              
              (2,539,948
              )
              
              
              (6,476,730
              )
              
              
              (5,903,959
              )
              
              
              (9,435,660
              )






11






CLEVELAND
BIOLABS, INC.




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




Note
1. Organization




Cleveland BioLabs, Inc. (“CBLI”) and its subsidiary (collectively, the
“Company”) is a biotechnology company focused on developing biodefense, tissue
protection and cancer treatment drugs based on the concept of modulation of cell
death for therapeutic benefit. The consolidated financial statements include the
accounts of CBLI’s majority-owned, newly formed Russian subsidiary, Incuron, LLC
(“Incuron”).  All intercompany balances and transactions have been
eliminated in consolidation.




In May,
2010, CBLI contributed certain intellectual property rights to Incuron which was
formed in the Russian Federation as a limited liability company on January 31,
2010, in exchange for an 83.9% membership interest.  The minority
partner, Bioprocess Capital Ventures (“BCV”) contributed a total of 105,840,000
Russian rubles (approximately $3.5 million based on the current exchange rate)
during April and June of 2010 in exchange for the remaining 16.1% membership
interest.  Incuron was formed to develop CBLI’s curaxin technology for
certain medical applications including oncology.  The participation
agreement between CBLI and BCV entered in December 2009 and amended in April
2010 require (i) additional capital contributions in the amount of 69,730,000
Russian rubles (approximately $2.3 million based on the current exchange rate)
by BCV and (ii) further contributions up to 373,927,000 Russian rubles
(approximately $12.4 million based on the current exchange rate) by BCV
contingent on the achievement of pre-determined scientific milestones and
contingent contributions by CBLI to preserve CBLI’s intended ultimate membership
interest in Incuron of 50.1%. Incuron commenced operations in May 2010 and the
results of its research and development efforts have been included in the
Company’s results of operations since that date.





The
Company’s financial statements have been prepared on the accrual basis of
accounting in accordance with accounting principles generally accepted in the
United States of America, or GAAP, and on a going concern basis which
contemplates the realization of assets and the liquidation of liabilities in the
ordinary course of business. The Company has incurred substantial losses from
operations which raises a question about its ability to continue as a going
concern.  The Company sustained a net loss of $5,892,919, for the six
months ended June 30, 2010 and $12,826,409 for the fiscal year ended
December 31, 2009.





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





Note 2. Summary of Significant
      Accounting Policies





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





B.
            Cash
      and Equivalents - The Company considers highly liquid investments with a
      maturity date of three months or less to be cash equivalents. In addition,
      the Company maintains cash and equivalents at financial institutions,
      which may exceed federally insured amounts at times and which may, at
      times, significantly exceed balance sheet amounts due to outstanding
      checks.





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




12




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





E.
            Equipment
      - Equipment is stated at cost and depreciated over the estimated useful
      lives of the assets (generally five years) using the straight-line method.
      Leasehold improvements are depreciated on the straight-line method over
      the shorter of the lease term or the estimated useful lives of the assets.
      Expenditures for maintenance and repairs are charged to expense as
      incurred. Major expenditures for renewals and betterments are capitalized
      and depreciated. Depreciation expense was $94,689 and $88,945 for the
      three months ended June 30, 2010 and 2009,
      respectively.  Depreciation expense was $192,996 and $180,543
      for the six months ended June 30, 2010 and 2009,
    respectively.





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





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





A portion
of this intellectual property is owned by the Cleveland Clinic Foundation
(“CCF”) and granted to the Company through an exclusive licensing agreement. As
part of the licensing agreement, the Company agrees to bear the costs associated
with the preparation, filing and maintenance of patent applications relating to
this intellectual property. Gross capitalized patents and patents pending costs
were $752,631 and $688,355 for ten patent applications as of June 30, 2010 and
December 31, 2009, respectively. Two of the CCF patent applications were
approved by several nations and are amortized on a straight-line basis over the
weighted average estimated remaining life of approximately fourteen years. The
remainder of the CCF patent applications are still pending approval. The Company
recognized $4,264, and $0 in amortization expense for the three months ended
June 30, 2010 and 2009, respectively.  The Company recognized $6,681,
and $0 in amortization expense for the six months ended June 30, 2010 and 2009,
respectively.





The
Company also has submitted patent applications as a result of intellectual
property exclusively developed and owned by the Company. Gross capitalized
patents pending costs were $217,960 and $199,371 for four patent applications as
of June 30, 2010 and December 31, 2009, respectively. The patent applications
are still pending approval.





The
Company has also submitted two patent applications as a result of the
collaborative research agreement with the Roswell Park Cancer Institute
(“RPCI”).  As part of this collaborative agreement, the Company agrees
to bear the costs associated with the preparation, filing and maintenance of
patent applications related to the intellectual property being
developed.  Gross capitalized patents pending costs were $17,928 and
$8,340 for two patent applications as of June 30, 2010 and December 31, 2009,
respectively.





The
Company has also submitted one patent application as a result of the
collaborative research agreement with the ChemBridge Corporation
(“ChemBridge”).  As part of this collaborative agreement, the Company
agrees to bear the costs associated with the preparation, filing and maintenance
of patent applications related to the intellectual property being
developed.  Gross capitalized patents pending costs were $38,652 and
$38,484 for this patent application as of June 30, 2010 and December 31, 2009,
respectively.




13





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




As
      of June 30, 2010WeightedAverageAccumulated
              
              
              Net
      Intangible
              
              
              AmortizationIntangible
      Assets
              
              Cost
              
              
              Amortization
              
              
              Asset
              
              
              Period
      (Years)Patents
              
              $
              235,767
              
              
              $
              11,255
              
              
              $
              221,512
              
              
              
              14.4Patent
      Applications
              
              
              794,405
              
              
              
              -
              
              
              
              794,405
              
              
              n.a.$
              1,027,171
              
              
              $
              11,255
              
              
              $
              1,015,916





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




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





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





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





The
Series D Private Placement warrants carry a seven-year term and are exercisable
for common shares of the Company at $1.60 per share.  The Company has
a balance in accrued warrant liability of $10,741,245 and $8,410,379 at June 30,
2010 and December 31, 2009 for these warrants, respectively.





The 2010
Common Stock Equity Offering warrants carry a five-year term and are exercisable
six months after the grant date for common shares of the Company at $4.50 per
share.  The Company has a balance in accrued warrant liability of
$1,935,385 and $0 at June 30, 2010 and December 31, 2009 for these warrants,
respectively.





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





K.
            Fair
      Value of Financial Instruments - Financial instruments, including cash and
      equivalents, accounts receivable, 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 June 30, 2010 and December 31,
2009.





The
Company carries its Series D Private Placement warrants at fair value totaling
$10,741,245 and $8,410,379 as of June 30, 2010 and December 31, 2009,
respectively.  The Company carries its 2010 Common Stock Equity
Offering warrants at fair value totaling $1,935,385 and $0 as of June 30, 2010
and December 31, 2009, respectively.  The Company used Level 3 inputs
for valuation of the warrants, and their fair values were determined using the
Black-Scholes option pricing model based on the following
assumptions:




14





Preferred
      D Warrant
              
              
              2010
      Offering WarrantValue
      at
              
              
              Value
      atJune
      30, 2010
              
              
              June
      30, 2010Stock
      price
              
              $
              3.66
              
              
              $
              3.66Exercise
      price
              
              $
              1.60
              
              
              $
              4.50Term
      in years
              
              
              2.87
              
              
              
              2.42Volatility
              
              
              102.97
              %
              
              
              88.68
              %Annual
      rate of quarterly dividends
              
              
              -
              
              
              
              -Discount
      rate- bond equivalent yield
              
              
              0.95
              %
              
              
              0.77
              %


Fair
      Value
                
                
                Fair
      Value Measurements atAs
      of
                
                
                June
      30, 2010June
      30, 2010
                
                
                Using
      Fair Value HierarchyLiabilities
                
                
                
                
                Level
      1
                
                
                Level
      2
                
                
                Level
      3Series
      D Preferred Warrant liability
                
                $
                10,741,246
                
                
                
                
                
                
                
                
                
                
                $
                10,741,2462010
      Offering Warrant liability
                
                $
                1,935,385
                
                
                
                
                
                
                
                
                
                
                $
                1,935,385Total
                
                $
                12,676,631
                
                
                
                
                
                
                
                
                
                
                $
                12,676,631


At June
30, 2010, the assumption for the expected term in years used to value the Series
D Private Placement warrants was changed based on an analysis of warrant
exercise activity for the twelve months since issuance. At the time the warrants
were issued, an expected term of two years was established based on the
expectation that the warrants would be exercised earlier in their term as the
warrants were immediately exercisable at a price below the market price of the
stock.  At June 30, 2010, the Company determined that the safe harbor
method for determination of the assumption relating to the expected term 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.





The
Company recognized a fair value measurement loss of $330,507 and $4,068,926 on
the Series D Private Placement warrants for the three months ended June 30, 2010
and June 30, 2009, respectively.  The Company recognized a fair value
measurement gain of $364,308 and $0 on the 2010 Common Stock Equity Offering
warrants for the three months ended June 30, 2010 and 2009,
respectively.  In total, the Company recognized a fair value
measurement gain of $33,801 and a fair value measurement loss of $4,068,926 for
the three months ended June 30, 2010 and 2009, respectively.





The
Company recognized a fair value measurement loss of $2,710,527 and $5,453,699 on
the Series D Private Placement warrants for the six months ended June 30, 2010
and 2009, respectively.  The Company recognized a fair value
measurement gain of $1,013,231 and $0 on the 2010 Common Stock Equity Offering
warrants for the six months ended June 30, 2010 and 2009,
respectively.  In total, the Company recognized a fair value
measurement loss of $1,697,296 and $5,453,699 for the six months ended June 30,
2010 and 2009 respectively.





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





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





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


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




15





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.





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





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





For the
six months ended June 30, 2010, the Company recognized $8,357 as revenue
resulting in a balance of deferred revenue of $2,321,259 at June 30, 2010. At
December 31, 2009, the balance in deferred revenue was $2,329,616.





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





P.
            Equity
      Incentive Plan - On May 26, 2006, the Company's Board of Directors adopted
      the 2006 Equity Incentive Plan (“Plan”) to attract and retain persons
      eligible to participate in the Plan, motivate participants to achieve
      long-term Company goals, and further align participants' interests with
      those of the Company's other stockholders. The Plan was to expire on May
      26, 2016 and the aggregate number of shares of stock which could be
      delivered under the Plan may not exceed 2,000,000 shares. On February 14,
      2007, these 2,000,000 shares were registered with the SEC by filing a Form
      S-8 registration statement. On April 29, 2008, the stockholders of the
      Company approved an amendment and restatement of the Plan (the “Amended
      Plan”) that clarified certain aspects of the Plan, contained updates that
      reflect changes and developments in federal tax laws and set the
      expiration date at April 29, 2018. On June 8, 2010, the stockholders of
      the Company approved an additional amendment to the Plan increasing the
      total shares that could be awarded under the Amended Plan to
      7,000,000.  As of June 30, 2010, there were 3,337,086 stock
      options and 713,397 shares granted under the Amended Plan and 95,604
      shares forfeited leaving 3,045,121 shares of stock available to be awarded
      under the Amended Plan.





During
the three months ended June 30, 2010, the Company issued 702,404 stock options
and 185,803 shares of common stock for the following:





·
            77,404
      stock options issued to employees and consultants under the Company’s
      incentive bonus plan.


·
            35,000
      stock options to two new employees as part of their
      compensation.


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


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


·
            30,000
      stock options to a consultant for payment of corporate strategy consulting
      services.


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




16




·
            82,706
      shares of common stock to six consultants for payment of corporate
      strategy consulting services rendered.  The shares were valued
      at $280,183.


·
            43,380
      shares of common stock to two consultants for payment of financial
      consulting services rendered.  The shares were valued at
      $154,833.





During
the six months ended June 30, 2010, the Company issued 846,433 stock options and
266,865 shares of common stock for the following:





·
            140,433
      stock options issued to employees and consultants under the Company’s
      incentive bonus plan.


·
            95,000
      stock options to four new employees as part of their
      compensation.


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


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


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


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


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


·
            144,744
      shares of common stock to six consultants for payment of corporate
      strategy consulting services rendered.  The shares were valued
      at $506,884.


·
            62,404
      shares of common stock to four consultants for payment of financial
      consulting services rendered.  The shares were valued at
      $225,623.





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





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


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


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


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


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


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


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





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





The fair
value of each stock option granted is estimated on the grant date. The Black
Scholes model is used for standard stock options, but if market conditions are
present within the stock options, the Company utilizes Monte Carlo simulation to
value the stock options. The assumptions used to calculate the fair value of
options granted are evaluated and revised, as necessary, to reflect the
Company's experience. The Company uses a risk-free rate published by the St.
Louis Federal Reserve at the time of the option grant, assumes a forfeiture rate
of zero, assumes an expected dividend yield rate of zero based on the Company's
intent not to issue a dividend in the foreseeable future, uses an expected life
based on the safe harbor method, and computes an expected volatility based on
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 June 30, 2010 and June 30, 2009, the Company granted
702,404 and 658,055 stock options, respectively. The Company recognized a total
of $614,025 and $1,119,463 in expense related to stock options for the three
months ended June 30, 2010 and June 30, 2009, respectively.  The
Company also incurred an additional $37,800 of expense for stock options awarded
under the 2009 Executive Compensation Plan. These options were originally
expensed based on the December 31, 2009 variables, but were not issued until May
18, 2010. The change in dates resulted in a difference in valuation assumptions
used in the Black-Scholes model causing an increase in the grant date fair
value. This increase in the grant date fair value from $2.31 to $2.40 per share
resulted in the incurrence of $37,800 in expense.  The net expense for
options for the three months ended June 30, 2010 and June 30, 2009 was $651,825
and $1,119,463, respectively.




17





During
the six months ended June 30, 2010 and June 30, 2009, the Company granted
846,433 and 658,055 stock options, respectively. The Company recognized a total
of $944,271 and $1,221,026 in expense related to stock options for the six
months ended June 30, 2010 and June 30, 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 six months ended June
30, 2010 and June 30, 2009, respectively.  The Company also incurred
an additional $37,800 of expense for stock options awarded under the 2009
Executive Compensation Plan. These options were originally expensed in 2009
based on the December 31, 2009 variables, but were not issued until May 18,
2010. The change in dates resulted in a difference in valuation assumptions used
in the Black-Scholes model causing an increase in the grant date fair value.
This increase in the grant date fair value from $2.31 to $2.40 per share
resulted in the incurrence of $37,800 in expense.  The net expense for
options for the six-months ended June 30, 2010 and June 30, 2009 was $943,284
and $1,183,148, respectively.





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





2010
      YTD
              
              
              2009Risk-free
      interest rate
              
              
              1.98-2.75
              %
              
              
              1.87-2.74
              %Expected
      dividend yield
              
              
              0
              %
              
              
              0
              %Expected
      life
              
              5-6
      years
              
              
              5-6
      yearsExpected
      volatility
              
              
              84.23-89.55
              %
              
              
              84.13-90.06
              %





The
weighted average, estimated grant date fair values of stock options granted
during the three months ended June 30, 2010 and June 30, 2009 were $2.32 and
$1.76, respectively.





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





WeightedWeighted
              
              AverageAverage
              
              RemainingExercise
              
              ContractualPrice
      per
              
              TermShares
              
              
              Share
              
              (in
      Years)Outstanding,
      December 31, 2009
              
              
              2,517,007
              
              
              $
              5.46Granted
              
              
              846,433
              
              
              $
              3.39Exercised
              
              
              63,541
              
              
              $
              1.57Forfeited,
      Canceled
              
              
              64,427
              
              
              $
              7.47Outstanding,
      June 30, 2010
              
              
              3,235,472
              
              
              $
              4.95
              
              8.15Exercisable,
      June 30, 2010
              
              
              2,963,097
              
              
              $
              4.72
              
              8.16





WeightedWeighted
              
              AverageAverage
              
              RemainingExercise
              
              ContractualPrice
      per
              
              TermShares
              
              
              Share
              
              (in
      Years)Outstanding,
      December 31, 2008
              
              
              1,948,874
              
              
              $
              6.17Granted
              
              
              658,055
              
              
              $
              2.54Exercised
              
              
              86,981
              
              
              $
              1.76Forfeited,
      Canceled
              
              
              3,313
              
              
              $
              4.00Outstanding,
      June 30, 2009
              
              
              2,516,635
              
              
              $
              5.37
              
              8.46Exercisable,
      June 30, 2009
              
              
              2,149,435
              
              
              $
              4.98
              
              8.41




18





The
Company recognized $631,092 and $301,758 in expense for shares issued under the
Amended Plan during the three months ended June 30, 2010 and June 30, 2009,
respectively.   The Company issued a total of 185,803 shares and
87,540 shares during the three months ended June 30, 2010 and June 30, 2009,
respectively.  In addition, the Company recognized $3,296 and $8,241
in compensation expense related to the amortization of restricted shares during
the three months ended June 30, 2010 and June 30, 2009,
respectively.





The
Company also recognized $1,272,990 and $503,842 in expense for shares issued
under the Amended Plan during the six months ended June 30, 2010 and June 30,
2009, respectively.   The Company issued a total of 375,865
shares and 167,540 shares during the six months ended June 30, 2010 and June 30,
2009, respectively.  In addition, the Company recognized $6,630 and
$16,574 in compensation expense related to the amortization of restricted shares
during the six months ended June 30, 2010 and June 30, 2009,
respectively.





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








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




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




Three
      Months Ended
              
              
              Six
      Months EndedJune
      30,2010
              
              
              June
      30,2009
              
              
              June
      30,2010
              
              
              June
      30,2009Net
      loss available to common stockholders
              
              $
              (2,439,660
              )
              
              $
              (6,699,202
              )
              
              $
              (5,803,671
              )
              
              $
              (9,927,111
              )Net
      loss per share, basic and diluted
              
              $
              (0.09
              )
              
              $
              (0.45
              )
              
              $
              (0.23
              )
              
              $
              (0.69
              )Weighted-average
      shares used in computing net loss per share, basic and
    diluted
              
              
              26,734,076
              
              
              
              14,789,062
              
              
              
              25,132,246
              
              
              
              14,342,277




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
              
              June
      30,2010
              
              
              June
      30,2009Preferred
      Shares
              
              
              -
              
              
              
              1,967,116Warrants
              
              
              9,803,619
              
              
              
              9,201,874Options
              
              
              3,253,472
              
              
              
              2,516,635Total
              
              
              13,057,091
              
              
              
              13,685,625






T.
            Concentrations
      of Risk - Grant and contract revenue was comprised wholly from grants and
      contracts issued by federal and state governments and accounted for 100.0%
      and 100.0% of total revenue for the six months ended June 30, 2010 and
      June 30, 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 us to a significant concentration of credit
risk consist primarily of cash and cash equivalents and securities
available-for-sale. The Company maintains deposits in federally insured
institutions in excess of federally insured limits. The Company does not believe
it is exposed to significant credit risk due to the financial position of the
depository institutions in which those deposits are held. Additionally, the
Company has established guidelines regarding diversification of its investment
portfolio and maturities of investments, which are designed to meet safety and
liquidity.





U.
            Foreign
      Currency Exchange Rate Risk - The Company has entered into a manufacturing
      agreement to produce one of its drug compounds with a foreign third party
      and is required to make payments in the foreign currency. As a result, the
      Company's financial results could be affected by changes in foreign
      currency exchange rates. Currently, the Company's exposure primarily
      exists with the Euro. As of June 30, 2010, the Company is obligated to
      make payments under the agreements of 1,654,440 Euros. As of June 30,
      2010, the Company has purchased forward contracts for 1,000,000 Euros
      and, therefore, at June 30, 2010, had foreign currency commitments of
      $803,064 for Euros given prevailing currency exchange spot
      rates.




19




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





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





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




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





Series
D Preferred Stock and Warrants and Related Adjustments





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




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.




20




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





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.





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.




21




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





On
October 26, 2009, the SEC declared effective a registration statement of the
Company registering up to 4,366,381 shares of common stock for resale from time
to time by the selling stockholders named in the prospectus contained in the
registration statement. This number represented 4,366,381 shares of common stock
issuable upon the conversion or exercise of the securities issued in the
Company’s February and March 2009 private placement. Of these 4,366,381 shares
of common stock, up to 3,863,848 shares were issuable upon conversion of Series
D Preferred and up to 502,533 shares were issuable upon exercise of the Series D
Warrants. The Company will not receive any proceeds from the sale of the
underlying shares of common stock, although to the extent the selling
stockholders exercised warrants for the underlying shares of common stock, the
Company will receive the exercise price of those warrants unless the warrant
holder 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.





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





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





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





2010
Common Stock Private Placement and Related Adjustments





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




22





The fair
value of the 1,138,462 Warrants issued with the 2010 Common Stock Private
Placement 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.





Other
Issuances





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





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





Note
4. Commitments and Contingencies





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





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




From time
to time, the Company may have certain contingent liabilities that arise in the
ordinary course of business. The Company accrues for liabilities when it is
probable that future expenditures will be made and such expenditures can be
reasonably estimated. For all periods presented, the Company is not a party to
any pending litigation or other legal proceedings. From time to time in the
ordinary course of business, the Company may be subject to claims brought
against it. It is not possible to state the ultimate liability, if any, that
could result to the Company as a result of 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 $92,041 and
$86,718 for the three months ended June 30, 2010 and June 30, 2009,
respectively.  The operating lease expenses recognized were $183,786
and $173,438 for the six months ended June 30, 2010 and June 30, 2009,
respectively.




23





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





OperatingLeases2010
      remaining
      two quarters
              
              
              245,7222011
              
              
              315,3422012
              
              
              147,9152013
              
              
              3,540$
              712,519


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 six months ended
June 30, 2010 and June 30, 2009:





Weighted
      AverageOptions
              
              
              Exercise
      Price Per ShareOutstanding,
      December 31, 2009
              
              
              2,517,007
              
              
              $
              5.46Granted
              
              
              846,433
              
              
              $
              3.39Exercised
              
              
              63,541
              
              
              $
              1.57Forfeited,
      Canceled
              
              
              64,427
              
              
              $
              7.47Outstanding,
      June 30, 2010
              
              
              3,235,472
              
              
              $
              4.95


Weighted
      AverageOptions
              
              
              Exercise
      Price Per ShareOutstanding,
      December 31, 2008
              
              
              1,948,874
              
              
              $
              6.17Granted
              
              
              658,055
              
              
              $
              2.54Exercised
              
              
              86,981
              
              
              $
              1.76Forfeited,
      Canceled
              
              
              3,313
              
              
              $
              4.00Outstanding,
      June 30, 2009
              
              
              2,516,635
              
              
              $
              5.37


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
            
            
            Number
      ofAverage
            
            
            CommonExercise
            
            
            SharesPrice
      Per
            
            
            ExerciseableWarrants
            
            
            Share
            
            
            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
            
            
            208,939
            
            
            $
            1.52
            
            
            
            243,144Forfeited,
      Canceled
            
            
            3,973
            
            
            $
            1.39
            
            
            
            5,718Outstanding,
      June 30, 2010
            
            
            7,882,222
            
            
            $
            3.88
            
            
            
            9,803,619




24




Weighted
              
              
              Number
      ofAverage
              
              
              CommonExercise
              
              
              SharesPrice
      Per
              
              
              ExerciseableWarrants
              
              
              Share
              
              
              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,
      June 30, 2009
              
              
              7,718,390
              
              
              $
              3.59
              
              
              
              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 material legal actions. From
time to time in the ordinary course of business, the Company may be subject to
claims brought against it.




Note
5. Subsequent Events




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




25




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





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





OVERVIEW





Cleveland
BioLabs, Inc. is a biotechnology company focused on developing biodefense,
tissue protection and cancer treatment drugs based on the concept of modulation
of cell death for therapeutic benefit. CBLI was 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 by Incuron, our majority-owned, newly formed
Russian subsidiary, as anticancer agents that could act as mono-therapy drugs or
in combination with other existing anticancer therapies.





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




Technology





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





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





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





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





Through
our research and development, 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.





26





·
            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.





These
drug candidates demonstrate the value of our scientific foundation. Based on the
accelerated review and approval status currently available for drugs qualifying
for Fast Track status, our most advanced drug candidate, Protectan CBLB502 may
be approved for treatment of acute radiation syndrome 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 CBLB502 demonstrates the
      potential to address an unmet medical need and is intended to treat a
      serious or life-threatening condition, CBLB502 has been granted Fast Track
      status by the FDA.  The Fast Track designation will allow CBLI
      to file a Biologic License Application, or BLA, on a rolling basis and
      will allow the FDA to review the filing as it is received rather than
      waiting for the complete submission prior to commencing the review
      process.  In addition, our BLA filing will be eligible for
      priority review, which could result in an abbreviated review time of six
      months. We expect to complete development of Protectan CBLB502 for
      treatment of acute radiation syndrome and initiate submission of the BLA
      with the FDA in mid-2011.




·
            Leveraging our relationship
      with leading research and clinical development institutions. The
      Cleveland Clinic, or CCF, one of the top research medical facilities in
      the world, is one of our co-founders. In January 2007, we entered into a
      strategic research partnership with Roswell Park Cancer Institute, or
      RPCI, in Buffalo, New York. We have continued our research and development
      program that we initiated at CCF at RPCI and RPCI shares valuable
      expertise with us as developmental efforts are performed on our drug
      candidates. These partnerships 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 Department of Defense, or DoD, the Biomedical
      Advanced Research and Development Authority, or BARDA, of the Department
      of Health and Human Services, or HHS, and 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 almost 2,000,000
      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.




27





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 June 30, 2010, we spent $65,456,290 on R&D.





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





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





Ninesetsof 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 theU.S.
Patent and Trademark Office(US Patent No. 7,638,485 titled "Modulating Apoptosis") and the European Patent Office
(European Publication Number FP 1706133, titled "Methods of Protecting Against
Radiation Using Flagellin.").This patent was also granted by the nine member countries of the Eurasian
Patent Organization, and the Ukraine.A second patenttitled “Small Molecule Inhibitors of
MRP1 and Other Multidrug Responders” was approved by several nations,not including the
U.S.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 June 30, 2010 and 2009, we spent $3,733,742 and
$4,525,603, respectively.  For the six months ended June 30, 2010 and
2009, we spent $7,326,313 and $6,760,224, respectively.  From our
inception to June 30, 2010, we spent $47,573,795 on R&D for
protectans.




Protectan
CBLB502





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





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




28





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.





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 June 30, 2010 and 2009, we spent $3,733,742 and $4,525,603, respectively,
on R&D for Protectan CBLB502.  For the six months ended June 30,
2010 and 2009, we spent $7,326,313 and $6,755,071, respectively, on R&D for
Protectan CBLB502.  From our inception to June 30, 2010, we spent
$44,436,854 on R&D for Protectan CBLB502.





Non-medical
Applications





Our
scientists have demonstrated that injecting Protectan CBLB502 into mice, rats
and non-human primates protects them from lethal doses of total body gamma
radiation. An important advantage of Protectan CBLB502, above any other
radioprotectant known to us, is the ability to effectively protect not only the
hematopoietic system, but also the gastrointestinal, 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, a Phase Ib
study, for CBLB502 and completed dosing in May 2010. This safety study included
a total of 100 healthy volunteers randomized among four dosing regimens of
CBLB502. Our goal is to complete the data analysis and filing of the final study
report with the FDA in the third quarter of 2010. Participants in the
100-subject study were assessed for adverse side effects and blood samples were
obtained to assess the effects of CBLB502 on various biomarkers. The primary
objectives of this study 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 would then anticipate
moving forward with the double-blind definitive safety study in a larger group
of healthy human 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.




The
Defense Threat Reduction Agency of the 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.




29





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.





In
September 2008, the BARDA 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 $2.3 million to $15.6
million and awarded the first milestone option of $6.3 million. BARDA has since
awarded the second, third and fourth milestone options under the contract for
$1.47 million, $0.46 million and $4.14 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.





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.





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 June 30, 2010 and 2009, we spent
$3,733,742 and $4,525,603, respectively, on R&D for biodefense applications
of Protectan CBLB502.  For the six months ended June 30, 2010 and
2009, we spent $7,326,313 and $6,698,944, respectively, on R&D for
biodefense applications of Protectan CBLB502.  From our inception to
June 30, 2010, we spent $42,603,798 on R&D for the biodefense applications
of Protectan CBLB502.




Protectan
CBLB502 is a candidate for procurement by the DoD, HHS/BARDA and other countries
/ territories 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.




30





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








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
      under Good Laboratory Practices, or GLP, conditions. We expect to complete
      these studies in 2011. The studies have an approximate cost of $2,500,000
      and are covered by a government development
  contract.




·
            Completing
      the analysis and reporting of the second Phase I safety study in
      approximately 100 healthy human volunteers, which we expect to complete in
      the third quarter of 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 initiate in 2011.  At the present time,
      the costs of the filing cannot be approximated with any level of
      certainty.




Medical
Applications





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




31





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.





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 late 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 CCF, 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 CCF 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.






32





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 June 30, 2010 and 2009, we spent $0 and $0,
respectively, on R&D for the medical applications of Protectan
CBLB502.  For the six months ended June 30, 2010 and 2009, we spent $0
and $56,127, respectively, on R&D for the medical applications of Protectan
CBLB502.  From our inception to June 30, 2010, we spent $1,833,056 on
R&D for the medical applications of Protectan CBLB502.




Protectan
CBLB612





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





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.




33





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;·
            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 June 30, 2010 and 2009, we spent $0 and $0, respectively, on
R&D for Protectan CBLB612.  For the six months ended June 30, 2010
and 2009, we spent $0 and $5,153, respectively, on R&D for Protectan
CBLB612.  From our inception to June 30, 2010, we spent $3,136,941 on
R&D for Protectan CBLB612. Further development and extensive testing will be
required to determine its technical feasibility and commercial
viability.





Curaxins





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





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.




34





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





In July
2010, a discovery regarding potential antiviral applications for our curaxin
family of molecules was pre-published online in the Journal of Virology, the
world’s leading peer-reviewed journal in the field of virology (Gasparian,
Neznanov, et al., Journal of Virology,  doi:10.1128/JVI.02569-09; July
14, 2010).





The
published study, conducted by our scientists in cooperation with investigators
from RPCI and Cleveland State University, examined the ability of the Company’s
prototype curaxin (CBLC102, or quinacrine) and other similar compounds to
inhibit a mechanism used by picornaviruses to synthesize their proteins that is
essential for their viability.  This group of viruses includes
important human pathogens such as poliovirus.  In particular, the
specific interaction of curaxins with double-stranded RNA effectively blocks
synthesis of viral, but not cellular proteins.  This study provides
proof of principle for the prospective extension of curaxins from anticancer to
antiviral applications.





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 June 30, 2010 and 2009, we spent $333,458 and $246,497 respectively on
R&D for curaxins.  For the six months ended June 30, 2010 and
2009, we spent $404,462 and $514,758 respectively on R&D for
curaxins.  From our inception to June 30, 2010, we spent $12,638,743
on R&D for curaxins.




In December 2009,we entered into
our Incuron joint venture with Bioprocess Capital Ventures, or BCV, a Russian
Federation venture capital fund, to develop our curaxin compounds for cancer,
liver, viral and age related disease applications. According to the terms of the
agreement, we transferred the aforementioned rights of curaxin molecules to the
new joint venture, and BCV will contribute an aggregate of 549,497,000 Russian
rubles (approximately $18.2 million based on the current exchange rate) to
support development of the compounds. BCV made the first payments of 105,840,000
Russian rubles (approximately $3.5 million based on the current exchange rate)
during April and June of 2010. Pursuant to the participation agreement, as
amended, BCV will make an additional payment of 69,730,000 Russian rubles
(approximately $2.3 million based on the current exchange rate) as part of its
initial contribution. BCV will make the balance of its contribution upon the
achievement of predetermined development milestones. The first milestone payment
of 192,737,000 Russian rubles (approximately $6.4 million based on the current
exchange rate) will be made upon approval to begin clinical trials on oncology
patients with a selected lead curaxin compound, or upon progression of a
clinical program of CBLC102. The second milestone payment of 181,190,000 Russian
rubles (approximately $6.0 million based on the current exchange rate) will be
made upon completion of at least one Phase I/II trial in cancer patients.
Although it is anticipated that CBLI will ultimately own 50.1% of the membership
interest in Incuron, depending on the U.S. dollar/Russian ruble exchange rate
and the U.S. dollar-equivalent value of the aggregate contributions made by BCV,
CBLI may be required to either transfer a portion of its ownership interest to
BCV or make a cash contribution to Incuron. In such a case, if CBLI chooses to
transfer a portion of its ownership interest to BCV, CBLI may ultimately own
less than 50.1% of the membership interest of Incuron, but will retain the right
to appoint a majority of the members of the board of directors of Incuron. We
serve as a subcontractor to Incuron to support certain mechanistic studies and
oversee clinical development in the U.S.


Curaxin
CBLC102





One of
the curaxins from the 9-aminoacridine group is a long-known, anti-infective
compound known as quinacrine, which we refer to as Curaxin CBLC102. It has been
used for over 40 years to treat malaria, osteoarthritis and autoimmune
disorders. However, we have discovered new mechanisms of action for quinacrine
in the area of apoptosis. Through assay testing performed at Dr. Andrei Gudkov’s
laboratories at CCF beginning in 2002, which included testing in a variety of
human tumor-derived cell lines representing cancers of different tissue origin
(including RCC, sarcomas, prostate, breast and colon carcinomas), we have
observed that Curaxin CBLC102 behaves as a potent NF-kB suppressor and activator
of p53 in these types of cancer cells. As published in Oncogene (Guo et al.,
Oncogene, 2009, 28:1151-1161), it has now been shown that treatment of cancer
cells with CBLC102 results in the inhibition of the molecular pathway
(PI3K/Akt/mTOR) that is important for cancer cell survival and is considered to
be a highly relevant anticancer treatment target.  Finally, CBLC102
has favorable pharmacological and toxicological profiles and demonstrates the
anticancer effect in transplants of human cancer cells into
primates.




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




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




35





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





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





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





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





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





We spent
approximately $262,637 and $1,741,194 on R&D for Curaxin CBLC102 in the
fiscal years ended December 31, 2009 and 2008, respectively. For the quarters
ended June 30, 2010 and 2009, we spent $166,729 and $70,958, respectively, on
R&D for Curaxin CBLC102.  For the six months ended June 30, 2010
and 2009, we spent $201,930 and $218,134, respectively, on R&D for Curaxin
CBLC102.  From our inception to June 30, 2010, we spent $6,931,049 on
R&D for Curaxin CBLC102.




Other
Curaxins





As
mentioned above, screening of the chemical library for compounds capable of
restoring normal function to wild type p53 in the context of RCC yielded three
chemical classes of compounds. Generation of focused chemical libraries around
the hits from one of these classes and their structure-activity optimization
brought about a new generation of curaxins. As the part of this program
performed in the partnership with ChemBridge Corporation, more than 800
proprietary compounds were screened for p53 activation, efficacy in animal tumor
models, selective toxicity and metabolic stability in the presence of rat and
human microsomes. The most active compounds were efficacious in preventing tumor
growth in models for colon carcinoma, melanoma, ovarian cancer, RCC, and breast
cancer.





As a
result of this comprehensive hit-to-lead optimization program, we have developed
CBLC137, which is a drug candidate with proprietary composition of matter
belonging to our next generation of highly improved curaxins. CBLC137 has
demonstrated reliable anti-tumor effects in animal models of colon, breast,
renal and prostate cancers.  CBLC137 has favorable pharmacological
characteristics, is suitable for oral administration and demonstrates a complete
lack of genotoxicity.  It shares all of the positive aspects of
CBLC102, but significantly exceeds the former compound’s activity and efficacy
in preclinical tumor models.  Further development of CBLC137 will
continue through the Incuron joint venture.





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 June 30, 2010 and 2009, we spent $166,729 and $175,539, respectively, on
R&D for other curaxins.  For the six months ended June 30, 2010
and 2009, we spent $202,532 and $296,623, respectively, on R&D for other
curaxins.  From our inception to June 30, 2010, we spent $5,707,694 on
R&D for other curaxins.





CBLC137
is at a very early stage of its development and, as a result, it is premature to
estimate when any development may be completed, the cost of development or when
any cash flow could be realized from development.




36




FINANCIAL
OVERVIEW





Including
several non-cash charges, our net loss decreased from $6,476,730 for the three
months ended June 30, 2009 to $2,528,908 for the three months ended June 30,
2010, a decrease of $3,947,822 or 61.0%. We incurred non-cash charges of
depreciation and amortization of $98,953 and $88,944, non-cash salaries and
consulting fees of $1,274,180 and $1,429,462 and a change in the value of
warrants of ($33,800) and $4,068,926 for the three months ended June 30, 2010
and 2009, respectively. Excluding these non-cash charges, our net loss
increased $300,177 or 33.8% from $889,398 for the three months ended June 30,
2009 to $1,189,575 for the three months ended June 30, 2010. This increase was
due to higher R&D costs on the curaxin compounds and general and
administrative costs to support our continued growth and development including
our consolidated subsidiary, Incuron.





Including
several non-cash charges, our net loss decreased from $9,435,660 for the six
months ended June 30, 2009 to $5,892,919 for the six months ended June 30, 2010,
a decrease of $3,542,741 or 37.6%. We incurred non-cash charges of depreciation
and amortization of $199,677 and $180,543, non-cash salaries and consulting fees
of $2,210,871 and $1,703,563 and a change in the value of warrants of $1,697,296
and $5,453,699 for the six months ended June 30, 2010 and 2009,
respectively. Excluding these non-cash charges, our net loss decreased
$312,780 or 14.9% from $2,097,855 for the six months ended June 30, 2009 to
$1,785,075 for the six months ended June 30, 2010. This decrease was due to
increased government funding and our cost containment efforts that include
incurring R&D costs that are predominantly supported through government
funding or direct investment and reducing general and administrative
costs.





Equity
Overview





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





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





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





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.




37





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





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





·
            the
      exercise price of the  Series B Warrants reduced from $6.37 to
      $5.99, and the aggregate number of shares of common stock issuable upon
      exercise of the Series B Warrants increased from 3,847,276 to 4,091,345;
      and




·
            the
      exercise price of the Series C Warrants reduced from $6.76 to $6.35, and
      the aggregate number of shares of common stock issuable upon exercise of
      the Series C Warrants increased from 434,596 to
  462,654.





Critical
Accounting Policies





Our
management's discussion and analysis of our financial condition and results of
operations is based upon our financial statements, which have been prepared in
accordance with GAAP. The preparation of these financial statements requires us
to make estimates and judgments that affect the reported amounts of our assets,
liabilities, revenues, expenses and other reported disclosures. We believe that
we consistently apply these judgments and estimates and the financial statements
and accompanying notes fairly represent all periods presented. However, any
differences between these judgments and estimates and actual results could have
a material impact on our statements of income and financial position. We base
our estimates on historical experience and on various other assumptions that we
believe are reasonable under the circumstances.




Note 2 to
our financial statements includes disclosure of our significant accounting
policies. Critical accounting estimates, as defined by the SEC, are those that
are most important to the portrayal of our financial condition and results of
operations and require our most difficult and subjective judgments and estimates
of matters that are inherently uncertain. While all decisions regarding
accounting policies are important, we believe that our policies regarding
revenue recognition, R&D expenses, intellectual property related costs,
stock-based compensation expense and fair value measurements could be considered
critical, and are discussed in more detail below.





Revenue
Recognition





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





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





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





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





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





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




38




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
June 30, 2010, $50,000 has been paid to CCF for milestone payments relating to
the filing of an IND with the FDA for Curaxin CBLC102, $250,000 has been paid to
CCF as a result of commencing Phase II clinical trials for Curaxin CBLC102 and
$50,000 has been paid to CCF relating to the filing of an IND with the FDA for
Protectan CBLB502. Once a drug receives regulatory approval, we will record any
subsequent milestone payments in identifiable intangible assets, less
accumulated amortization, and amortize them evenly over the remaining agreement
term or the expected drug life cycle, whichever is shorter. We expect our
R&D expenses to increase as we continue to develop our drug
candidates.




Intellectual
Property Related Costs





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





Through
December 31, 2009, we capitalized $929,976 in expenditures less amortization
associated with the preparation, filing and maintenance of certain of our
patents, which were incurred through the year ended December 31, 2009. We
capitalized an additional $92,621 and amortized an additional $6,681 for the six
months ended June 30, 2010, resulting in a balance of capitalized intellectual
property totaling $1,015,916.





Stock-based
Compensation





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





The fair
value of each stock option granted is estimated on the grant date using accepted
valuation techniques such as the Black Scholes Option Valuation model or Monte
Carlo Simulation depending on the terms and conditions present within the
specific option being valued. The assumptions used to calculate the fair value
of options granted are evaluated and revised, as necessary, to reflect our
experience. We use a risk-free rate based on published rates from the St. Louis
Federal Reserve at the time of the option grant; assume a forfeiture rate of
zero; assume an expected dividend yield rate of zero based on our intent not to
issue a dividend in the foreseeable future; use an expected life based on the
safe harbor method; and presently compute an expected volatility based on a
method layering in the volatility of our company along with that of similar
high-growth, publicly-traded, biotechnology companies due to the limited trading
history of our company. Compensation expense is recognized using the
straight-line amortization method for all stock-based awards.





During
the six months ended June 30, 2010 and June 30, 2009, we granted 846,433 and
658,055 stock options, respectively. We recognized a total of $944,271 and
$1,221,026 in expense related to stock options for the six months ended June 30,
2010 and June 30, 2009, respectively.  We also recaptured $38,787 and
$37,878 of previously recognized expense due to the forfeiture of non-vested
stock options during the six months ended June 30, 2010 and June 30, 2009,
respectively.  We also incurred an additional $37,800 of expense for
stock options awarded under the 2009 Executive Compensation Plan. These options
were originally expensed in 2009 based on the December 31, 2009 variables, but
were not issued until May 18, 2010. The change in dates resulted in a difference
in valuation assumptions used in the Black-Scholes model causing an increase in
the grant date fair value. This increase in the grant date fair value from $2.31
to $2.40 per share resulted in the incurrence of $37,800 in
expense.  The net expense for options for the six-months ended June
30, 2010 and June 30, 2009 was $943,284 and $1,183,148,
respectively.





We also
recognized a total of $1,272,990 and $503,841 in expense for shares issued and a
total of $6,630 and $16,574 in expense related to the amortization of restricted
shares for the six months ended June 30, 2010 and June 30, 2009,
respectively





Fair
Value Measurement





We value
our financial instruments based on fair value measurements and disclosures which
establishes a valuation hierarchy for disclosure of the inputs to valuation used
to measure fair value. This hierarchy prioritizes the inputs into three
broad levels as follows: Level 1 inputs are quoted prices (unadjusted) in active
markets for identical assets or liabilities; Level 2 inputs are quoted prices
for similar assets and liabilities in active markets or inputs that are
observable for the asset or liability, either directly or indirectly; and Level
3 inputs are unobservable inputs in which little or no market data exists,
therefore requiring a company to develop its own assumptions.  We do
not have any significant assets or liabilities measured at fair value using
Level 1 or Level 2 inputs as of June 30, 2010.




39




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





We carry
the warrants issued in the Series D Private Placement at fair value using Level
3 inputs for its valuation methodology totaling $10,741,245 and $8,410,379 as of
June 30, 2010 and December 31, 2009, respectively.  We recognized a
fair value measurement loss of $330,507 and $4,068,926 for the three months
ended June 30, 2010 and 2009, respectively.  We recognized a fair
value measurement loss of $2,710,527 and $5,453,699 for the six months ended
June 30, 2010 and 2009, respectively.





We carry
the warrants issued in conjunction with the 2010 Common Stock Equity Offering at
fair value using Level 3 inputs for its valuation methodology totaling
$1,935,385 and $0 as of June 30, 2010 and December 31, 2009,
respectively.  We recognized a fair value measurement gain of $364,308
and $0 for the three months ended June 30, 2010 and 2009,
respectively.  We recognized a fair value measurement gain of
$1,013,231 and $0 for the six months ended June 30, 2010 and 2009,
respectively.





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




Recently
Issued Accounting Pronouncements





See Note
2W to financial statements in Item 1.




Results
of Operations





The
following table sets forth our statement of operations data for the three and
six months ended June 30, 2010 and 2009 and the years ended December 31, 2009
and 2008 and should be read in conjunction with our financial statements and the
related notes appearing elsewhere in this filing and in our annual report on
Form 10-K for the year ended December 31, 2009.





Three
      Months
              
              Three
      Months
              
              Six
      Months
              
              Six
      Months
              
              Year
      Ended
              
              Year
      EndedEnded
              
              Ended
              
              Ended
              
              Ended
              
              December
      31,
              
              December
      31,30-Jun-10
              
              30-Jun-09
              
              30-Jun-10
              
              30-Jun-09
              
              2009
              
              2008(unaudited)
              
              (unaudited)
              
              (unaudited)
              
              (unaudited)Revenues
              
              $
              4,210,763
              
              
              $
              4,184,978
              
              
              $
              8,381,111
              
              
              $
              6,494,709
              
              
              $
              14,345,908
              
              
              $
              4,705,597Operating
      expenses
              
              
              6,831,315
              
              
              
              6,609,236
              
              
              
              12,458,596
              
              
              
              10,234,008
              
              
              
              20,728,837
              
              
              
              19,050,965Other
      expense (income)
              
              
              (84,005
              )
              
              
              4,064,421
              
              
              
              1,828,846
              
              
              
              5,713,618
              
              
              
              6,463,208
              
              
              
              (59,597
              )Net
      interest expense (income)
              
              
              (7,639
              )
              
              
              (11,949
              )
              
              
              (13,412
              )
              
              
              (17,257
              )
              
              
              (19,728
              )
              
              
              (259,844
              )Net
      income (loss)
              
              $
              (2,528,908
              )
              
              $
              (6,476,730
              )
              
              $
              (5,892,919
              )
              
              $
              (9,435,660
              )
              
              $
              (12,826,409
              )
              
              $
              (14,025,927
              )





The
following table summarizes R&D expenses for the three months and six months
ended June 30, 2010 and 2009 and the years ended December 31, 2009 and 2008 and
since inception:





Three
      Months
              
              
              Three
      Months
              
              
              Six
      Months
              
              
              Six
      Months
              
              
              Year
      Ended
              
              
              Year
      Ended
              
              
              TotalEnded
              
              
              Ended
              
              
              Ended
              
              
              Ended
              
              
              December
      31,
              
              
              December
      31,
              
              
              Since30-Jun-10
              
              
              30-Jun-09
              
              
              30-Jun-10
              
              
              30-Jun-09
              
              
              2009
              
              
              2008
              
              
              Inception(unaudited)
              
              
              (unaudited)
              
              
              (unaudited)
              
              
              (unaudited)
              
              
              
              
              
              
              
              
              (unaudited)Research
      and development
              
              $
              4,170,115
              
              
              $
              4,772,100
              
              
              $
              7,867,895
              
              
              $
              7,274,982
              
              
              $
              14,331,673
              
              
              $
              13,160,812
              
              
              $
              65,456,290General
              
              $
              102,915
              
              
              $
              -
              
              
              $
              137,120
              
              
              $
              -
              
              
              $
              -
              
              
              $
              931,441
              
              
              $
              5,243,752Protectan
      CBLB502 - non-medical applications
              
              $
              3,733,742
              
              
              $
              4,525,603
              
              
              $
              7,326,313
              
              
              $
              6,698,944
              
              
              $
              13,676,289
              
              
              $
              7,264,813
              
              
              $
              42,603,798Protectan
      CBLB502 - medical applications
              
              $
              -
              
              
              $
              -
              
              
              $
              -
              
              
              $
              56,127
              
              
              $
              56,127
              
              
              $
              756,227
              
              
              $
              1,833,056Protectan
      CBLB612
              
              $
              -
              
              
              $
              -
              
              
              $
              -
              
              
              $
              5,153
              
              
              $
              6,567
              
              
              $
              974,459
              
              
              $
              3,136,941Curaxin
      CBLC102
              
              $
              166,729
              
              
              $
              70,958
              
              
              $
              201,930
              
              
              $
              218,134
              
              
              $
              262,637
              
              
              $
              1,741,194
              
              
              $
              6,931,049Other
      Curaxins
              
              $
              166,729
              
              
              $
              175,539
              
              
              $
              202,532
              
              
              $
              296,623
              
              
              $
              330,053
              
              
              $
              1,492,678
              
              
              $
              5,707,694





Three
Months Ended June 30, 2010 Compared to Three Months Ended June 30,
2009





Revenue





Revenue
increased from $4,184,978 for the three months ended June 30, 2009 to $4,210,763
for the three months ended June 30, 2010 representing an increase of $25,785 or
0.6% resulting primarily from an increase in revenue from various federal grants
and contracts including the DoD and BARDA contracts.




40





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





Revenue
              
              Revenue2010
              
              2009Period
      of
              
              (April
      1 thru
              
              (April
      1 thru
              
              
              RevenueAgency
              
              Program
              
              
              Amount
              
              Performance
              
              June
      30)
              
              June
      30)
              
              
              2009(unaudited)
              
              (unaudited)DoD
              
              DTRA
      Contract
              
              $
              1,263,836
              
              03/2007-02/2009
              
              $
              -
              
              $
              102,510
              
              $
              183,613NY
      State/RPCI
              
              Sponsored
      Research Agreement
              $
              3,000,000
              
              03/2007-02/2012
              
              $
              4,213
              
              $
              3,678
              
              $
              35,696DoD
              
              DOD
      Contract
              
              $
              9,590,000
              
              05/2008
      - 09/2009
              $
              112,533
              
              $
              2,141,972
              
              $
              4,843,303HHS
              
              BARDA
      Contract
              
              $
              15,600,000
              
              09/2008-09/2011
              
              $
              3,468,372
              
              $
              1,775,071
              
              $
              5,374,535NIH
              
              NIAID
      Grant
              
              $
              1,232,695
              
              09/2008-08/2010
              
              $
              -
              
              $
              161,747
              
              $
              1,021,095NIH
              
              NIAID
      GO Grant
              
              $
              5,300,000
              
              09/2009-08/2011
              
              $
              625,645
              
              $
              -
              
              $
              1,237,666Totals
              
              $
              4,210,763
              
              $
              4,184,978
              
              $
              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 CCF, clinical trials and consulting fees.
General and administrative expenses include all corporate and administrative
functions that serve to support our current and future operations while also
providing an infrastructure to support future growth. Major items in this
category include management and staff salaries, rent/leases, professional
services and travel-related expenses. We anticipate these expenses to increase
as a result of increased legal and accounting fees in connection with our
compliance with ongoing reporting and accounting requirements of the SEC and the
expansion of our business.





Operating
expenses increased from $6,609,236 for the three months ended June 30, 2009 to
$6,831,315 for the three months ended June 30, 2010, an increase of $222,079 or
3.4%. We recognized a total of $1,274,180 of non-cash, stock-based compensation
for the three months ended June 30, 2010 compared to $1,429,462 for the three
months ended June 30, 2009.  If these non-cash, stock-based
compensation expenses were excluded, operating expenses would have increased
from $5,179,774 for the three months ended June 30, 2009 to $5,557,135 for the
three months ended June 30, 2010.  This represents an increase in
operating expenses of $377,361 or 7.3% as explained below.





R&D
costs decreased from $4,772,100 for the three months ended June 30, 2009 to
$4,170,115 for the three months ended June 30, 2010. This represents a decrease
of $601,985 or 12.6%. We recognized a total of $204,634 of R&D non-cash,
stock based compensation for the three months ended June 30, 2010 compared to
$618,461 for the three months ended June 30, 2009.  Without the
non-cash, stock-based compensation, R&D expenses decreased from $4,153,639
for the three months ended June 30, 2009 to $3,965,481 for the three months
ended June 30, 2010; a decrease of $188,158 or 4.5%.  The
lower R&D expenses were a result of decreased subcontract
costs.





Selling,
general and administrative costs increased from $1,837,136 for the three months
ended June 30, 2009 to $2,661,200 for the three months ended June 30,
2010.  This represents an increase of $824,064 or 44.9%.  We
recognized a total of $1,069,546 of non-cash, stock-based compensation under
selling, general and administrative costs for the three months ended June 30,
2010 compared to $811,001 for the three months ended June 30, 2009. Without the
non-cash, stock-based compensation, the selling, general and administrative
expenses increased from $1,026,135 for the three months ended June 30, 2009 to
$1,591,654 for the three months ended June 30, 2010; an increase of $565,519 or
55.1%.  The higher general and administrative expenses were incurred
as a result of higher general and administrative costs to support the continued
growth and development of our infrastructure including for our consolidated
subsidiary, Incuron.





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




41





Six
Months Ended June 30, 2010 Compared to Six Months Ended June 30,
2009





Revenue





Revenue
increased from $6,494,709 for the six months ended June 30, 2009 to $8,381,111
for the six months ended June 30, 2010 representing an increase of $1,886,402 or
29.0% resulting primarily from an increase in revenue from various federal
grants and contracts including the DoD and BARDA contracts.





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





Revenue
              
              Revenue2010
              
              2009Period
      of
              
              (thru
              
              (thru
              
              
              RevenueAgency
              
              Program
              
              
              Amount
              
              Performance
              
              June
      30)
              
              June
      30)
              
              
              2009(unaudited)
              
              (unaudited)DoD
              
              DTRA
      Contract
              
              $
              1,263,836
              
              03/2007-02/2009
              
              $
              -
              
              $
              103,534
              
              $
              183,613NY
      State/RPCI
              
              Sponsored
      Research Agreement
              
              $
              3,000,000
              
              03/2007-02/2012
              
              $
              8,357
              
              $
              28,338
              
              $
              35,696DOD
              
              DOD
      Contract
              
              $
              9,590,000
              
              05/2008
      - 09/2009
              
              $
              495,655
              
              $
              3,322,435
              
              $
              4,843,303HHS
              
              BARDA
      Contract
              
              $
              15,600,000
              
              09/2008-09/2011
              
              $
              6,441,224
              
              $
              2,477,259
              
              $
              5,374,535NIH
              
              NIAID
      Grant
              
              $
              1,232,695
              
              09/2008-02/2010
              
              $
              560
              
              $
              563,143
              
              $
              1,021,095NIH
              
              NIAID
      Grant
              
              $
              5,300,000
              
              09/2009-08/2011
              
              
              1,435,315
              
              $
              -
              
              $
              1,237,666Totals
              
              $
              8,381,111
              
              $
              6,494,709
              
              $
              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 CCF, clinical trials and consulting fees.
General and administrative expenses include all corporate and administrative
functions that serve to support our current and future operations while also
providing an infrastructure to support future growth. Major items in this
category include management and staff salaries, rent/leases, professional
services and travel-related expenses. We anticipate these expenses to increase
as a result of increased legal and accounting fees in connection with our
compliance with ongoing reporting and accounting requirements of the SEC and the
expansion of our business.





Operating
expenses increased from $10,234,008 for the six months ended June 30, 2009 to
$12,458,596 for the six months ended June 30, 2010, an increase of $2,224,588 or
21.7%. We recognized a total of $2,210,871 of non-cash, stock-based compensation
for the six months ended June 30, 2010 compared to $1,703,563 for the six months
ended June 30, 2009.  If these non-cash, stock-based compensation
expenses were excluded, operating expenses would have increased from $8,530,445
for the six months ended June 30, 2009 to $10,247,725 for the six months ended
June 30, 2010.  This represents an increase in operating expenses of
$1,717,280 or 20.1% as explained below.





R&D
costs increased from $7,274,982 for the six months ended June 30, 2009 to
$7,867,895 for the six months ended June 30, 2010. This represents
an increase of $592,913 or 8.2%. We recognized a total of $344,825 of
R&D non-cash, stock based compensation for the six months ended June 30,
2010 compared to $664,420 for the six months ended June 30,
2009.  Without the non-cash, stock-based compensation, the R&D
expenses increased from $6,610,562 for the six months ended June 30, 2009 to
$7,523,070 for the six months ended June 30, 2010; an increase of $912,508 or
13.8%.  The higher R&D expenses were a result of increased costs
to support the increase in grant and contract revenue.





Selling,
general and administrative costs increased from $2,959,026 for the six months
ended June 30, 2009 to $4,590,701 for the six months ended June 30,
2010.  This represents an increase of $1,631,675 or
55.1%.  We recognized a total of $1,866,046 of non-cash, stock-based
compensation under selling, general and administrative costs for the six months
ended June 30, 2010 compared to $1,039,143 for the six months ended June 30,
2009. Without the non-cash, stock-based compensation, the selling, general and
administrative expenses increased from $1,919,883 for the six months ended June
30, 2009 to $2,724,655 for the six months ended June 30, 2010; an increase of
$804,772 or 41.9.%.  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 and the costs to develop the
infrastructure for our consolidated subsidiary, Incuron.




42





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.





Liquidity
and Capital Resources





We have
incurred annual operating losses since our inception, and, as of June 30, 2010,
we had an accumulated deficit of $75,491,603.  Our principal sources
of liquidity have been cash provided by sales of our securities, government
grants and contracts and licensing agreements. Our principal uses of cash have
been R&D and working capital. We expect our future sources of liquidity to
be primarily government contracts and grants, equity financing, licensing fees
and milestone payments in the event we enter into licensing agreements with
third parties, and research collaboration fees in the event we enter into
research collaborations with third parties, which to date we have
not.




Net cash
used in operating activities totaled $2,768,501 for the six months ended June
30, 2010, compared to $3,852,000 used in operating activities for the six months
ended June 30, 2009. 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 $1,721,228 for the six months ended June 30,
2010 and net cash provided by investing activities was $878,710 for the six
months ended June 30, 2009. The decrease in cash provided by investing
activities resulted primarily from the liquidation of a short-term investment in
2009 as compared to 2010.





Net cash
provided by financing activities totaled $8,204,464 for the six months ended
June 30, 2010, compared to net cash provided by financing activities of
$3,981,165 for the six months ended June 30, 2009.  The increase in
cash provided by financial activities was attributed to the investment in
Incuron, LLC by BCV and the 2010 Common Stock Equity Offering during the first
six months of 2010, as compared to the Series D Preferred and Series D Warrants
offering during the same period in 2009.





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





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





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





Impact
of Inflation





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





Impact
of Exchange Rate Fluctuations





We
believe that our results of operations are somewhat dependent upon changes in
foreign currency exchange rates. We have entered into agreements with foreign
third parties to produce one of our drug compounds and are required to make
payments in the foreign currency. As a result, our financial results could be
affected by changes in foreign currency exchange rates. As of June 30, 2010, we
are obligated to make payments under these agreements of 1,654,440 Euros. We
have purchased 1,000,000. Euros and therefore, at June 30, 2010, had foreign
currency commitments of $803,064 for Euros given prevailing currency exchange
spot rates.





Off-Balance
Sheet Arrangements





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




43




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 June 30, 2010, we had not
drawn on this facility.





Foreign Currency Risk. As of
June 30, 2010, we have agreements with third parties that require payment in the
foreign currency. As a result, our financial results could be affected by
changes in foreign currency exchange rates. Currently, our exposure primarily
exists with the Euro.  As a consequence, movements in exchange rates
could cause our foreign currency denominated expenses to fluctuate as a
percentage of net revenue, affecting our profitability and cash flows. At this
time, our exposure to foreign currency fluctuations is not
material.





In
addition, 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
4T: 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 June 30, 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 June 30, 2010, our
Chief Executive Officer and Chief Financial Officer concluded that, as of such
date, our disclosure controls and procedures were effective to assure that
information required to be declared by us in reports that we file or submit
under the Exchange Act is (1) recorded, processed, summarized, and reported
within the periods specified in the SEC’s rules and forms and (2) accumulated
and communicated to our management, including our Chief Executive Officer and
Chief Financial Officer, as appropriate, to allow timely decisions regarding
required disclosure.





Changes
in Internal Control over Financial Reporting





There was
no change in our internal control over financial reporting (as defined in Rules
13a-15(f) and 15(d)-15(f) under the Exchange Act) during the fiscal quarter
ended June 30, 2010 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.




44





PART
II - Other Information





Item
1. Legal Proceedings





As
of June 30, 2010, we were not a party to any litigation or other legal
proceeding.





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





(a)
None.





(b) Not
applicable.





(c)
None.





Item
3. Defaults Upon Senior Securities





None.





Item
4. Removed and Reserved





Item 5. Other Information





None.





Item
6. Exhibits




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





Exhibit
              Number
            
            Description of Document10.1
            
            Amendment
      to Participation Agreement, dated April 10, 2010, by and between Cleveland
      BioLabs, Inc. and Bioprocess Capital Ventures, LLC.10.2
            
            First
      Amendment to the Cleveland BioLabs, Inc. Equity Incentive Plan
      (incorporated by reference to Exhibit 99.1 to our Form 8-K filed June 9,
      2010).10.3
            
            Form
      of Stock Award Grant Agreement (incorporated by reference to Exhibit 99.2
      to our Form 8-K filed June 9, 2010).10.4
            
            Form
      of Non-Qualified Stock Option Agreement (incorporated by reference to
      Exhibit 99.3 to our Form 8-K filed June 9, 2010).31.1
            
            Certification
      of Michael Fonstein, Chief Executive Officer, pursuant to Section 302 of
      the Sarbanes Oxley Act of 2002.31.2
            
            Certification
      of John A. Marhofer, Jr., Chief Financial Officer, pursuant to Section 302
      of the Sarbanes Oxley Act of 2002.32.1
            
            Certification
      Pursuant To 18 U.S.C. Section 1350




45




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:
      August 16, 2010
              By:
              /s/
      MICHAEL FONSTEINMichael
      FonsteinChief
      Executive Officer(Principal
      Executive Officer)




Dated:
      August  16, 2010
              By:
              /s/
      JOHN A. MARHOFER, JR.John
      A. Marhofer, Jr.Chief
      Financial Officer(Principal
      Financial Officer)




46