UNITED
STATES SECURITIES AND EXCHANGE COMMISSION





WASHINGTON,
D.C. 20549





FORM
10-Q





(Mark
One)





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





For the
quarterly period ended March 31, 2009





OR





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





For the
transition period from ____ to ____





Commission
file number 001-32954





CLEVELAND BIOLABS, INC.


(Exact
name of registrant as specified in its charter)





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





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








(Former
name, former address and former fiscal year,


if
changed since last report)





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





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes   
o  No   
o





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





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


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





As of May
12, 2009, there were 14,610,466shares outstanding of
registrant's common stock, par value $0.005 per share








CLEVELAND
BIOLABS INC


10-Q


5/14/2009





TABLE OF
CONTENTS





PAGEPART
      I - FINANCIAL INFORMATIONITEM
      1:
                    Financial
      StatementsBalance
      Sheets as of March 31, 2009 and December 31, 2008
                    3Statements
      of Operations For Three Months Ended March 31, 2009 and
    2008
                    5Statements
      of Cash Flows For Three Months Ended  March 31, 2009 and
      2008
                    6Statement
      of Stockholders' Equity from January 1, 2008 to December 31, 2008 and to
      March 31, 2009
                    7Notes
      to Financial Statements
                    10ITEM
      2:
                    Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations
                    22ITEM
      3:
                    Quantitative
      and Qualitative Disclosures About Market Risk
                    43ITEM
      4:
                    Controls
      and Procedures
                    43PART
      II - OTHER INFORMATIONITEM
      1:
                    Legal
      Proceedings
                    44ITEM
      2:
                    Unregistered
      Sales of Equity Securities and Use of Proceeds
                    44ITEM
      3:
                    Defaults
      Upon Senior Securities
                    44ITEM
      4:
                    Submission
      of Matters to a Vote of Securities Holders
                    44ITEM
      5:
                    Other
      Information
                    44ITEM
      6:
                    Exhibits
                    44Signatures
                    
                    45




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


2





CLEVELAND
BIOLABS, INC.





BALANCE
SHEETS





March 31,
2009 (unaudited) and December 31, 2008





March
      312009
                
                
                December
      31(unaudited)
                
                
                2008ASSETSCURRENT
      ASSETSCash
      and equivalents
                
                $
                3,735,017
                
                
                $
                299,849Short-term
      investments
                
                
                -
                
                
                
                1,000,000Accounts
      receivable:Trade
                
                
                1,539,291
                
                
                
                1,043,821Interest
                
                
                -
                
                
                
                9,488Other
      prepaid expenses
                
                
                213,765
                
                
                
                510,707Total
      current assets
                
                
                5,488,073
                
                
                
                2,863,865EQUIPMENTComputer
      equipment
                
                
                312,173
                
                
                
                309,323Lab
      equipment
                
                
                1,120,621
                
                
                
                1,102,465Furniture
                
                
                326,654
                
                
                
                312,1341,759,448
                
                
                
                1,723,922Less
      accumulated depreciation
                
                
                729,439
                
                
                
                637,8401,030,009
                
                
                
                1,086,082OTHER
      ASSETSIntellectual
      property
                
                
                748,468
                
                
                
                733,051Deposits
                
                
                23,482
                
                
                
                23,482771,950
                
                
                
                756,533TOTAL
      ASSETS
                
                $
                7,290,032
                
                
                $
                4,706,480


3





CLEVELAND
BIOLABS, INC.





BALANCE
SHEETS





March 31,
2009 (unaudited) and December 31, 2008





March
      312009
                  
                  
                  December
      31(unaudited)
                  
                  
                  2008LIABILITIES
      AND STOCKHOLDERS' EQUITYCURRENT
      LIABILITIESAccounts
      payable
                  
                  $
                  978,148
                  
                  
                  $
                  1,101,961Deferred
      revenue
                  
                  
                  2,383,486
                  
                  
                  
                  2,365,312Dividends
      payable
                  
                  
                  40,506
                  
                  
                  
                  321,293Accrued
      expenses
                  
                  
                  203,745
                  
                  
                  
                  379,653Accrued
      warrant liability
                  
                  
                  4,401,606
                  
                  
                  
                  -Total
      current liabilities
                  
                  
                  8,007,491
                  
                  
                  
                  4,168,219STOCKHOLDERS'
      EQUITYPreferred
      stock, $.005 par valueAuthorized
      - 10,000,000 shares at March 31, 2009 and December 31,
2008Series
      B convertible preferred stock, Issued and outstanding 2,816,116 and
      3,160,974 shares at March 31, 2009 and December 31, 2008,
      respectively
                  
                  
                  14,081
                  
                  
                  
                  15,805Series
      D convertible preferred stock, Issued and outstanding 542.84 and 0 shares
      at March 31, 2009 and December 31, 2008, respectively
                  
                  
                  3
                  
                  
                  
                  -Common
      stock, $.005 par valueAuthorized
      – 40,000,000 shares at March 31, 2009 and December 31,
2008Issued
      and outstanding 14,316,077 and 13,775,805 shares at March 31, 2009 and
      December 31, 2008, respectively
                  
                  
                  71,580
                  
                  
                  
                  68,879Additional
      paid-in capital
                  
                  
                  58,670,957
                  
                  
                  
                  56,699,750Accumulated
      deficit
                  
                  
                  (59,474,080
                  )
                  
                  
                  (56,246,173
                  )Total
      stockholders' equity (deficit)
                  
                  
                  (717,459
                  )
                  
                  
                  538,261TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY
                  
                  $
                  7,290,032
                  
                  
                  $
                  4,706,480




4





CLEVELAND
BIOLABS, INC.





STATEMENT
OF OPERATIONS





Three
Months Ending March 31, 2009 and 2008 (unaudited)





Three
      Months EndedMarch
      31
                  
                  
                  March
      312009
                  
                  
                  2008(unaudited)
                  
                  
                  (unaudited)REVENUESGrant
      and contract
                  
                  $
                  2,309,731
                  
                  
                  $
                  556,324Service
                  
                  
                  -
                  
                  
                  
                  120,0002,309,731
                  
                  
                  
                  676,324OPERATING
      EXPENSESResearch
      and development
                  
                  
                  2,502,881
                  
                  
                  
                  3,551,386Selling,
      general and administrative
                  
                  
                  1,121,890
                  
                  
                  
                  1,193,114Total
      operating expenses
                  
                  
                  3,624,771
                  
                  
                  
                  4,744,500LOSS
      FROM OPERATIONS
                  
                  
                  (1,315,040
                  )
                  
                  
                  (4,068,176
                  )OTHER
      INCOMEInterest
      income
                  
                  
                  5,308
                  
                  
                  
                  145,127Sublease
      revenue
                  
                  
                  4,505
                  
                  
                  
                  2,656Gain
      on disposal of fixed assets
                  
                  
                  -
                  
                  
                  
                  1,394Gain
      on investment
                  
                  
                  -
                  
                  
                  
                  3,292Total
      other income
                  
                  
                  9,813
                  
                  
                  
                  152,469OTHER
      EXPENSEWarrant
      issuance costs
                  
                  
                  266,970
                  
                  
                  
                  -Corporate
      relocation
                  
                  
                  -
                  
                  
                  
                  54,344Interest
      expense
                  
                  
                  1,960
                  
                  
                  
                  -Change
      in value of warrant liability
                  
                  
                  1,384,772
                  
                  
                  
                  -Total
      other expense
                  
                  
                  1,653,702
                  
                  
                  
                  54,344NET
      LOSS
                  
                  $
                  (2,958,929
                  )
                  
                  $
                  (3,970,051
                  )DIVIDENDS
      ON CONVERTIBLE PREFERRED STOCK
                  
                  
                  (268,979
                  )
                  
                  
                  (316,286
                  )NET
      LOSS AVAILABLE TO COMMON SHAREHOLDERS
                  
                  $
                  (3,227,908
                  )
                  
                  $
                  (4,286,337
                  )NET
      LOSS AVAILABLE TO COMMON SHAREHOLDERS  PER SHARE OF COMMON STOCK
      - BASIC AND  DILUTED
                  
                  $
                  (0.24
                  )
                  
                  $
                  (0.33
                  )WEIGHTED
      AVERAGE NUMBER OF SHARES USED  IN CALCULATING NET LOSS PER
      SHARE, BASIC AND  DILUTED
                  
                  
                  13,607,114
                  
                  
                  
                  13,143,686




5





CLEVELAND BIOLABS, INC.





STATEMENTS
OF CASH FLOWS





For the
Three Months Ended March 31, 2009 and 2008 (unaudited)





March
      31
                        
                        
                        March
      312009
                        
                        
                        2008(unaudited)
                        
                        
                        (unaudited)CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      loss
                        
                        $
                        (2,958,929
                        )
                        
                        $
                        (3,970,051
                        )Adjustments
      to reconcile net loss to net cash used by operating
      activities:Depreciation
                        
                        
                        91,599
                        
                        
                        
                        76,809Noncash
      salaries and consulting expense
                        
                        
                        274,101
                        
                        
                        
                        (192,626
                        )Loss
      on abondined patents
                        
                        
                        23,984
                        
                        
                        
                        -Series
      D warrant issuance costs
                        
                        
                        266,970
                        
                        
                        
                        -Change
      in value of warrant liability
                        
                        
                        1,384,772
                        
                        
                        
                        -Changes
      in operating assets and liabilities:Accounts
      receivable - trade
                        
                        
                        (495,470
                        )
                        
                        
                        (364,074
                        )Accounts
      receivable - interest
                        
                        
                        9,488
                        
                        
                        
                        7,407Other
      prepaid expenses
                        
                        
                        296,942
                        
                        
                        
                        (114,394
                        )Deposits
                        
                        
                        -
                        
                        
                        
                        (881
                        )Accounts
      payable
                        
                        
                        (123,812
                        )
                        
                        
                        555,663Deferred
      revenue
                        
                        
                        18,174
                        
                        
                        
                        (90,749
                        )Accrued
      expenses
                        
                        
                        (175,908
                        )
                        
                        
                        (200,539
                        )Milestone
      payments
                        
                        
                        -
                        
                        
                        
                        50,000Total
      adjustments
                        
                        
                        1,570,840
                        
                        
                        
                        (273,384
                        )Net
      cash (used in) provided by operatingactivities
                        
                        
                        (1,388,089
                        )
                        
                        
                        (4,243,435
                        )CASH
      FLOWS FROM INVESTING ACTIVITIESSale
      of short-term investments
                        
                        
                        1,000,000
                        
                        
                        
                        -Purchase
      of equipment
                        
                        
                        (35,525
                        )
                        
                        
                        (55,070
                        )Costs
      of patents pending
                        
                        
                        (39,402
                        )
                        
                        
                        (150,743
                        )Net
      cash (used in) provided by investing activities
                        
                        
                        925,073
                        
                        
                        
                        (205,813
                        )CASH
      FLOWS FROM FINANCING ACTIVITIESProceeds
      from issuance of Series D preferred stock and warrants
                        
                        
                        5,428,307
                        
                        
                        
                        -Financing
      costs on Series D preferred stock
                        
                        
                        (720,175
                        )
                        
                        
                        -Series
      D warrant issuance costs
                        
                        
                        (266,970
                        )
                        
                        
                        -Dividends
                        
                        
                        (549,766
                        )
                        
                        
                        (661,295
                        )Exercise
      of stock options
                        
                        
                        6,788
                        
                        
                        
                        737Net
      cash (used in) provided by financing activities
                        
                        
                        3,898,184
                        
                        
                        
                        (660,558
                        )INCREASE
      (DECREASE) IN CASH AND EQUIVALENTS
                        
                        
                        3,435,168
                        
                        
                        
                        (5,109,806
                        )CASH
      AND EQUIVALENTS AT BEGINNING OF
                        
                        
                        299,849
                        
                        
                        
                        14,212,189PERIODCASH
      AND EQUIVALENTS AT END OF PERIOD
                        
                        $
                        3,735,017
                        
                        
                        $
                        9,102,383Supplemental
      disclosures of cash flow information:Cash
      paid during the period for interest
                        
                        $
                        1,960
                        
                        
                        $
                        -Cash
      paid during the year for income taxes
                        
                        $
                        -
                        
                        
                        $
                        -Supplemental
      schedule of noncash financing activities:Issuance
      of stock options to employees, consultants, and independent board
      members
                        
                        $
                        101,563
                        
                        
                        $
                        728,077Conversion
      of Series B preferred stock to common stock
                        
                        $
                        2,172,605
                        
                        
                        $
                        2,177,154Expense
      recapture of expense for options expensed in 2007 but issued in
      2008
                        
                        $
                        -
                        
                        
                        $
                        (1,459,425
                        )Expense
      recapture of expense for options that were nonvested and
      forfeited
                        
                        $
                        (37,878
                        )
                        
                        $
                        -Issuance
      of shares to consultants and employees
                        
                        $
                        202,083
                        
                        
                        $
                        521,000Accrual
      of Series B preferred stock dividends
                        
                        $
                        268,979
                        
                        
                        $
                        316,287Amortization
      of restricted shares issued to employees
                        
                        $
                        8,333
                        
                        
                        $
                        17,722


6


CLEVELAND
BIOLABS, INC.
  STATEMENTS
OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS
  Period
From January 1, 2008 to December 31, 2008 and to
 March 31, 2009 (unaudited)
  Stockholders'
      EquityCommon
      StockShares
                                                    
                                                    
                                                    AmountBalance
      at January 1, 2008
                                                    
                                                    
                                                    12,899,241
                                                    
                                                    
                                                    $
                                                    64,496Issuance
      of options
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -Partial
      recapture of expense for options expensed in 2007
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -but
      issued in 2008Issuance
      of restricted shares
                                                    
                                                    
                                                    130,000
                                                    
                                                    
                                                    
                                                    650Restricted
      stock awards
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -Exercise
      of options
                                                    
                                                    
                                                    37,271
                                                    
                                                    
                                                    
                                                    186Conversion
      of Series B Preferred Shares to Common
                                                    
                                                    
                                                    709,293
                                                    
                                                    
                                                    
                                                    3,547Dividends
      on Series B Preferred shares
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -Net
      Loss
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -Balance
      at December 31, 2008
                                                    
                                                    
                                                    13,775,805
                                                    
                                                    
                                                    $
                                                    68,879Issuance
      of options
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -Issuance
      of restricted shares
                                                    
                                                    
                                                    80,000
                                                    
                                                    
                                                    
                                                    400Recapture
      of expense for nonvested options forfeited
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -Restricted
      stock awards
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    -Exercise
      of options
                                                    
                                                    
                                                    10,132
                                                    
                                                    
                                                    
                                                    51Conversion
      of Series B Preferred Shares to Common
                                                    
                                                    
                                                    450,140
                                                    
                                                    
                                                    
                                                    2,251Dividends
      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
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -Net
      Loss
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -Balance
      at March 31, 2009
                                                    
                                                    
                                                    14,316,077
                                                    
                                                    
                                                    $
                                                    71,580
  7
  CLEVELAND
BIOLABS, INC.
  STATEMENTS
OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS
  Period
From January 1, 2008 to December 31, 2008 and to
 March 31, 2009 (unaudited)
  Stockholders'
      EquityPreferred
      StockSeries
      B
                                                    
                                                    
                                                    Amount
                                                    
                                                    
                                                    Series
      D
                                                    
                                                    
                                                    AmountBalance
      at January 1, 2008
                                                    
                                                    
                                                    3,870,267
                                                    
                                                    
                                                    $
                                                    19,351
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    $
                                                    -Issuance
      of options
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -Partial
      recapture of expense for options expensed in 2007
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -but
      issued in 2008Issuance
      of restricted shares
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -Restricted
      stock awards
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -Exercise
      of options
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -Conversion
      of Series B Preferred Shares to Common
                                                    
                                                    
                                                    (709,293
                                                    )
                                                    
                                                    
                                                    (3,547
                                                    )
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -Dividends
      on Series B Preferred shares
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -Net
      Loss
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -Balance
      at December 31, 2008
                                                    
                                                    
                                                    3,160,974
                                                    
                                                    
                                                    $
                                                    15,805
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    $
                                                    -Issuance
      of options
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -Issuance
      of restricted shares
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -Recapture
      of expense for nonvested options forfeited
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -Restricted
      stock awards
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -Exercise
      of options
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -Conversion
      of Series B Preferred Shares to Common
                                                    
                                                    
                                                    (344,858
                                                    )
                                                    
                                                    
                                                    (1,724
                                                    )
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -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
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -Net
      Loss
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -Balance
      at March 31, 2009
                                                    
                                                    
                                                    2,816,116
                                                    
                                                    
                                                    $
                                                    14,081
                                                    
                                                    
                                                    
                                                    543
                                                    
                                                    
                                                    $
                                                    3
  8




CLEVELAND BIOLABS, INC.





STATEMENTS
OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS





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


March 31,
2009 (unaudited)





Stockholders'
      EquityAdditional
                                          
                                          
                                          Other
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          ComprehensivePaid-in
                                          
                                          
                                          Comprehensive
                                          
                                          
                                          Accumulated
                                          
                                          
                                          
                                          
                                          
                                          IncomeCapital
                                          
                                          
                                          Income/(Loss)
                                          
                                          
                                          Deficit
                                          
                                          
                                          Total
                                          
                                          
                                          (Loss)Balance
      at January 1, 2008
                                          
                                          $
                                          55,148,608
                                          
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          (41,038,212
                                          )
                                          
                                          $
                                          14,194,244Issuance
      of options
                                          
                                          
                                          2,287,803
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          2,287,803Partial
      recapture of expense for options expensed in 2007
                                          
                                          
                                          (1,459,425
                                          )
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (1,459,425
                                          )but
      issued in 2008Issuance
      of restricted shares
                                          
                                          
                                          625,850
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          626,500Restricted
      stock awards
                                          
                                          
                                          72,722
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          72,722Exercise
      of options
                                          
                                          
                                          24,191
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          24,378Conversion
      of Series B Preferred Shares to Common
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -Dividends
      on Series B Preferred shares
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (1,182,033
                                          )
                                          
                                          
                                          (1,182,033
                                          )Net
      Loss
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (14,025,927
                                          )
                                          
                                          
                                          (14,025,927
                                          )
                                          
                                          $
                                          (14,025,927
                                          )Balance
      at December 31, 2008
                                          
                                          $
                                          56,699,750
                                          
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          (56,246,172
                                          )
                                          
                                          $
                                          538,261Issuance
      of options
                                          
                                          
                                          101,563
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          101,563Issuance
      of restricted shares
                                          
                                          
                                          201,683
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          202,083Recapture
      of expense for nonvested options forfeited
                                          
                                          
                                          (37,878
                                          )
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (37,878
                                          )Restricted
      stock awards
                                          
                                          
                                          8,333
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          8,333Exercise
      of options
                                          
                                          
                                          6,738
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          6,788Conversion
      of Series B Preferred Shares to Common
                                          
                                          
                                          (526
                                          )
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -Dividends
      on Series B Preferred shares
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (268,979
                                          )
                                          
                                          
                                          (268,979
                                          )Issuance
      of shares - Series D financing
                                          
                                          
                                          5,428,304
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          5,428,850Allocation
      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
                                          )Net
      Loss
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (2,958,929
                                          )
                                          
                                          
                                          (2,958,929
                                          )
                                          
                                          $
                                          (2,958,929
                                          )Balance
      at March 31, 2009
                                          
                                          $
                                          58,670,957
                                          
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          (59,474,080
                                          )
                                          
                                          $
                                          (717,459
                                          )


9


CLEVELAND
BIOLABS, INC.




NOTES
TO FINANCIAL STATEMENTS




Note
1. Organization




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





Basis of
Presentation





The
Company’s financial statements have been prepared on the accrual basis of
accounting in accordance with accounting principles generally accepted in the
United States of America.





The
Company recently secured additional financing to sustain operations by issuing
additional convertible preferred shares with warrants. The Company is also
exploring individual investment or licensing arrangements and plans to submit
proposals for government contracts and grants over the next two years totaling
over $30 million. Many of the proposals will be submitted to government agencies
that have awarded contracts and grants to the Company in the recent past. 
Finally, the Company has implemented cost containment efforts that permit the
incurrence of only those costs that are properly funded, either through a
government contract or grant or other capital sources such as direct
investment.  It is expected that the successful implementation of the
financing and cost containment efforts identified above will allow the Company
to continue to realize its assets and liquidate its liabilities in the ordinary
course of business.





Note 2. Summary of Significant
Accounting Policies





A.
            Basis
      of Presentation - The information at March 31, 2009 and March 31, 2008,
      and for the three-months ended March 31, 2009 and March 31, 2008, is
      unaudited. In the opinion of management, these financial statements
      include all adjustments, consisting of normal recurring adjustments,
      necessary for a fair presentation of the results for the interim periods
      presented. Interim results are not necessarily indicative of results for a
      full year. These financial statements should be read in conjunction with
      CBLI’s audited financial statements for the year ended December 31, 2008,
      which were contained in the Company’s Annual Report on Form 10-K filed
      with the U.S. Securities and Exchange
  Commission.





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





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





D.
            Accounts
      Receivable - The Company extends unsecured credit to customers under
      normal trade agreements, which generally require payment within 30 days.
      Management estimates an allowance for doubtful accounts which is based
      upon management's review of delinquent accounts and an assessment of the
      Company's historical evidence of collections. There is no allowance for
      doubtful accounts as of March 31, 2009 and December 31,
    2008.





E.
            Equipment
      - Equipment is stated at cost and depreciated over the estimated useful
      lives of the assets (generally five years) using the straight-line method.
      Leasehold improvements are depreciated on the straight-line method over
      the shorter of the lease term or the estimated useful lives of the assets.
      Expenditures for maintenance and repairs are charged to expense as
      incurred. Major expenditures for renewals and betterments are capitalized
      and depreciated. Depreciation expense was $91,599 and $76,809 for the
      three-months ended March 31, 2009 and 2008,
  respectively.




10





F.
            Impairment
      of Long-Lived Assets - In accordance with Statements of Financial
      Accounting Standards, or SFAS, No. 144, Accounting for the Impairment or
      Disposal 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 or the anticipated useful life of the patent. If the patent
      application is not approved, the costs associated the patent application
      will be expensed as part of selling, general and administrative expenses
      at that time. Capitalized intellectual property is reviewed at least
      annually for impairment.





A portion
of this intellectual property is owned by the Cleveland Clinic Foundation, or
CCF, and granted to the Company through an exclusive licensing agreement. As
part of the licensing agreement, CBLI agrees to bear the costs associated with
the preparation, filing and maintenance of patent applications relating to this
intellectual property. Gross capitalized patents pending costs were $622,635 and
$629,363 for twelve and thirteen patent applications as of March 31, 2009 and
December 31, 2008, respectively. All of the CCF patent applications are still
pending approval.  During 2009, the Company abandoned one patent
application due to developing an improved drug for the same application and
expensed $23,984 in selling, general and administrative expenses.





The
Company also has submitted six patent applications as a result of intellectual
property exclusively developed and owned by the Company. Gross capitalized
patents pending costs were $125,833 and $103,688 for six and five patent
applications as of March 31, 2009 and December 31, 2008, respectively. The
patent applications are still pending approval.




H.
            Line
      of Credit - The Company has a working capital line of credit that is fully
      secured by short-term investments. This fully-secured, working capital
      line of credit carries an interest rate of prime, a borrowing limit of
      $1,000,000, and expires on September 25, 2009. At March 31, 2009, there
      were no outstanding borrowings under this credit
  facility.





I.
            Accrued
      Warrant Liability – The Company has issued warrants as part of the Series
      D Private Placement (as defined in Note 3). The warrants meet the definition of a derivative
      instrument in accordance with SFAS 133as the warrants are not indexed to the
      Company’s stock, andconsequently,
      should be accounted for as a derivative
      instrument.Therefore, the warrants are initially
      recorded as accrued warrant liabilities at their fair values on the date
      of issuance. Subsequent changes in the value of the warrants are shown in
      the statement of operations as “change in value of warrant
      liability.”





These
warrants carry a seven-year term and are fully exercisable for common shares of
the Company at $1.60 per share.  The Company has a balance in accrued
warrant liability of $4,401,606 and $0 at March 31, 2009 and December 31, 2008,
respectively.





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





In
September 2006, The Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value
Measurements.”  SFAS No. 157 provides enhanced guidance for using fair
value to measure assets and liabilities and expands disclosure with respect to
fair value measurements.  This statement was originally effective for
fiscal years beginning after November 15, 2007. In February 2008, the FASB
issued FSP157-2 which allows companies to elect a one-year deferral of adoption
of SFAS No. 157 for non-recurring assets and non-financial liabilities that are
recognized or disclosed at fair value in the financial statements on a
non-recurring basis. The Company has adopted SFAS No. 157 as of January 1,
2008.


11





SFAS No.
157 establishes a valuation hierarchy for disclosure of the inputs to valuation
used to measure fair value.  This hierarchy prioritizes the inputs
into three broad levels as follows: Level 1 inputs are quoted prices
(unadjusted) in active markets for identical assets or liabilities; Level 2
inputs are quoted prices for similar assets and liabilities in active markets or
inputs that are observable for the asset or liability, either directly or
indirectly; and Level 3 inputs are unobservable inputs in which little or no
market data exists, therefore requiring a company to develop its own
assumptions.  The Company does not have any significant assets or
liabilities measured at fair value using Level 1 or Level 2 inputs as of March
31, 2009.





The
Company analyzed all financial instruments with features of both liabilities and
equity under SFAS No. 150, “Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity,” SFAS No. 133, “Accounting for
Derivative Instruments and Hedging Activities,” and EITF 00-19, “Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company’s Own Stock.”





The
Company carries its warrants issued in connection with the Series D Private
Placement at fair value totaling $4,401,606 and $0 as of March 31, 2009 and
December 31, 2008, respectively.  The Company used Level 3 inputs for
its valuation methodology for the warrant liability, and their fair values were
determined using the Black-Scholes option pricing model based on the following
assumptions:





WarrantValue
      atMarch 31, 2009Stock
      price
                    
                    $
                    2.56Exercise
      price
                    
                    $
                    1.60Term
      in years
                    
                    
                    2.00Volatility
                    
                    
                    110.14
                    %Annual
      rate of quarterly dividends
                    
                    
                    -Discount
      rate- bond equivalent yield
                    
                    
                    0.89
                    %Discount
      due to limitations on marketability,
                    
                    
                    40.00
                    %liquidity
      and other credit factors




Fair
      Value
                      
                      Fair
      Value Measurements atAs
      of
                      
                      March
      31, 2009March
      31, 2009
                      
                      Using
      Fair Value HierarchyLiabilities
                      
                      
                      
                      Level
      1
                      
                      Level
      2
                      
                      Level
      3Warrant
      liability
                      
                      $
                      4,401,606
                      
                      
                      
                      
                      
                      
                      $
                      4,401,606





The
Company recognized a fair value measurement loss of $1,384,772 and $0 for the
quarters ended March 31, 2009 and March 31, 2008, respectively.





The
Company did not identify any other non-recurring assets and liabilities that are
required to be presented on the balance sheets at fair value in accordance with
SFAS 157.





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





L.
            Revenue
      Recognition - The Company recognizes revenue in accordance with Staff
      Accounting Bulletin No. 104, “Revenue Recognition”, or SAB 104, and
      Statement of Financial Accounting Standards No. 116, or SFAS
      116.   Revenue sources consist of government grants,
      government contracts and commercial development
  contracts.


12





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 per SAB 104. Grant revenue is recognized in one of two different ways
depending on the grant. Cost reimbursement grants require us to submit proof of
costs incurred that are invoiced by us to the government agency, which then pays
the invoice. In this case, grant revenue is recognized during the period that
the costs were incurred according to the terms of the government grant. Fixed
cost grants require no proof of costs at the time of invoicing, but proof is
required for audit purposes and grant revenue is recognized during the period
that the costs were incurred according to the terms of the government grant. The
grant revenue under these fixed costs grants is recognized using a
percentage-of-completion method, which uses assumptions and estimates. These
assumptions and estimates are developed in coordination with the principal
investigator performing the work under the government fixed-cost grants to
determine key milestones, expenses incurred, and deliverables to perform a
percentage-of-completion analysis to ensure that revenue is appropriately
recognized. Critical estimates involved in this process include total costs
incurred and anticipated to be incurred during the remaining life of the
grant.





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





The
Company recognizes revenue related to the funds received from the State of New
York under the sponsored research agreement with the Roswell Park Cancer
Institute (RPCI) in accordance with SFAS 116.  The principles of SFAS
116 result 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
development revenues are recognized when the service or development is
delivered.





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





The
Company received $2,000,000 in funds from the State of New York through the
Roswell Park Cancer Institute (“RPCI”) during the second quarter of
2007.  The Company received an additional $1,000,000 in funds from the
State of New York through the RPCI during the second quarter of
2008.  The Company is recognizing this revenue over the terms and
conditions of the sponsored research agreement. The Company recognizes revenue
on research laboratory services and the purchase and subsequent use of related
equipment. The amount paid as a payment toward future services related to the
equipment is recognized as a prepaid asset and will be recognized as revenue
ratably over the useful life of the asset. For the three-months ended March 31,
2009, the Company recognized $42,834 in deferred revenue from an ongoing
government grant and recognized $24,660 as revenue resulting in a balance of
deferred revenue of $2,383,486 at March 31, 2009. At December 31, 2008, the
balance in deferred revenue was $2,365,312.





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





O.
            Equity
      Incentive Plan - On May 26, 2006, the Company's Board of Directors adopted
      the 2006 Equity Incentive Plan (“Plan”) to attract and retain persons
      eligible to participate in the Plan, motivate participants to achieve
      long-term Company goals, and further align participants' interests with
      those of the Company's other stockholders. The Plan expires on May 26,
      2016 and the aggregate number of shares of stock which may be delivered
      under the Plan shall not exceed 2,000,000 shares. On February 14, 2007,
      these 2,000,000 shares were registered with the SEC by filing a Form S-8
      registration statement. On April 29, 2008, the stockholders of the Company
      approved an amendment and restatement of the Plan (the “Amended Plan”).
      The Amended Plan increases the number of shares available for issuance by
      an additional 2,000,000 shares, clarifies other aspects of the Plan, and
      contains updates that reflect changes and developments in federal tax
      laws.  As of March 31, 2009 there were 1,702,721 stock options
      and 235,000 shares granted under the Amended Plan and 21,366 forfeited
      leaving 2,083,645 shares of stock to be awarded under the Amended
      Plan.


13





P.
            Stock-Based
      Compensation - The FASB issued SFAS No. 123(R) (revised December 2004),
      Share Based Payment, which is a revision of SFAS No. 123 Accounting for
      Stock-Based Compensation. SFAS 123(R) requires all share-based payments to
      employees, including grants of employee stock options, to be recognized in
      the statement of operations based on their fair values. The Company values
      employee stock-based compensation under the provisions of SFAS 123(R) and
      related interpretations.





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





During
the three-months ended March 31, 2009, the Company granted no stock options. The
Company recognized a total of $101,563 in expense related to previously granted
options for the three-months ended March 31, 2009.  The Company also
recaptured $37,878 of previously recognized expense due to the forfeiture of
non-vested stock options during the three-months ended March 31,
2009.





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





2009
      YTD
                      
                      
                      2008Risk-free
      interest rate
                      
                      
                      n/a
                      
                      
                      
                      2.43-3.58
                      %Expected
      dividend yield
                      
                      
                      n/a
                      
                      
                      
                      0
                      %Expected
      life
                      
                      
                      n/a
                      
                      
                      5-6
      yearsExpected
      volatility
                      
                      
                      n/a
                      
                      
                      
                      64.25-82.47
                      %





The
weighted average, estimated grant date fair values of stock options granted
during the three-months ended March 31, 2009 and March 31, 2008 were $0 and
$2.86, respectively.





The
following tables summarize the stock option activity for the three-months ended
March 31, 2009 and March 31, 2008, respectively.


14





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





Weighted
                  
                  WeightedAverage
                  
                  AverageExercise
                  
                  RemainingPrice
      per
                  
                  ContractualShares
                  
                  
                  Share
                  
                  Term
      (in Years)Outstanding,
      December 31, 2007
                  
                  
                  1,011,740
                  
                  
                  $
                  7.29Granted
                  
                  
                  719,948
                  
                  
                  $
                  4.89Exercised
                  
                  
                  11,099
                  
                  
                  $
                  1.87Forfeited,
      Canceled
                  
                  
                  -
                  
                  
                  
                  n/aOutstanding,
      March 31, 2008
                  
                  
                  1,720,589
                  
                  
                  $
                  6.32
                  
                  9.09Exercisable,
      March 31, 2008
                  
                  
                  1,256,747
                  
                  
                  $
                  5.75
                  
                  9.13





The
Company also recognized $202,083 and $521,000 in expense for shares issued under
the Plan during the three-months ended March 31, 2009 and March 31, 2008,
respectively.   The Company issued a total of 80,000 shares and
105,000 during the three months ended March 31, 2009 and March 31, 2008,
respectively.  In addition, the Company recognized $8,333 and $17,722
in compensation expense related to the amortization of restricted shares during
the three-months ended March 31, 2009 and March 31, 2008,
respectively.





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




The
following table presents the calculation of basic and diluted net loss per share
for the three-months ended March 31, 2009 and 2008:





Quarter
      Ended
                  
                  
                  Quarter
      EndedMarch 31, 2009
                  
                  
                  March 31, 2008Net
      loss available to common stockholders
                  
                  $
                  (3,227,908
                  )
                  
                  $
                  (4,286,337
                  )Net
      loss per share, basic and diluted
                  
                  $
                  (0.24
                  )
                  
                  $
                  (0.33
                  )Weighted-average
      shares used in computing net loss per share, basic and
    diluted
                  
                  
                  13,607,114
                  
                  
                  
                  13,143,686




15





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





The total
number of shares excluded from the calculations of diluted net loss per share,
prior to application of the treasury stock method for preferred shares, was
8,084,185 and 3,524,687 for the three-months ended March 31, 2009 and 2008,
respectively. Such securities, had they been dilutive, would have been included
in the computation of diluted earnings per share.





The total
number of shares excluded from the calculations of diluted net loss per share,
prior to application of the treasury stock method for warrants, was 9,201,874 and
3,453,268 for the three-months ended March 31, 2009 and 2008, respectively. Such
securities, had they been dilutive, would have been included in the computation
of diluted earnings per share.





The total
number of shares excluded from the calculations of diluted net loss per share,
prior to the application of the treasury stock method for options, was 1,935,429 and
1,720,589 for the three-months ended March 31, 2009 and 2008, respectively. Such
securities, had they been dilutive, would have been included in the computation
of diluted earnings per share.





In
summary, the total number of shares excluded from the calculations of diluted
net loss per share, prior to application of the treasury stock method for all
dilutive securities, was 19,221,488 and 8,698,544 for the three-months ended
March 31, 2009 and 2008, respectively. Such securities, had they been dilutive,
would have been included in the computation of diluted earnings per
share.





R.
            Concentrations
      of Risk - Grant and contract revenue was comprised wholly from grants and
      contracts issued by the federal government and accounted for 100.0% and
      82.3% of total revenue for the three-months ended March 31, 2009 and 2008,
      respectively. Although the Company anticipates ongoing federal grant and
      contract revenue, there is no guarantee that this revenue stream will
      continue in the future.




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





S.
            Foreign
      Currency Exchange Rate Risk - The Company has entered into a manufacturing
      agreement to produce one of its drug compounds and into an agreement for
      assay development and validation with foreign third parties and is
      required to make payments in the foreign currency. As a result, the
      Company's financial results could be affected by changes in foreign
      currency exchange rates. Currently, the Company's exposure primarily
      exists with the Euro and the British Pound, or GBP. As of March 31, 2009,
      the Company is obligated to make payments under the agreements of 784,102
      Euros and 88,673 GBP. As of March 31, 2009, the Company has not
      purchased any forward contracts for Euros or GBP and, therefore, at
      March  31, 2009, had foreign currency commitments of $1,039,641
      for Euros and $126,714 for GBP given prevailing currency exchange spot
      rates..





T.
            Comprehensive
      Income/(Loss) - The Company applies Statement of Financial Accounting
      Standards (SFAS) No. 130, “Reporting Comprehensive Income.” SFAS No. 130
      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.





Note
3. Stock Transactions




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


16





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





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




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




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




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




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




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




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




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




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




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




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


17





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





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





The
Series D Preferred ranks junior to the Company’s Series B Convertible Preferred
Stock (“Series B Preferred”) and senior to all shares of Common Stock and other
capital stock of the Company.





If the
Company does not meet certain milestones, the Conversion Price will, unless the
closing price of the Common Stock is greater than $3.69 on the date the
Milestone is missed, be reduced to 80% of the Conversion Price in effect on that
date (the “Milestone Adjustment”).  In addition to the Milestone
Adjustment, on August 13, 2009 (the “Initial Adjustment Date”), the Conversion
Price shall be reduced to 95% of the then Conversion Price, and on each three
month anniversary of the Initial Adjustment Date, the then Conversion Price
shall be reduced by $0.05 (subject to adjustment) until maturity.  The
Conversion Price is also subject to proportional adjustment in the event of any
stock split, stock dividend, reclassification or similar event with respect to
the Common Stock and to anti-dilution adjustment in the event of any Dilutive
Issuance as defined in the Certificate of Designation.





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





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





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





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


18





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





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





The
Company recorded a 40% reduction in the calculated value as shown above due to
the restrictions on marketability, liquidity and other credit
factors.  As these shares become registered securities or otherwise
freely tradeable, this reduction will be adjusted as applied to fair market
value calculations.





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





The value
assigned to the warrants could not exceed the value of the gross proceeds at the
issuance date of each tranche of the offering.  As such, the value
assigned to the warrants on the March 27, 2009 tranche of the Series D Private
Placement was reduced to $789,000 which represents the gross proceeds from that
tranche of the offering.





In
addition, since the convertible preferred stock is convertible into shares of
common stock, an embedded beneficial conversion feature was recorded as a
discount to additional paid-in-capital in accordance with EITF No. 00-27,
“Application of Issue No. 98-5 to Certain Convertible
Instruments.”  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.





For the
three-months ending March 31, 2009, 344,858 Series B Preferred Shares were
converted into 450,140 shares of common stock. At March 31, 2009, there were
2,816,116 outstanding Series B Preferred for which $40,506 in dividends had been
accrued.





Note
4. Commitments and Contingencies





The
Company has entered into various agreements with third parties and certain
related parties in connection with the research and development activities of
its existing product candidates as well as discovery efforts on potential new
product candidates. These agreements include costs for research and development
and license agreements that represent the Company's fixed obligations payable to
sponsor research and minimum royalty payments for licensed patents. These
amounts do not include any additional amounts that the Company may be required
to pay under its license agreements upon the achievement of scientific,
regulatory and commercial milestones that may become payable depending on the
progress of scientific development and regulatory approvals, including
milestones such as the submission of an investigational new drug application to
the FDA and the first commercial sale of the Company's products in various
countries. These agreements include costs related to manufacturing, clinical
trials and preclinical studies performed by third parties. In addition, as
described in Note 3, the Company may be required to deposit funds in the Sinking
Fund if it receives certain sublicense income.





The
Company is also party to three agreements that require it to make milestone
payments, royalties on net sales of the Company's products and payments on
sublicense income received by the Company. As of March 31, 2009, $350,000 in
milestone payments have been made under one of these
agreements.


19





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




The
Company currently has operating lease commitments in place for facilities in
Buffalo, New York and Chicago, Illinois as well as office equipment. The Company
recognizes rent expense on a straight-line basis over the term of the related
operating leases. The operating lease expenses recognized were $86,719 and
$83,045 for the three-months ended March 31, 2009 and 2008,
respectively.





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





OperatingLeases2009
                    
                    Remaining
      Three Quarters
                    
                    $
                    270,9072010
                    
                    
                    
                    
                    343,6562011
                    
                    
                    
                    
                    311,8032012
                    
                    
                    
                    
                    144,3752013
                    
                    
                    
                    
                    -$
                    1,070,741




The
Company has entered into stock option agreements with key employees, board
members and consultants with exercise prices ranging from $0.66 to $17.00. These
awards were approved by the Company’s Board of Directors. The options expire ten
years from the date of grant except for 18,000 options that expire on December
31, 2012, subject to the terms applicable in the agreement.




The
following tables summarize the stock option activity for the three-months ended
March 31, 2009 and March 31, 2008:




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





Weighted
      AverageShares
                  
                  
                  Exercise
      Price Per ShareOutstanding,
      December 31, 2007
                  
                  
                  1,011,740
                  
                  
                  $
                  7.29Granted
                  
                  
                  719,948
                  
                  
                  $
                  4.89Exercised
                  
                  
                  11,099
                  
                  
                  $
                  1.87Forfeited,
      Canceled
                  
                  
                  -
                  
                  
                  
                  n/aOutstanding,
      March 31, 2008
                  
                  
                  1,720,589
                  
                  
                  $
                  6.32




20





The
Company has entered into warrant agreements with strategic partners, consultants
and investors with exercise prices ranging from $1.13 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
      AverageWarrants
                  
                  
                  Exercise
      Price Per ShareOutstanding,
      December 31, 2008
                  
                  
                  3,453,268
                  
                  
                  $
                  8.86Granted
                  
                  
                  4,265,122
                  
                  
                  $
                  1.60Exercise
      Price Adjustment
                  
                  
                  
                  
                  
                  $
                  (3.07
                  )Exercised
                  
                  
                  -
                  
                  
                  
                  n/aForfeited,
      Canceled
                  
                  
                  -
                  
                  
                  
                  n/aOutstanding,
      March 31, 2009
                  
                  
                  7,718,390
                  
                  
                  $
                  3.59




Weighted
      AverageShares
                  
                  
                  Exercise
      Price Per ShareOutstanding,
      December 31, 2007
                  
                  
                  3,453,268
                  
                  
                  $
                  8.86Granted
                  
                  
                  -
                  
                  
                  
                  n/aExercised
                  
                  
                  -
                  
                  
                  
                  n/aForfeited,
      Canceled
                  
                  
                  -
                  
                  
                  
                  n/aOutstanding,
      March 31, 2008
                  
                  
                  3,453,268
                  
                  
                  $
                  8.86





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





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




The
Company is not currently a party to any pending legal actions. From time to time
in the ordinary course of business, the Company may be subject to claims brought
against it. It is not possible to state the ultimate liability, if any, in these
matters.




Note
5. Subsequent Events




No
material subsequent events have occurred since the balance sheet date of March
31, 2009.


21


Item
2: Management's Discussion and Analysis of Financial Condition and Results of
Operations





This
management's discussion and analysis of financial condition and results of
operations and other portions of this filing contain forward-looking information
that involves risks and uncertainties. Our actual results could differ
materially from those anticipated by the forward-looking information. Factors
that may cause such differences include, but are not limited to, availability
and cost of financial resources, results of our research and development,
efforts and clinical trials, product demand, market acceptance and other factors
discussed below and in the Company's other SEC filings, including its Annual
Report on Form 10-K for the year ended December 31, 2008. This management's
discussion and analysis of financial condition and results of operations should
be read in conjunction with our financial statements and the related notes
included elsewhere in this filing and in our Annual Report on Form 10-K for the
year ended December 31, 2008.





OVERVIEW





CBLI was
incorporated in Delaware and commenced business operations in June 2003 as a
development-stage, biotechnology company, with a very specific and targeted
focus on discovery and development of drugs that control cell death. We have
devoted substantially all of our resources to the identification, development
and commercialization of new types of drugs for protection of normal tissues
from exposure to radiation and other stresses, such as toxic chemicals and
cancer treatments. CBLI’s pipeline includes products from two primary families
of compounds: protectans and curaxins. We are developing protectans as drug
candidates that protect healthy tissues from acute stresses such as radiation,
chemotherapy and ischemia (pathologies developed as a result of blocking blood
flow to a part of the body). Curaxins are being developed as anticancer agents
that could act as mono-therapy drugs or in combination with other existing
anticancer therapies.





On July
20, 2006, we sold 1,700,000 shares of common stock, par value $0.005 per share,
in our initial public offering at a per share price of $6.00. After our initial
public offering, our common stock was listed on the NASDAQ Capital Market under
the symbol “CBLI” and on the Boston Stock Exchange under the symbol “CFB.” Our
trading symbol on the Boston Stock Exchange was later changed to “CBLI.” On
August 28, 2007, trading of our common stock transferred from the NASDAQ Capital
Market to the NASDAQ Global Market. In September 2007, we ceased our listing on
the Boston Stock Exchange.  On November 28, 2008, trading of our
common stock transferred from the NASDAQ Global Market back to the NASDAQ
Capital Market. The Company believes that it meets current listing requirements
for the NASDAQ Capital Market as set forth by NASDAQ.





Technology





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





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





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





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


22


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 including
      non-medical applications such as protection from exposure to radiation,
      whether as a result of military or terrorist action or as a result of a
      nuclear accident, as well as medical applications such as reducing cancer
      treatment toxicities.





·
            Curaxins
      - small molecules designed to kill tumor cells by simultaneously targeting
      multiple regulators of apoptosis. Initial test results indicate that
      curaxins can be effective against a number of malignancies, including
      hormone-refractory prostate cancer, renal cell carcinoma, 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 100% or even
50% of all cancer patients. This means that there likely will be a need for
additional anticancer drugs for each type of cancer.





These
drug candidates demonstrate the value of our scientific foundation. Based on the
expedited approval process currently available for non-medical applications such
as protection from exposure to radiation, our most advanced drug candidate,
Protectan CBLB502, may be approved for such applications within 21 months.
Another drug candidate, Curaxin CBLC102, demonstrated efficacy and safety in a
Phase IIa clinical trial concluded in late 2008.





RESEARCH
AND DEVELOPMENT





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





There are
significant risks and uncertainties inherent in the preclinical and clinical
studies associated with our research and development projects. As a result, the
costs to complete such projects, as well as the period in which net cash
outflows from such programs are expected to be incurred, may not be reasonably
estimable. From our inception to March 31, 2009, we spent $45,759,603 on
research and development.





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





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





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





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





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


23





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





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





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





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





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





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





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





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





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





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





STRATEGIES
AND OBJECTIVES





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





·
            Aggressively working towards
      the commercialization of Protectan CBLB502. Our most advanced drug
      candidate, Protectan CBLB502, offers the potential to protect normal
      tissues against exposure to radiation. Because of the potential military
      and defense implications of such a drug, the normally lengthy FDA approval
      process for these non-medical applications is substantially abbreviated
      resulting in a large cost savings to us. We expect to complete development
      of Protectan CBLB502 for these non-medical applications by the end of
      2010.


24





·
            Leveraging our relationship
      with leading research and clinical development institutions. The
      Cleveland Clinic Foundation, one of the top research medical facilities in
      the world, is one of our co-founders. In addition to providing us with
      drug leads and technologies, the Cleveland Clinic will share valuable
      expertise with us as clinical trials are performed on our drug candidates.
      In January 2007, we entered into a strategic research partnership with
      Roswell Park Cancer Institute, or RPCI, in Buffalo, New York. This
      partnership will enhance the speed and efficiency of our clinical research
      and provide us with access to the state-of-the-art clinical development
      facilities of a globally recognized cancer research
  center.





·
            Utilizing governmental
      initiatives to target our markets. Our focus on drug candidates
      such as Protectan CBLB502, which has applications that have been deemed
      useful for military and defense purposes, provides us with a built-in
      market for our drug candidates. This enables us to invest less in costly
      retail and marketing resources. In an effort to improve our responsiveness
      to military and defense needs, we have established a collaborative
      relationship with the Armed Forces Radiobiology Research
      Institute.





·
            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.





PRODUCTS
IN DEVELOPMENT





Protectans





We are
exploring a new natural source of factors that suppress the programmed cell
death (apoptosis) response in human cells, which can be rapidly developed into
therapeutic products. These inhibitors are anti-apoptotic factors developed by
microorganisms of human microflora throughout millions of years of co-evolution
with mammalian host.  We are using the same strategy that was applied
for the discovery of antibiotics, one of the biggest medical achievements of the
20th
century.  We have established a technological process for screening of
such factors, named protectans, and their rapid preclinical evaluation. These
inhibitors can 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).





Fourteen
sets of patent applications have been filed over the past five years around
various aspects and qualities of the protectan family of compounds. The first of
these patents was granted in 2008 by the nine members of the Eurasian Patent
Organization and two additional countries totaling eleven overall. The issued
patent covers the method of protecting a mammal from radiation using flagellin
or its derivatives, including Protectan CBLB502.





We spent
$8,995,500 and $11,828,423 on research and development for protectans overall in
the fiscal years ended December 31, 2008 and December 31, 2007, respectively.
For the quarters ended March 31, 2009 and 2008 we spent $2,234,621 and
$2,427,395, respectively.  From our inception to March 31, 2009, we
spent $28,743,120 on research and development for protectans.





Protectan
CBLB502





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


25





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





We spent
$8,021,040 and $10,701,175 on research and development for Protectan CBLB502 in
the fiscal years ended December 31, 2008 and December 31, 2007,
respectively.  For the quarters ended March 31, 2009 and 2008 we spent
$2,229,467, and $2,164,442 respectively on research and development for
Protectan CBLB502.  From our inception to March 31, 2009, we spent
$25,607,593 on research and development for Protectan CBLB502.




Non-medical
Applications





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





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





The FDA
gave us permission to start safety testing on humans on August 7, 2008. The
first healthy volunteer in the dose escalation safety study was dosed on October
14, 2008. The initial safety study will involve single injections of Protectan
CBLB502 in ascending dose groups of six healthy volunteers each. Participants in
the study are being assessed for adverse side effects over two-week time period
and blood samples are being obtained to assess the effects of Protectan CBLB502
on various biomarkers. The study is currently projected to be completed in
spring 2009. The second safety study in a larger number of healthy volunteers is
planned to start in the third quarter of 2009.





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





·
            Performing
      a Phase I dose-escalation human study on a small number of volunteers. We
      expect to complete this study in June 2009 due to testing of additional
      cohorts in order to achieve maximum confidence in the dose selected for
      the larger human safety study. The study has an approximate cost of
      $1,500,000 and is partially covered by a government
    contract.





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




26




·
            Performing
      a human safety study in a larger number of volunteers using the dose of
      Protectan CBLB502 previously shown to be safe in humans and efficacious in
      animals. We estimate completion of this study in late 2010 at an
      approximate cost of $5,300,000 based on 500 subjects tested in four
      locations. This study is also covered by a government development
      contract.





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




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





In
September 2008, we were awarded a $774,183 grant from the National Institute of
Allergy and Infectious Diseases (NIAID) of the National Institutes of Health
(NIH), to further study certain mitigating properties of Protectan CBLB502 in
the context of hematopoietic damage from radiation exposure. The grant program,
Medical Countermeasures to Enhance Platelet Regeneration and Increase Survival
Following Radiation Exposure, is funded through the Project BioShield Act of
2004 and administered by the Department of Health and Human
Services.





In
September 2008, the Biomedical Advanced Research and Development Authority
(BARDA) of the Department of Health and Human Services (DHHS) awarded us a
contract under the Broad Agency Announcement 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 is $13.3 million over a three-year period, with the
first year's award of $3.4 million. BARDA seeks to acquire developed medical
countermeasures that will be clinically useful in a civilian medical emergency
situation that results from or involves exposure of a large population to the
effects of a nuclear detonation, a radiologic dispersive device (such as a dirty
bomb), or exposure to radioactive material with or without combined injury or
trauma.





Protectan
CBLB502's unprecedented efficacy, unique ability to address both hematopoietic
and gastrointestinal damage, broad time window of use, and mitigation effects
that do not require additional supportive care and set it apart from any other
existing or potential therapies.





We spent
$7,264,813 and $9,885,776 on research and development for the biodefense
applications of Protectan CBLB502 in the fiscal years ended December 31, 2008
and December 31, 2007, respectively.  For the quarters ended March 31,
2009 and 2008 we spent $2,173,341 and $1,960,377 respectively on research and
development for biodefense applications of Protectan CBLB502.  From
our inception to March 31, 2009, we spent $23,774,537 on research and
development for the biodefense applications of Protectan CBLB502.





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





We intend
to enter into contracts to sell Protectan CBLB502 to various U.S. government
agencies as soon as the FDA approves the BLA. Future sales to U.S. government
agencies will depend, in part, on our ability to meet federal contract
requirements. Also, if the U.S. government makes significant future contract
awards for the supply of its emergency stockpile to our competitors, our
business will be harmed and it is unlikely that we will be able to ultimately
commercialize our competitive product.




27




Medical
Applications





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





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





The
prospect of increasing patients' tolerance to chemotherapeutic drugs and
optimizing treatment regimens would be a significant paradigm shift in cancer
treatment. It is estimated that approximately 40% of the roughly $50 billion
annually spent on cancer treatment represents supportive care addressing
toxicities of various treatments, including chemotherapy.





Consistent
with this strategy, we plan to initiate a Phase I/II study for Protectan CBLB502
in head and neck cancer patients in 2009. The primary endpoint of the study will
be the reduction of toxicities of radiation and chemotherapy, such as mucositis
(a painful inflammation and ulceration of oral mucosa causing difficulties with
speaking and eating). Mucositis weakens the patient by not allowing for the oral
intake of nutrients and fluids and forces the temporary suspension of
radiotherapy and chemotherapy until the tissues of the mouth and throat have
healed. Due to the ability of head and neck cancer cells to regrow during
periods of interrupted treatment, any interruption in radiotherapy should be
avoided. Since the main cause of treatment interruptions in radiotherapy or
combinations of chemotherapy and radiotherapy treatment regimens of head and
neck cancer is acute mucositis, the ability to prevent mucositis, and therefore,
interruptions in treatment, could potentially result in better outcomes for
patients with cancers of the head and neck.





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





Moreover,
studies funded by a grant from the DoD and conducted at the Cleveland Clinic,
have demonstrated Protectan CBLB502’s ability to accelerate limb recovery in an
animal model of tourniquet-mediated injury simulating the situation occurring in
human. It has been demonstrated that injection of Protectan CBLB502 within 30
minutes of tourniquet removal leads to a marked reduction in the severity of
injury, including reductions in tissue edema, pro-inflammatory cytokine
production and leukocyte infiltration leading to accelerated recovery of limb
function.





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




In order
for us to receive final FDA approval 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 cannot estimate with any certainty when the FDA may allow the
      application. We expect to submit the amendment upon the receipt of
      dedicated federal funding. We estimate that the approximate cost of filing
      will be less than $100,000.





·
            Performing
      a Phase I/II human efficacy study on a small number of 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.




28




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





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




We spent
$756,227 and $815,399 on research and development for the medical applications
of Protectan CBLB502 in the fiscal years ended December 31, 2008 and December
31, 2007, respectively. For the quarters ended March 31, 2009 and 2008, we spent
$56,127 and $204,064 respectively on R&D for the medical applications of
Protectan CBLB502.  From our inception to March 31, 2009, we spent
$1,833,056 on research and development for the medical applications of Protectan
CBLB502.




Protectan
CBLB612





While the
bulk of our R&D has focused on Protection CBLB502, we have conducted some
preliminary research into a compound derived from the same family and which we
refer to as Protectan CBLB612. Protectan CBLB612 is a modified lipopeptide
mycoplasma that acts as a powerful stimulator and mobilizer of hematopoietic
(bone marrow/blood production) stem cells, 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.,
Thousand Oaks, California), demonstrated a stronger efficacy of Protectan
CBLB612 as a propagator and mobilizer of HSC in peripheral blood.





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





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





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




29




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 Department of Defense.




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 GMP-manufactured
    CBLB612.





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





·
            Performing
      a Phase I dose-escalation human
study;





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





·
            Filing
      a New Drug Application.




We spent
$974,459 and $1,127,248 on research and development for Protectan CBLB612 in the
fiscal years ended December 31, 2008 and December 31, 2007, respectively. For
the quarters ended March 31, 2009 and 2008, we spent $5,153 and $262,954
respectively on R&D for Protectan CBLB612.  From our inception to
March 31, 2009, we spent $3,135,528 on research and development for Protectan
CBLB612. Further development and extensive testing will be required to determine
its technical feasibility and commercial viability.




Curaxins





Curaxins
are small molecules that destroy tumor cells by simultaneously targeting two
regulators of apoptosis. Our initial test results indicate that curaxins can be
effective against a number of malignancies, including renal cell carcinoma, or
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.




30




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





This new
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.




We spent
$3,233,872 and $4,708,773 on research and development for curaxins overall in
the fiscal years ended December 31, 2008 and December 31, 2007, respectively.
For the quarters ended March 31, 2009 and 2008, we spent $268,261 and $872,646
respectively on R&D for curaxins.  From our inception to March 31,
2009, we spent $11,909,853 on research and development for
curaxins.




Curaxin
CBLC102





One of
the curaxins from the 9-aminoacridine group is a long-known, anti-infective
compound known as quinacrine, which we refer to as Curaxin CBLC102. It has been
used for over 40 years to treat malaria, osteoarthritis and autoimmune
disorders. However, we have discovered new mechanisms of action for quinacrine
in the area of apoptosis. Through assay testing performed at Dr. Andrei Gudkov’s
laboratories at the Cleveland Clinic beginning in 2002, which included testing
in a variety of human tumor-derived cell lines representing cancers of different
tissue origin (including RCC, sarcomas, prostate, breast and colon carcinomas),
we have observed that Curaxin CBLC102 behaves as a potent NF-kB suppressor and
activator of p53 in these types of cancer cells. It has favorable
pharmacological and toxicological profiles and demonstrates the anticancer
effect in transplants of human cancer cells into primates.





We have applied for a patent covering
the use of Curaxin CBLC102 as an anticancer agent





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





We
launched a Phase II study with CBLC102 in January 2007 to provide proof of
safety and of anti-neoplastic activity in cancer patients and establish a
foundation for clinical trials of our new proprietary curaxin molecules, which
have been designed and optimized for maximum anticancer effects, as well as for
additional treatment regimens based on ongoing research into the precise
molecular mechanisms of action of curaxins.





Thirty-one
patients were enrolled in a 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 Roswell Park Cancer Institute.





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


31


We spent
$1,741,194 and $2,712,521 on research and development for Curaxin CBLC102 in the
fiscal years ended December 31, 2008 and December 31, 2007, respectively. For
the quarters ended March 31, 2009 and 2008, we spent $147,177 and $469,853
respectively on research and development for Curaxin CBLC102.  From
our inception to March 31, 2009, we spent $6,613,659 on research and development
for Curaxin CBLC102.




Other
Curaxins





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





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





We spent
$1,492,678 and $1,996,252 on research and development for other curaxins in the
fiscal years ended December 31, 2008 and December 31, 2007,
respectively.  For the quarters ended March 31, 2009 and 2008, we
spent $121,084 and $402,792 respectively on R&D for other
curaxins.  From our inception to March 31, 2009, we spent $5,296,194
on research and development for other curaxins.





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




FINANCIAL  OVERVIEW





We
were incorporated in Delaware and commenced business operations in June
2003. Beginning July 21, 2006, our common stock was listed on the NASDAQ Capital
Market and on the Boston Stock Exchange under the symbols “CBLI” and “CFB”
respectively. On August 28, 2007, trading of our stock moved from the NASDAQ
Capital Market to the NASDAQ Global Market. In September 2007, we ceased our
listing on the Boston Stock Exchange.




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, par value $0.005 per share, 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. As of March 31, 2009, 1,762,894 shares of
Series B Preferred were converted and $2,119,741 in dividends earned were paid.
At March 31, 2009 there were 2,816,116 remaining outstanding Series B Preferred
shares for which $40,506 in dividends had been accrued.





On
February 13, 2009, March 20, 2009, and March 27, 2009, we entered into Purchase
Agreements with various Purchasers, pursuant to which we agreed to sell to the
Purchasers an aggregate of 542.84 shares of Series D Preferred and Warrants to
purchase an aggregate of 3,877,386 shares of the Company’s Common Stock, par
value $0.005 per share.  The Warrants have a seven-year term and an
exercise price of $1.60. Each share of Series D Preferred is convertible into
approximately 7,143 shares of Common Stock, subject to the adjustment as
described below.




32




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





In
consideration for its services as exclusive placement agent, GSS received cash
compensation and Warrants to purchase an aggregate of approximately 387,736
shares of Common Stock.  In the aggregate, Series D Preferred and
Warrants issued in the transaction (including those issued to GSS) are
convertible into, and exercisable for, approximately 8,142,508 shares of Common
Stock. Each share of Series D Preferred is convertible into a number of shares
of Common Stock equal to (1) the stated value of the share ($10,000), divided by
(2) the Conversion Price ($1.40, subject to adjustment as discussed
below).





The
Series D Preferred ranks junior to our Series B Preferred and senior to all our
shares of Common Stock and other capital stock.





If we do
not meet certain milestones, the Conversion Price will, unless the closing price
of the Common Stock is greater than $3.69 on the date the Milestone is missed,
be reduced to 80% of the Conversion Price in effect on that date.  In
addition to the Milestone Adjustment, (a) on August 13, 2009 , the Conversion
Price shall be reduced to 95% of the then Conversion Price, and (b) on each
three-month anniversary of August 13, 2009, the then Conversion Price shall
be reduced by $0.05 until maturity.  The Conversion Price is also
subject to proportional adjustment in the event of any stock split, stock
dividend, reclassification or similar event with respect to the Common Stock and
to anti-dilution adjustment in the event of any Dilutive Issuance.





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





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





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




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




Critical
Accounting Policies and the Use of Estimates





Our
management's discussion and analysis of our financial condition and results of
operations is based upon our financial statements, which have been prepared in
accordance with generally accepted accounting principles in the U.S., or GAAP.
The preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of our assets, liabilities, revenues,
expenses and other reported disclosures. We base our estimates on historical
experience and on various other assumptions that we believe are reasonable under
the circumstances.




33




Note 2 to
our financial statements includes disclosure of our significant accounting
policies. While all decisions regarding accounting policies are important, we
believe that our policies regarding revenue recognition, research and
development expenses, intellectual property related costs, stock-based
compensation expense and fair value measurements could be considered
critical.





Revenue
Recognition





We
recognize revenue in accordance with Staff Accounting Bulletin No. 104, “Revenue
Recognition”, and Statement of Financial Accounting Standards No. 116, or SFAS
116. Our revenue sources consist of government grants, government contracts and
a commercial development contract.





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





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





We
recognize revenue related to the funds received in 2007 from the State of New
York under the sponsored research agreement with the Roswell Park Cancer
Institute in accordance with SFAS 116.  The principles of SFAS 116
result in the recognition of revenue as allowable costs are incurred. The
Company recognizes revenue on research laboratory services and the purchase and
subsequent use of related equipment. The amount paid as a payment toward future
services related to the equipment is recognized as a prepaid asset and will be
recognized as revenue as the services are performed and the prepaid asset is
recognized as expense.





Government
contract revenue is recognized as allowable research and development expenses
are incurred during the period and according to the terms of the contract.
Commercial development revenues are recognized when the service or development
is delivered.




Research
and Development Expenses





Research
and development costs are expensed as incurred. These expenses consist primarily
of our proprietary research and development efforts, including salaries and
related expenses for personnel, costs of materials used in our research and
development 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 research and development arrangements are
expensed when the specific milestone has been achieved. As of March 31, 2009,
$50,000 has been paid to CCF for milestone payments relating to the filing of an
IND with the FDA for Curaxin CBLC102, $250,000 has been paid to CCF as a result
of commencing Phase II clinical trials for Curaxin CBLC102 and $50,000 has been
paid to CCF relating to the filing of an IND with the FDA for Protectan CBLB502.
Once a drug receives regulatory approval, we will record any subsequent
milestone payments in identifiable intangible assets, less accumulated
amortization, and amortize them evenly over the remaining agreement term or the
expected drug life cycle, whichever is shorter. We expect our research and
development expenses to increase as we continue to develop our drug
candidates.




Intellectual
Property Related Costs





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




34




Through
December 31, 2008, we capitalized $733,051 in expenditures associated with the
preparation, filing and maintenance of certain of our patents, which were
incurred through the year ended December 31, 2008. We capitalized an additional
$39,402 and wrote off $23,984 of previously capitalized expenditures relating to
these costs incurred for the three months ended March 31, 2009, resulting in a
balance of capitalized intellectual property totaling $748,468.




Stock-based
Compensation





We value
stock-based compensation pursuant to the provisions of SFAS 123(R). Accordingly,
effective January 1, 2005, all stock-based compensation, including grants of
employee stock options, are recognized in the statement of operations based on
their fair values.





The
Financial Accounting Standards Board (FASB) issued SFAS No. 123(R) requiring all
share-based payments to employees, including grants of employee stock options,
be recognized in the statement of operations based at their fair values. The
Company values employee stock-based compensation under the provisions of SFAS
123(R) and related interpretations.





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





During
the three months ended March 31, 2009, the Company granted no stock options. The
Company recognized a total of $101,563 in expense related to options for the
three months ended March 31, 2009.  The Company also recaptured
$37,878 of previously recognized expense due to the stock option
forfeitures





For the
three months ended March 31, 2009 the Company also recognized a total of
$202,083 expense for shares issued under the Plan and a total of $8,333 in
expense related to the amortization of restricted
shares.





During
the quarters ended March 31, 2009 and 2008, the Company granted 0 and 719,948
additional stock options pursuant to stock award agreements, respectively. We
recognized a total of $63,685 and ($731,348) in expense related to options for
the quarters ended March 31, 2009 and 2008, respectively.  The
weighted average, estimated grant date fair values of stock options granted
during the quarters ended March 31, 2009 and 2008 was $0 and $2.86,
respectively.




Fair
Value Measurement





In
September 2006, The Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value
Measurements.”  SFAS No. 157 provides enhanced guidance for using fair
value to measure assets and liabilities and expands disclosure with respect to
fair value measurements.  This statement was originally effective for
fiscal years beginning after November 15, 2007. In February 2008, the FASB
issued FSP157-2 which allows companies to elect a one-year deferral of adoption
of SFAS No. 157 for non-recurring assets and non-financial liabilities that are
recognized or disclosed at fair value in the financial statements on a
non-recurring basis. The Company has adopted SFAS No. 157 as of January 1,
2008.





SFAS No.
157 establishes a valuation hierarchy for disclosure of the inputs to valuation
used to measure fair value.  This hierarchy prioritizes the inputs
into three broad levels as follows: Level 1 inputs are quoted prices
(unadjusted) in active markets for identical assets or liabilities; Level 2
inputs are quoted prices for similar assets and liabilities in active markets or
inputs that are observable for the asset or liability, either directly or
indirectly; and Level 3 inputs are unobservable inputs in which little or no
market data exists, therefore requiring a company to develop its own
assumptions.  The Company does not have any significant assets or
liabilities measured at fair value using Level 1 or Level 3 inputs as of March
31, 2009.




35




The
Company analyzed all financial instruments with features of both liabilities and
equity under SFAS No. 150, “Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity,” SFAS No. 133, “Accounting for
Derivative Instruments and Hedging Activities,” and EITF 00-19, “Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company’s Own Stock.”





The
Company carries the warrants issued in the Series D Private Placement at fair
value totaling $4,401,606 and $0 as of March 31, 2009 and December 31, 2008,
respectively.  The Company recognized a fair value measurement loss of
$1,384,772 and $0 for the quarters ended March 31, 2009 and March 31, 2008,
respectively.





The
Company did not identify any other non-recurring assets and liabilities that are
required to be presented on the balance sheets at fair value in accordance with
SFAS 157.




Impact
of Recently Issued Accounting Pronouncements





In June
2008, the Financial Accounting Standards Board ("FASB") issued EITF Issue No.
07-5 ("EITF 07-5"), Determining whether an Instrument (or Embedded Feature) is
indexed to an Entity's Own Stock. EITF No. 07-5 is effective for financial
statements issued for fiscal years beginning after December 15, 2008, and
interim periods within those fiscal years. Early application is not permitted.
Paragraph 11(a) of SFAS No. 133 - specifies that a contract that would otherwise
meet the definition of a derivative but is both (a) indexed to the Company's own
stock and (b) classified in stockholders' equity in the statement of financial
position would not be considered a derivative financial instrument. EITF 07-5
provides a new two-step model to be applied in determining whether a financial
instrument or an embedded feature is indexed to an issuer's own stock and thus
able to qualify for the SFAS No. 133 paragraph 11(a) scope exception. The
adoption of EITF 07-5 is not anticipated to materially impact our financial
statements.





In June
2008, the FASB issued EITF 08-4, "Transition Guidance for Conforming Changes to
Issue No. 98-5." The objective of EITF 08-4 is to provide transition guidance
for conforming changes made to EITF No. 98-5, "Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios," that result from EITF No. 00-27 "Application of Issue No.
98-5 to Certain Convertible Instruments," and SFAS 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." This
Issue is effective for financial statements issued for fiscal years ending after
December 15, 2008. Early application is permitted. We are currently evaluating
the impact of adoption of EITF 08-4.





In May
2008, the FASB issued SFAS No. 162,Hierarchy of Generally Accepted
Accounting Principles (“SFAS No. 162”). SFAS No. 162 identifies the
sources of accounting principles and the framework for selecting the principles
used in the preparation of financial statements. The implementation of this
standard did not have an impact on our financial statements.





In April
2008, the FASB issued FASB Staff Position No. FAS 142-3, “Determination of the Useful
Life of Intangible Assets” (“FSP FAS 142-3”).  FSP FAS 142-3 amends
the factors that should be considered in developing renewal or extension
assumptions used to determine the useful life of a recognized intangible asset
under FASB Statement No. 142, “Goodwill and Other Intangible Assets”. The FSP is
intended to improve the consistency between the useful life of a recognized
intangible asset under Statement 142 and the period of expected cash flows used
to measure the fair value of the asset under SFAS 141(R) and other U.S.
generally accepted accounting principles.  The new standard is
effective for financial statements issued for fiscal years and interim periods
beginning after December 15, 2008.  We are currently evaluating the
impact, if any of FSP FAS 142-3 upon adoption on our financial
statements.





In March
2008, the FASB issued SFAS No. 161.  “Disclosures about Derivative
Instruments and Hedging Activities,” (SFAS No. 161).  SFAS No. 161
amends and expands the disclosure requirements of SFAS No. 133, “Accounting for
Derivative Instruments and Hedging Activities.”  SFAS No. 161 requires
qualitative disclosures about objectives and strategies for using derivatives,
quantitative disclosures about fair value amounts of gains and losses on
derivative instruments and disclosures about credit-risk-related contingent
features in derivative agreements.  SFAS No. 161 is intended to
improve financial reporting about derivative instruments and hedging activities
by requiring enhanced disclosures to enable investors to better understand their
effects on an entity's financial position, financial performance, and cash
flows. This statement is effective for financial statements issued for fiscal
years beginning after November 15, 2008.  The adoption of SFAS No.161
will not affect our financial condition and results of operations, but may
require additional disclosures if we enter into derivative and hedging
activities.




36




In
October 2008, the FASB issued FAS 157-3, Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active(FAS 157-3).
FAS 157-3 clarifies the application of FASB Statement No. 157, Fair Value Measurements, in a
market that is not active and provides an example to illustrate key
considerations in determining the fair value of a financial asset when the
market for that financial asset is not active. The FSP is effective upon
issuance, including for prior periods for which financial statements have not
been issued. Revisions resulting from a change in the valuation technique or its
application should be accounted for as a change in accounting estimate following
the guidance in FASB Statement No. 154, Accounting Changes and Error
Corrections. However, the disclosure provisions in Statement 154 for a
change in accounting estimate are not required for revisions resulting from a
change in valuation technique or its application. We believe the impact of this
pronouncement on our financial statements to be immaterial.




Results
of Operations





Our
operating results for the past three fiscal years have been nominal. The
following table sets forth our statement of operations data for the quarter
ended March 31, 2009 and 2008, and the years ended December 31, 2008 and
December 31, 2007, and should be read in conjunction with our financial
statements and the related notes appearing elsewhere in this filing and in our
Annual Report on Form 10-K for the year ended December 31, 2008.





Quarter
                            
                            
                            Quarter
                            
                            
                            Year
      Ended
                            
                            
                            Year
      EndedEnded
                            
                            
                            Ended
                            
                            
                            December
      31,
                            
                            
                            December
      31,31-Mar-09
                            
                            
                            31-Mar-08
                            
                            
                            2008
                            
                            
                            2007(unaudited)
                            
                            
                            (unaudited)Revenues
                            
                            $
                            2,309,731
                            
                            
                            $
                            676,324
                            
                            
                            $
                            4,705,597
                            
                            
                            $
                            2,018,558Operating
      expenses
                            
                            
                            3,624,771
                            
                            
                            
                            4,744,500
                            
                            
                            
                            19,050,965
                            
                            
                            
                            27,960,590Other
      expense (income)
                            
                            
                            1,647,237
                            
                            
                            
                            47,002
                            
                            
                            
                            (59,597
                            )
                            
                            
                            2,058,236Net
      interest expense (income)
                            
                            
                            (3,348
                            )
                            
                            
                            (145,127
                            )
                            
                            
                            (259,844
                            )
                            
                            
                            (1,003,766
                            )Net
      income (loss)
                            
                            $
                            (2,958,929
                            )
                            
                            $
                            (3,970,051
                            )
                            
                            $
                            (14,025,927
                            )
                            
                            $
                            (26,996,502
                            )





The
following table summarizes research and development expenses for the quarters
ended March 31, 2009 and 2008 and the years ended December 31, 2008 and 2007 and
since inception:





Quarter
                
                
                Quarter
                
                
                Year
      Ended
                
                
                Year
      Ended
                
                
                TotalEnded
                
                
                Ended
                
                
                December
      31,
                
                
                December
      31,
                
                
                Since31-Mar-09
                
                
                31-Mar-08
                
                
                2008
                
                
                2007
                
                
                Inception(unaudited)
                
                
                (unaudited)Research
      and development
                
                $
                2,502,881
                
                
                $
                3,551,386
                
                
                $
                13,160,812
                
                
                $
                17,429,652
                
                
                $
                45,759,603General
                
                $
                $ -
                
                
                $
                251,345
                
                
                $
                931,441
                
                
                $
                892,456
                
                
                $
                5,106,630Protectan
      CBLB502 - medical applications
                
                $
                2,173,341
                
                
                $
                1,960,377
                
                
                $
                7,264,813
                
                
                $
                9,885,776
                
                
                $
                23,774,537Protectan
      CBLB502 - non-medical applications
                
                $
                56,127
                
                
                $
                204,064
                
                
                $
                756,227
                
                
                $
                815,399
                
                
                $
                1,833,056Protectan
      CBLB612
                
                $
                5,153
                
                
                $
                262,954
                
                
                $
                974,459
                
                
                $
                1,127,248
                
                
                $
                3,135,527Curaxin
      CBLC102
                
                $
                147,177
                
                
                $
                469,853
                
                
                $
                1,741,194
                
                
                $
                2,712,521
                
                
                $
                6,613,659Other
      Curaxins
                
                $
                121,084
                
                
                $
                402,792
                
                
                $
                1,492,678
                
                
                $
                1,996,252
                
                
                $
                5,296,194




37




Three
Months Ended March 31, 2009 Compared to Three Months Ended March 31,
2008





Revenue





Revenue
increased from $676,324 for the three months ended March 31, 2008 to $2,309,731
for the three months ended March 31, 2009 representing an increase of $1,633,407
or 141.5% resulting primarily from an increase in revenue from various federal
grants and contracts including the Department of Defense and BARDA
contracts.





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




Revenue
                                          
                                          
                                          Revenue
                                          
                                          
                                          Revenue2009
                                          
                                          
                                          2008
                                          
                                          
                                          2008Period
      of
                                          
                                          (thru
                                          
                                          
                                          (thruAgency
                                          
                                          Program
                                          
                                          Amount
                                          
                                          Performance
                                          
                                          March
      31)
                                          
                                          
                                          March31)(unaudited)
                                          
                                          
                                          (unaudited)DoD
                                          
                                          DTRA
      Contract
                                          
                                          
                                          $
                                          1,263,836
                                          
                                          03/2007-02/2009
                                          
                                          $
                                          1,024
                                          
                                          
                                          $
                                          323,826
                                          
                                          
                                          $
                                          613,901NIH
                                          
                                          Phase
      II NIH SBIR program
                                          
                                          
                                          $
                                          750,000
                                          
                                          07/2006-06/2008
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          77,971
                                          
                                          
                                          $
                                          77,971NY
      State/RPCI
                                          
                                          Sponsored
      Research Agreement
                                          
                                          
                                          $
                                          3,000,000
                                          
                                          03/2007-02/2012
                                          
                                          $
                                          24,660
                                          
                                          
                                          $
                                          90,749
                                          
                                          
                                          $
                                          305,298NIH
                                          
                                          NCI
      Contract
                                          
                                          
                                          $
                                          750,000
                                          
                                          09/2006-08/2008
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          63,778
                                          
                                          
                                          $
                                          219,618DoD
                                          
                                          DOD
      Contract
                                          
                                          
                                          $
                                          8,900,000
                                          
                                          05/2008
      - 09/2009
                                          
                                          $
                                          1,180,463
                                          
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          2,938,357HHS
                                          
                                          BARDA
      Contract
                                          
                                          
                                          $
                                          13,300,000
                                          
                                          09/2008-09/2011
                                          
                                          $
                                          702,188
                                          
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          219,412NIH
                                          
                                          NIAID
      Grant
                                          
                                          
                                          $
                                          774,183
                                          
                                          09/2008-02/2010
                                          
                                          $
                                          401,396
                                          
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          211,040Totals
                                          
                                          $
                                          2,309,731
                                          
                                          
                                          $
                                          556,324
                                          
                                          
                                          $
                                          4,585,597




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




Operating
Expenses





Operating
expenses have historically consisted of costs relating to R&D and general
and administrative expenses.  R&D expenses have consisted mainly
of supporting our R&D teams, process development, sponsored research at the
Roswell Park Cancer Institute and Cleveland Clinic, clinical trials and
consulting fees. General and administrative expenses include all corporate and
administrative functions that serve to support our current and future operations
while also providing an infrastructure to support future growth. Major items in
this category include management and staff salaries, rent/leases, professional
services and travel-related expenses. We anticipate these expenses to increase
as a result of increased legal and accounting fees anticipated in connection
with our compliance with ongoing reporting and accounting requirements of the
SEC and the expansion of our business.





Operating
expenses decreased from $4,744,500 for the three-months ended March 31, 2008 to
$3,624,771 for the three-months ended March 31, 2009, a decrease of $1,119,729
or 23.6%.  We recognized a total of $274,101 of non-cash, stock-based
compensation for the three-months ended March 31, 2009 compared to ($192,626)
for the three-months ended March 31, 2008.  If these non-cash,
stock-based compensation expenses were excluded, operating expenses would have
decreased from $4,937,126 for the three-months ended March 31, 2008 to
$3,350,670 for the three-months ended March 31, 2009.  This represents
a decrease in operating expenses of $1,586,456 or 32.1% as explained
below.





Research
and development costs decreased from $3,551,386 for the three-months ended March
31, 2008 to $2,502,881 for the three-months ended March 31, 2009. This
represents a decrease of $1,048,505 or 29.5%. We recognized a total of $45,958
of R&D non-cash, stock based compensation for the three-months ended March
31, 2009 compared to $46,862 for the three-months ended March 31,
2008.  Without the non-cash, stock-based compensation, the R&D
expenses decreased from $3,504,524 for the three-months ended March 31, 2008 to
$2,456,923 for the three-months ended March 31, 2008; a decrease of $1,047,601
or 29.9%.  The lower research and development expenses were a result
of cost containment efforts and focusing research and development efforts on a
more select number of projects.




38




Selling,
general and administrative costs decreased from $1,193,114 for the three-months
ended March 31, 2008 to $1,121,890 for the three-months ended March 31,
2009.  This represents a decrease of $71,224 or 6.0%.  We
recognized a total of  $228,143 of non-cash, stock-based compensation
under selling, general and administrative costs for the three-months ended March
31, 2009 compared to ($239,488) for the three-months ended March 31, 2008.
Without the non-cash, stock-based compensation, the selling, general and
administrative expenses decreased from $1,432,602 for the three-months ended
March 31, 2008 to $893,747 for the three months ended March 31, 2009; a decrease
of $538,855 or 37.6%.  The lower general and administrative expenses
were incurred as a result of cost containment efforts.





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





Year Ended December 31, 2008 Compared
to Year Ended December 31, 2007





Revenue





Revenue
increased from $2,018,558 for the year ended December 31, 2007 to $4,705,597 for
the year ended December 31, 2008, representing an increase of $2,687,039 or
133.1%, resulting primarily from an increase in revenue from the DoD contract,
the BARDA contract and the NIAID grant.





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





Period
      of
                                  
                                  Revenue
                                  
                                  
                                  RevenueAgency
                                  
                                  Program
                                  
                                  Amount
                                  
                                  Performance
                                  
                                  2008
                                  
                                  
                                  2007DoD
                                  
                                  DTRA
      Contract
                                  
                                  $
                                  1,263,836
                                  
                                  03/2007-02/2009
                                  
                                  $
                                  613,901
                                  
                                  
                                  $
                                  466,322NIH
                                  
                                  Phase
      II NIH SBIR program
                                  
                                  $
                                  750,000
                                  
                                  07/2006-06/2008
                                  
                                  $
                                  77,971
                                  
                                  
                                  $
                                  459,621NASA
                                  
                                  Phase
      I NASA STTR program
                                  
                                  $
                                  100,000
                                  
                                  01/2006-01/2007
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  33,197NY
      State/RPCI
                                  
                                  Sponsored
      Research Agreement
                                  
                                  $
                                  3,000,000
                                  
                                  03/2007-02/2012
                                  
                                  $
                                  305,298
                                  
                                  
                                  $
                                  329,390NIH
                                  
                                  NCI
      Contract
                                  
                                  $
                                  750,000
                                  
                                  09/2006-08/2008
                                  
                                  $
                                  219,618
                                  
                                  
                                  $
                                  440,028DoD
                                  
                                  DOD
      Contract
                                  
                                  $
                                  8,900,000
                                  
                                  05/2008
      - 09/2009
                                  
                                  $
                                  2,938,357
                                  
                                  
                                  $
                                  -HHS
                                  
                                  BARDA
      Contract
                                  
                                  $
                                  13,300,000
                                  
                                  09/2008-09/2011
                                  
                                  $
                                  219,412
                                  
                                  
                                  $
                                  -NIH
                                  
                                  NIAID
      Grant
                                  
                                  $
                                  774,183
                                  
                                  09/2008-02/2010
                                  
                                  $
                                  211,040
                                  
                                  
                                  $
                                  -Totals
                                  
                                  $
                                  4,585,597
                                  
                                  
                                  $
                                  1,728,558





We
anticipate our revenue over the next year to be derived mainly from government
grants and contracts. We have been awarded 17 government contracts and grants
totaling over $30 million in funding for R&D.  We plan to submit
proposals for additional government contracts and grants over the next two years
totaling over $30 million in funding. Many of the proposals will be submitted to
government agencies that have awarded contracts and grants to us in the recent
past, but there is no guarantee that any will be awarded to us.





If these
awards are not funded in their entirety or if new grants and contracts are not
awarded in the future, our ability to fund future R&D and implement
technological improvements would be diminished, which would negatively impact
our ability to compete in our industry.




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 the Cleveland Clinic, clinical trials and
consulting fees. We plan to incur only those R&D costs that are properly
funded, either through a government contract or grant or other capital sources
such as direct investment. 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. Some of these
costs will be funded through government contracts and grants that provide
indirect cost reimbursement for certain indirect costs such as fringe benefits,
overhead and general and administrative expenses.




39




Operating
expenses decreased from $27,960,590 for the year ended December 31, 2007 to
$19,050,965 for the year ended December 31, 2008. This represents a decrease of
$8,909,625 or 31.9%. We recognized a total of $1,527,598 of non-cash
compensation for stock based compensation for the year December 31, 2008
compared to $7,789,305 for the year ended December 31, 2007. If these non-cash
stock based compensation expenses were excluded, operating expenses would have
decreased from $20,171,285 for the year ended December 31, 2007 to $17,523,367
for the year ended December 31, 2008. This represents a decrease in operating
expenses of $2,647,918 or 15.1% as explained below.





This
decrease resulted primarily from a decrease in R&D expenses from $17,429,652
for the year ended December 31, 2007 to $13,160,812 for the year ended December
31, 2008, a decrease of $4,268,840 or 24.5%. The reduced R&D expenses were
incurred primarily as a result of decreasing the number of R&D subcontracts
and other costs until sufficient funding is obtained.  We recognized a
total of $1,836,787 of non-cash compensation for R&D stock based
compensation for the year ended December 31, 2007 compared to $632,252 for the
year ended December 31, 2008. Without the non-cash stock based compensation, the
R&D expenses decreased from $15,592,865 for the year ended December 31, 2007
to $12,528,560 for the year ended December 31, 2008; a decrease of $3,064,305 or
19.7%.





The
following table summarizes research and development expenses for the years ended
December 31, 2008, 2007 and 2006 and since inception:





Year
      Ended
                          December
      31,
                          2008
                        
                        
                        Year
      Ended
                          December
      31,
                          2007
                        
                        
                        Year
      Ended
                          December
      31,
                          2006
                        
                        
                        Total
                          Since
                          InceptionResearch
      and development
                        
                        $
                        13,160,812
                        
                        
                        $
                        17,429,652
                        
                        
                        $
                        6,989,804
                        
                        
                        $
                        43,256,722General
                        
                        $
                        931,441
                        
                        
                        $
                        892,456
                        
                        
                        $
                        378,113
                        
                        
                        $
                        5,106,630Protectan
      CBLB502 - non-medical applications
                        
                        $
                        7,264,813
                        
                        
                        $
                        9,885,776
                        
                        
                        $
                        3,574,593
                        
                        
                        $
                        21,601,196Protectan
      CBLB502 - medical applications
                        
                        $
                        756,227
                        
                        
                        $
                        815,399
                        
                        
                        $
                        144,369
                        
                        
                        $
                        1,776,929Protectan
      CBLB612
                        
                        $
                        974,459
                        
                        
                        $
                        1,127,248
                        
                        
                        $
                        466,715
                        
                        
                        $
                        3,130,374Curaxin
      CBLC102
                        
                        $
                        1,741,194
                        
                        
                        $
                        2,712,521
                        
                        
                        $
                        1,372,998
                        
                        
                        $
                        6,466,483Other
      Curaxins
                        
                        $
                        1,492,678
                        
                        
                        $
                        1,996,252
                        
                        
                        $
                        1,053,016
                        
                        
                        $
                        5,175,110




In
addition, selling, general and administrative expenses decreased from
$10,530,938 for the year ended December 31, 2007 to $5,890,153, for the year
ended December 31, 2008. This represents a decrease of $4,640,785 or 44.1%.
These lower selling, general and administrative expenses were incurred as a
result of a substantial reduction in the non-cash stock based compensation for
the selling, general and administrative area of the Company. We recognized a
total of $5,952,517 of non-cash stock-based compensation for general and
administrative compensation for the year ended December 31, 2007 compared to
$895,346 for the year ended December 31, 2008. Without the non-cash stock based
compensation, the general and administrative expenses increased from $4,578,421
for the year ended December 31, 2007 to $4,994,807 for the year ended December
31, 2008; an increase of $416,386 or 9.1%.





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




40




Liquidity
and Capital Resources





We have
incurred annual operating losses since our inception, and, as of March 31, 2009,
we had an accumulated deficit of $59,474,080. Our principal sources of liquidity
have been cash provided by sales of our securities and government grants,
contracts and agreements. Our principal uses of cash have been research and
development and working capital. We expect our future sources of liquidity to be
primarily government grants, equity financing, licensing fees and milestone
payments in the event we enter into licensing agreements with third parties, and
research collaboration fees in the event we enter into research collaborations
with third parties.





Net cash
used in operating activities totaled $1,412,073 for the three months ended March
31, 2009, compared to $4,243,435 used in operating activities for the three
months ended March 31, 2008. Net cash used in operating activities totaled
$12,121,102 for the year ended December 31, 2008, compared to $16,607,922 used
in operating activities for the same period in 2007. For all periods, the
decrease in cash used was primarily attributable to cost containment efforts and
a more focused effort in research and development.





Net cash
provided by investing activities was $949,057 for the three months ended March
31, 2009 and net cash used in investing activities was $205,813 for the three
months ended March 31, 2008. Net cash used in investing activities was $558,407
for the year ended December 31, 2008 and $442,523 used for the same period in
2007. The increase in cash provided by investing activities resulted primarily
from the sale of a short term investment.





Net cash
used in financing activities totaled $3,898,184 for the three months ended March
31, 2009, compared to net cash used in financing activities of $660,558 for the
three months ended March 31, 2008.  The increase in cash provided by
financing activities was attributed to the issuance of the Series D Preferred
Shares and Warrants as compared to the cash used in financing activities to pay
dividends on the Series B preferred during the first three months of 2008. Net
cash used in financing activities totaled $1,232,831 for the year ended December
31, 2008, compared to $28,200,591 provided by financing activities for the year
ended December 31, 2007. This decrease in cash provided by financing activities
was attributed to the payment of dividends on the Series B preferred as compared
to the proceeds from the issuance of Series B Preferred in connection with our
Series B private placement offering in 2007.





Under our
exclusive license agreement with CCF, we may be responsible for making milestone
payments to CCF in amounts ranging from $50,000 to $4,000,000. The milestones
and corresponding payments for Protectan CBLB502 and Curaxin CBLC102 are set
forth below:





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





As of
March 31, 2009, we have paid $50,000 for the milestone payment relating to the
filing of the IND application for Curaxin CBLC102, $250,000 for commencing Phase
II clinical trials for Curaxin CBLC102 and $50,000 for the filing of an IND
application for Protectan CBLB502.  The $50,000 milestone payment for
Curaxin CBLC102 was made May 3, 2007, the $250,000 milestone was paid on August
21, 2007 and the $50,000 milestone for Protectan CBLB502 was made on August 27,
2008 as per the terms of the agreement.





Our
agreement with the CCF also provides for payment by us to CCF of royalty
payments calculated as a percentage of the net sales of the drug candidates
ranging from 1-2%, and sublicense royalty payments calculated as a percentage of
the royalties received from the sublicenses ranging from 5-35%. However, any
royalty payments and sublicense royalty payments assume that we will be able to
commercialize our drug candidates, which are subject to numerous risks and
uncertainties, including those associated with the regulatory approval process,
our research and development process and other factors. Each of the above
milestone payments, royalty payments and sublicense royalty payments was accrued
until CCF owns less than five percent of our common stock on a fully-diluted
basis or we receive more than $30,000,000 in funding and/or revenues from
sources other than CCF, which have occurred with the completion of the private
offering in March 2007.




41




To meet
our longer term cash requirements, we may be required to issue equity or debt
securities or enter into other financial arrangements, including relationships
with corporate and other partners. Depending upon market conditions, we may not
be successful in raising sufficient additional capital for our long-term
requirements. In such event, our business, prospects, financial condition and
results of operations could be materially adversely affected.





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




Impact
of Inflation





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




Impact
of Exchange Rate Fluctuations





We
believe that our results of operations are somewhat dependent upon moderate
changes in foreign currency exchange rates. We have entered into a manufacturing
agreement with a foreign third party to produce one of its drug compounds and
are required to make payments in the foreign currency. Currently, our exposure
primarily exists with the Euro and the Great British Pound or GBP. As of March
31, 2009, we are obligated to make payments under the agreement of 784,102 Euros
and 88,673 GBP. We also expect to enter into additional agreements with foreign
third parties, increasing the risk. As a result, our financial results could be
affected by changes in foreign currency exchange rates. We have established
means to purchase forward contracts to hedge against this risk. As of March 31,
2009, the Company has commitments of $1,039,641 for Euros and
$126,714 fpr GBP given prevailing foreign currency exchange spot
rates.





Off-Balance
Sheet Arrangements





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




42




Item
3: Quantitative and Qualitative Disclosures About Market Risk





Not
applicable.





Item
4: Controls and Procedures





Effectiveness
of Disclosure





Our
management, with the participation of our chief executive officer and chief
financial officer, evaluated the effectiveness of our disclosure controls and
procedures as of March 31, 2009 as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”). Our
management recognizes that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving their
objectives and management necessarily applies its judgment in evaluating the
cost-benefit relationship of possible controls and procedures. Based on the
evaluation of our disclosure controls and procedures as of March 31, 2009, our
chief executive officer and chief financial officer concluded that, as of such
date, our disclosure controls and procedures were effective to assure that
information required to be declared by us in reports that we file or submit
under the Exchange Act is (1) recorded, processed, summarized, and reported
within the periods specified in the SEC's rules and forms and (2) accumulated
and communicated to our management, including our chief executive officer and
chief financial officer, as appropriate, to allow timely decisions regarding
required disclosure.





Changes
in Internal Control over Financial Reporting





No change
in our internal control over financial reporting (as defined in Rules 13a-15(f)
and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended
March 31, 2009 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.




43




PART
II - Other Information





Item
1. Legal Proceedings





As
of March 31, 2009, we were not a party to any litigation or other legal
proceeding.





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





(a)
Previously reported on Form 8-K, filed with the Securities and Exchange
Commission on March 30, 2009.





(b)
None.





(c)
None.





Item
3. Defaults Upon Senior Securities





None.





Item
4. Submission of Matters to a Vote of Security Holders





None.





Item
5. Other Information





None.





Item
6. Exhibits




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





Exhibit
                            Number
                          
                          Description
      of Document31.1
                          
                          Certification
      of Michael Fonstein, Chief Executive Officer, pursuant to Section 302 of
      the Sarbanes Oxley Act of 2002.31.2
                          
                          Certification
      of John A. Marhofer, Jr., Chief Financial Officer, pursuant to Section 302
      of the Sarbanes Oxley Act of 2002.32.1
                          
                          Certification
      Pursuant To 18 U.S.C. Section
1350




44




Signatures





In
accordance with the requirements of the Securities Exchange Act of 1934, the
Registrant has dulycaused this report
to be signed on its behalf by the undersigned thereunto duly
authorized.





CLEVELAND
      BIOLABS, INC.Dated:
      May 14, 2009
                  By:
                  /s/
      MICHAEL FONSTEINMichael
      Fonstein
                    Chief
      Executive Officer
                    (Principal
      Executive Officer)Dated:
      May 14, 2009
                  By:
                  /s/
      JOHN A. MARHOFER, JR.John
      A. Marhofer, Jr.
                    Chief
      Financial Officer
                    (Principal
      Financial
Officer)




45