United States Securities and Exchange
Commission


WASHINGTON,
D.C. 20549





FORM
10-K





(Mark
One)


x Annual Report Pursuant
to Section 13 or 15(d) of the Securities Exchange Act of 1934




For
the fiscal year ended December 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, NY 14203
            
            (716)
      849-6810(Address
      of principal executive offices)
            
            Telephone
      No.





Securities
Registered Pursuant to Section 12(b) of the Act:





Title
      of each class
            
            Name
      of each exchange which registeredCommon
      Stock, par value $0.005 per share
            
            NASDAQ
      Capital Market





Securities
Registered Pursuant to Section 12(g) of the Act:


None





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.


 ̈ Yes x No





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.


 ̈    Yes
xNo





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.  xYesoNo




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





Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. x





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
definition of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):





Large
      accelerated filero
            Accelerated
      fileroNon-accelerated
      filero
            Smaller
      reporting companyx





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





The
aggregate market value of the voting and non-voting common equity held by
non-affiliates, computed by reference to the price at which the common equity
was last sold or the average bid and asked price of such common equity, as of
the last business day of the registrant’s most recently completed second fiscal
quarter was $46,703,406. There were 26,632,040 shares of common stock
outstanding as of March 5, 2010.




DOCUMENTS
INCORPORATED BY REFERENCE





The
definitive proxy statement relating to the registrant’s Annual Meeting of
Stockholders, to be held on June 8, 2010, is incorporated by reference in Part
III to the extent described therein.









CLEVELAND
BIOLABS, INC.


FORM
10-K


03/22/10




Cleveland
BioLabs, Inc.





Form
10-K





For
the Fiscal Year Ended December 31, 2009





INDEX





PagePART
      IItem
      1
            
            Description
      of Business
            
            1Item
      1A
            
            Risk
      Factors
            
            17Item
      1B
            
            Unresolved
      Staff Comments
            
            26Item
      2
            
            Description
      of Property
            
            26Item
      3
            
            Legal
      Proceedings
            
            26Item
      4
            
            Removed
      and Reserved
            
            26PART
      IIItem
      5
            
            Market for
      Registrant’s Common Equity, Related Stockholder Matters and
      Issuer Purchases
      of Equity Securities
            
            27Item
      6
            
            Selected
      Financial Data
            
            27Item
      7
            
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
            
            28Item
      7A
            
            Quantitative
      and Qualitative Disclosures About Market Risk
            
            35Item
      8
            
            Financial
      Statements and Supplementary Data
            
            36Item
      9
            
            Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosures
            
            65Item
      9A
            
            Controls
      and Procedures
            
            65Item
      9B
            
            Other
      Information
            
            65PART
      IIIItem
      10
            
            Directors,
      Executive Officers and Corporate Governance
            
            66Item
      11
            
            Executive
      Compensation
            
            66Item
      12
            
            Security Ownership
      of Certain Beneficial Owners and Management and Related Stockholder
      Matters
            
            66Item
      13
            
            Certain
      Relationships and Related Transactions, and Director
      Independence
            
            66Item
      14
            
            Principal
      Accountant Fees and Services
            
            66PART
      IVItem
      15
            
            Exhibits
      and Financial Statement Schedules
            
            66SIGNATURES
            
            
            
            70





FORWARD-LOOKING
STATEMENTS





This Annual Report on Form 10-K
contains forward-looking statements that involve risks and uncertainties.
Forward-looking statements give our current expectations of forecasts of future
events. All statements other than statements of current or historical fact
contained in this annual report, including statements regarding our future
financial position, business strategy, new products, budgets, liquidity, cash
flows, projected costs, regulatory approvals or the impact of any laws or
regulations applicable to us, and plans and objectives of management for future
operations, are forward-looking statements. The words “anticipate,” “believe,”
“continue,” “should,” “estimate,” “expect,” “intend,” “may,” “plan,” “project,”
“will,” and similar expressions, as they relate to us, are intended to identify
forward-looking statements .





We
have based these forward-looking statements on our current expectations about
future events. While we believe these expectations are reasonable, such
forward-looking statements are inherently subject to risks and uncertainties,
many of which are beyond our control. The actual future results for Cleveland
BioLabs, Inc. may differ materially from those discussed here for various
reasons. When you consider these forward-looking statements, you should keep in
mind these risk factors and other cautionary statements in this annual report
including in Item 7 “Management’s Discussion and Analysis of Financial Condition
and Results of Operations” and in Item 1A “Risk Factors.”





Given
these risks and uncertainties, you are cautioned not to place undue reliance on
such forward-looking statements. The forward-looking statements included in this
report are made only as of the date hereof. We do not undertake any obligation
to update any such statements or to publicly announce the results of any
revisions to any of such statements to reflect future events or developments.
When used in the report, unless otherwise indicated, “CBLI,” the “Company,”
“we,” “our” and “us” refers to Cleveland BioLabs, Inc.




PART
I





Item 1.  Description of
Business





GENERAL
OVERVIEW





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





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




Technology





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





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





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




1





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





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





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




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




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





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





These
drug candidates demonstrate the value of our scientific foundation. Based on the
expedited approval process currently available for non-medical applications such
as protection from exposure to radiation, our most advanced drug candidate,
Protectan CBLB502 may be approved for such applications within 18 - 24
months. Another drug candidate, Curaxin CBLC102, demonstrated activity and
safety in a Phase IIa clinical trial concluded in late 2008.




INDUSTRY





CBLI is a biotechnology, or biotech,
company focused ondeveloping biodefense, tissue protection and cancer
treatment drugs.Historically,
biotech was defined by newly discovered “genetic engineering” technology, which
was first developed in universities and new startup biotech companies in the
mid-1970s. Later, other technologies (based on a constant flow of discoveries in
the field of biology) started playing a leading role in biotech development.
Medicine, and specifically drug development, is a lucrative field for use of
these technologies. Large pharmaceutical, or Pharma, companies joined the
biotech arena through licensing, sponsored research, and corporate agreement
relationships. As of April 2008, biotech is a $360 billion industry (based on
total market capitalization of U.S. public companies tracked by BioWorld) and
includes large companies such as Amgen, Inc. and Genentech,
Inc.


The
traditional biotech business model is a derivative of the long drug development
process. Typical biotech companies go through the following stages:





·
            During
      the first stage, biotech companies fund their development through equity
      or debt financings while conducting R&D, which culminates in phased
      drug trials.




·
            During
      the second stage, when their lead drug candidates enter the drug trials,
      biotech companies may start licensing their drug candidates to Pharma
      companies in order to (1) generate revenue, (2) gain access to additional
      expertise, and (3) establish relations with Pharma companies who can
      eventually take a leading role in distributing successful
      drugs.




·
            At
      the most advanced stage, biotech companies generate revenues by selling
      drugs or other biotech products to consumers or through alliances of
      equals.




2




The
Project BioShield Act, which was signed into law in July 2004, allocated $5.6
billion over ten years to fund the research, development and procurement of
drugs, biological products or devices to treat or prevent injury from exposure
to biological, chemical, radiological or nuclear agents as a result of a
military, terrorist or nuclear attack. The legislation provides for a more
expedited approval process by allowing for approval based on Phase I safety
studies in humans and efficacy studies in two animal species (rodents and
non-human primates) instead of Phase II and III human clinical trials (seeGovernment Regulation ).
With the Project BioShield Act, biotech companies now have greater access to
grants and contracts with the U.S. government. Several biotech companies,
including CBLI, have secured grants and contracts from the U.S. government to
develop drugs and vaccines as medical countermeasures against potential
terrorist attacks. For biotech companies focused on these types of drugs and
vaccines, this type of funding, together with the modified Food and Drug
Administration, or FDA, approval process, are major departures from the
traditional biotech business model. The principal provisions of this law are
to:





·
            Facilitate
      R&D efforts of biomedical countermeasures by the National Institutes
      of Health;




·
            Provide
      for the procurement of needed countermeasures through a special reserve
      fund of $5.6 billion over ten years;
and




·
            Authorize,
      under limited circumstances, the emergency use of medical products that
      have not been approved by the FDA.





STRATEGIES
AND OBJECTIVES





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





·
            Aggressively working towards
      the commercialization of Protectan CBLB502. Our most advanced drug
      candidate, Protectan CBLB502, offers the potential to protect normal
      tissues against exposure to radiation. Because of the potential military
      and defense implications of such a drug, the normally lengthy FDA approval
      process for these non-medical applications is substantially abbreviated
      resulting in a large cost savings to us. We expect to complete development
      of Protectan CBLB502 for these non-medical applications and complete
      submission of the Biologic License Application, or BLA, with the FDA in
      the first half of 2011.




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




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




·
            Utilizing and developing other
      strategic relationships. We have collaborative relationships with
      other leading organizations that enhance our drug development and
      marketing efforts. For example, one of our founders, with whom we maintain
      a strategic partnership, is ChemBridge Corporation. Known for its
      medicinal chemistry expertise and synthetic capabilities, ChemBridge
      provides valuable resources to our drug development research including
      access to a chemical library of over 1,000,000
  compounds.




RESEARCH
AND DEVELOPMENT





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





There are
significant risks and uncertainties inherent in the preclinical and clinical
studies associated with our R&D projects. As a result, the costs to complete
such projects, as well as the period in which net cash outflows from such
programs are expected to be incurred, may not be reasonably estimated. From our
inception to December 31, 2009, we spent $57,588,395 on R&D.




3





Our
ability to complete our R&D on schedule is, however, subject to a number of
risks and uncertainties, which are discussed below under Item 1A – Risk
Factors.  In addition, we have sustained losses from operations in
each fiscal year since our inception in June 2003, and we may exhaust our
financial resources and be unable to complete the development of our products
due to the substantial investment in R&D that will be required for the next
several years. We expect to spend substantial additional sums on the continued
R&D of proprietary products and technologies with no certainty that losses
will not increase or that we will ever become profitable as a result of these
expenditures.





The
testing, marketing and manufacturing of any product for use in the 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.





PRODUCTS
IN DEVELOPMENT





Protectans





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





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





We spent
approximately $13,738,983 and $8,995,500 on R&D for protectans for all
applications in the fiscal years ended December 31, 2009 and 2008, respectively.
From our inception to December 31, 2009, we have spent approximately $40,247,483
on R&D for protectans.




Protectan
CBLB502





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





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




4





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





We spent
approximately $13,732,416 and $8,021,040 on R&D for Protectan CBLB502 in the
fiscal years ended December 31, 2009 and 2008, respectively. From our inception
to December 31, 2009, we have spent approximately $37,110,541 on R&D for
Protectan CBLB502.





Non-medical
Applications





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





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




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




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




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





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





In March
2008, the DoD, awarded us a contract valued at up to $8.9 million over eighteen
months through the Chemical Biological Medical Systems Joint Project Management
Office Broad Agency Announcement, or BAA, for selected tasks in the advanced
development of Protectan CBLB502 as a Medical Radiation Countermeasure, or MRC,
to treat radiation injury following exposure to radiation from nuclear or
radiological weapons. In September 2009, the DoD increased the funding under
this contract by $0.6 million to $9.5 million to support bridging studies
between lyophilized and liquid drug formulations.





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




5





In
September 2008, the Biomedical Advanced Research and Development Authority, or
BARDA, of the Department of Health and Human Services, or HHS, awarded us a
contract under the BAA titled, "Therapies for Hematopoietic Syndrome, Bone
Marrow Stromal Cell Loss, and Vascular Injury Resulting from Acute Exposure to
Ionizing Radiation," for selected tasks in the advanced development of Protectan
CBLB502. The total contract value including all milestone-based options started
at $13.3 million over a three-year period, with the first year's award of $3.4
million. In September 2009, BARDA increased the total contract value by $2.3
million to $15.6 million and awarded the first milestone option of $6.3 million.
BARDA seeks to acquire developed medical countermeasures that will be clinically
useful in a civilian medical emergency situation that results from or involves
exposure of a large population to the effects of a nuclear detonation, a
radiologic dispersive device (such as a dirty bomb), or exposure to radioactive
material with or without combined injury or trauma.





We spent
approximately $13,676,289 and $7,264,813 on R&D for the non-medical
applications of Protectan CBLB502 in the fiscal years ended December 31, 2009
and 2008, respectively. From our inception to December 31, 2009, we have spent
approximately $35,277,485 on R&D for the non-medical applications of
Protectan CBLB502.




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




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




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





Regulatory
Status





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





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




6





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





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




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





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




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




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




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




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




Medical
Applications





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





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





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




7





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





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





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





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




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




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





·
            Performing
      a Phase I/II human efficacy study on a small number of head and neck
      cancer patients. We expect to complete this study two years from the
      receipt of allowance from the FDA of the IND amendment at an approximate
      cost of $1,500,000 which is covered by a government development
      grant.




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




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




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




Protectan
CBLB612





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




8





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





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





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





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





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





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





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




Two sets
of patent applications have been filed for Protectan CBLB612.





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





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





·
            Conducting
      pivotal animal safety studies with cGMP-manufactured
    CBLB612;




·
            Submitting
      an IND application and receiving approval from the FDA to conduct clinical
      trials;




·
            Performing
      a Phase I dose-escalation human
study;





9





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




·
            Filing
      a New Drug Application.




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





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





Curaxins





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





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





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





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





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





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





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





We spent
approximately $592,690 and $3,233,872 on R&D for curaxins overall in the
fiscal years ended December 31, 2009 and 2008, respectively. From our inception
to December 31, 2009, we have spent approximately $12,234,282 on R&D for
curaxins.





In
December 2009, we entered into a joint venture, Incuron, with Bioprocess Capital
Ventures, or BCV, a Russian Federation venture capital fund, to develop our
curaxin compounds for cancer applications. According to the terms of the
agreement, we will transfer the rights of curaxin anticancer molecules to the
new joint venture, and BCV will contribute approximately $18 million over three
payments to support development of the compounds. The first payment of $5.8
million is due upon formation of the Incuron entity, which is expected to occur
in April 2010.The
ensuing payments are based upon achievement of predetermined development
milestones. The first milestone payment of $6.4 million shall be made upon
approval to begin clinical trials on oncology patients with a selected lead
curaxin compound, or upon progression of a clinical program of CBLC102. The
second milestone payment shall be made upon completion of at least one Phase
I/II trial in cancer patients. We will serve as a subcontractor to Incuron to
support certain mechanistic studies and oversee clinical
development.




10




Curaxin
CBLC102





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




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




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





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





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





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





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





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





We spent
approximately $262,637 and $1,741,194 on R&D for Curaxin CBLC102 in the
fiscal years ended December 31, 2009 and 2008, respectively. From our inception
to December 31, 2008, we have spent approximately $6,729,120 on R&D for
Curaxin CBLC102.




11




Other
Curaxins





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





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





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





We spent
approximately $330,053 and $1,492,678 on R&D for other curaxins in the
fiscal years ended December 31, 2009 and 2008, respectively. From our inception
to December 31, 2008, we have spent approximately $5,505,163 on R&D for
other curaxins.





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




COLLABORATIVE
RESEARCH AGREEMENTS





Cleveland
Clinic Foundation





We have a
unique opportunity to accelerate our development by utilizing intellectual
property, drug leads, new research technologies, technical know-how and original
scientific concepts derived from 25 years of research achievements relevant to
cancer by Dr. Andrei Gudkov and his research team while at the Cleveland Clinic.
Pursuant to an agreement we entered into with the Cleveland Clinic effective as
of July 1, 2004, we were granted an exclusive license to the Cleveland Clinic’s
research base underlying our therapeutic platform (the CBLC100, CBLB500 and
CBLB600 series). In consideration for obtaining this exclusive license, we
agreed to:





·
            Issue
      to the Cleveland Clinic 1,341,000 shares of common
  stock;




·
            Make
      certain milestone payments (ranging from $50,000 to $4,000,000, depending
      on the type of drug and the stage of such drug’s
    development);




·
            Make
      royalty payments (calculated as a percentage of the net sales of the drugs
      ranging from 1-2%); and




·
            Make
      sublicense royalty payments (calculated as a percentage of the royalties
      received from the sublicenses ranging from
  5-35%).




12




The
schedule of milestone payments is as follows:




File
      IND application for Protectan CBLB502  (completed February
      2008)
              
              $
              50,000Commence
      Phase II clinical trials for Protectan CBLB502
              
              $
              100,000File
      BLA 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


Under
this license agreement, we may exclusively license additional technologies
discovered by Dr. Gudkov in this field by providing the Cleveland Clinic with
notice within 60 days after receiving an invention disclosure report from the
Cleveland Clinic relating to any such additional technologies. We believe that
this relationship will prove valuable, not only for the purposes of developing
the discoveries of Dr. Gudkov and his colleagues, but also as a source of
additional new technologies. We also expect that the Cleveland Clinic will play
a critical role in validating therapeutic concepts and in conducting trials. The
Cleveland Clinic may terminate the license upon a material breach by us, as
specified in the agreement. However, we may avoid such termination if we cure
the breach within 90 days of receipt of a termination notice. As each patent
covered by this license agreement expires, the license agreement will terminate
as to that patent.





In August
2004, we entered into a cooperative research and development agreement, or
CRADA, with (i) the Uniformed Services University of the Health Sciences, which
includes AFRRI, (ii) the Henry M. Jackson Foundation for the Advancement of
Military Medicine, Inc., and (iii) the Cleveland Clinic, to evaluate one of our
radioprotective drug candidates and its effects on intracellular and
extracellular signaling pathways. As a collaborator under this agreement, we are
able to use the laboratories of the AFRRI to evaluate Protectan CBLB502 and its
effects on intracellular and extracellular signaling pathways in order to
improve countermeasures to lethal doses of radiation. Under the terms of the
agreement, all parties are financially responsible for their own expenses
related to the agreement. The agreement has a five-year term, but may be
unilaterally terminated by any party upon 30 days prior written notice with or
without cause.




In
February 2008, the terms of the agreement were extended by an additional two
years expiring August 15, 2010, and an additional scope of the research to be
performed under the CRADA has been added. As the part of the extended research
plan AFRRI will perform additional experiments in non-human primates to evaluate
radioprotection efficacy of Protectan CBLB502 and perform analysis of
hematopoietic stem cell mobilization by Protectan CBLB612.




Roswell
Park Cancer Institute





In
January 2007, we entered into a strategic research partnership with RPCI to
develop our anticancer and radioprotectant drug candidates.





RPCI,
founded in 1898, is a world-renowned cancer research hospital and the nation's
first cancer research, treatment and education center. RPCI is a member of the
prestigious National Comprehensive Cancer Network, an alliance of the nation's
leading cancer centers, and is one of only ten free-standing cancer centers in
the nation.





RPCI and
various agencies of the state of New York provided us with approximately $5
million of grant and other funding. We established a major research/clinical
facility at the RPCI campus in Buffalo, New York, which has become the
foundation for several of our advanced research and clinical
trials.





Our
partnership with RPCI will enhance the speed and efficiency of our clinical
research, and will provide us with access to state-of-the-art clinical
development facilities in partnership with a globally recognized cancer research
center. We believe that our proprietary technology, combined with the assistance
of RPCI, and our continuing strong relationship with the Cleveland Clinic, will
position us to become a leading oncology company. A key element of our long-term
business strategy is to partner with world-class institutions to aid us in
accelerating our drug development timeline. We believe that our firm alliances
with both RPCI and the Cleveland Clinic provide us with a significant
competitive advantage.




ChemBridge
Corporation





Another
vital component of our drug development capabilities is our strategic
partnership with ChemBridge Corporation, an established leader in combinatorial
chemistry and in the manufacture of diverse chemical libraries.




13





On April
27, 2004, we entered into a library access agreement with ChemBridge that, in
exchange for shares of our common stock and warrants, provides us with continual
access to a chemical library of 214,000 compounds. Under the library access
agreement, we have also agreed to collaborate with ChemBridge in the future on
two optimization projects, wherein ChemBridge will have the responsibility of
providing the chemistry compounds for the project and we will have the
responsibility of providing the pharmacological/biological compounds. Upon
providing ChemBridge with our data after at least two positive repeat screening
assays, which have been confirmed in at least one additional functional assay,
ChemBridge will have the option to select such compound as one of the two
optimization projects. ChemBridge will retain a 50% ownership interest in two
lead compounds selected by ChemBridge and all derivative compounds thereof. The
parties will jointly manage the development and commercialization of any
compounds arising from an optimization project. The library access agreement
does not have a specified term or any termination provisions.





We have a
strong working relationship with ChemBridge.  We have fully completed
one joint hit-to-lead optimization program with ChemBridge.  As a
result of this program, we have developed CBLC137, which is a drug candidate
belonging to our next generation of highly improved curaxins with proprietary
composition of matter and intellectual property protection.  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 that compound’s activity and efficacy in
preclinical tumor models.





PATENTS





As a result of the license agreement
with the Cleveland Clinic, we currently have filed, on the Cleveland Clinic’s
behalf, ten patent applications covering new classes of anticancer and
radiation-protecting compounds, their utility and mode of action. One of the
patent applications was approved bythe U.S. Patent and Trademark Office
and counterpart agencies in several other nations. The patent issued in the U.S.
is US Patent No. 7,638,485 titled "Modulating Apoptosis" covering the method of
protecting a mammal from radiation using flagellin including CBLB502.




Our
intellectual property platform is based primarily on these ten patent
applications exclusively licensed to us by the Cleveland Clinic, four patent
applications we have filed and own exclusively, three patents filed in
collaboration with RPCI per the Sponsored Research Agreement and one in
collaboration with ChemBridge Corporation.




In 2009,
five patent applications were introduced and filed for approval with the U.S.
Patent Office and
counterpart agencies in several other nations. Two of the patent
applications are licensed from the Cleveland Clinic and three are licensed to us
in collaboration with RPCI.





We review
our patent applications on a continuing basis. In 2009, six patents were
combined into two separate patent applications and two patent applications were
abandoned due to the determination that the technology forecasted no financial
return.





MANUFACTURING





We do not
intend to establish or operate facilities to manufacture our drug candidates,
and therefore will be dependent upon third parties to do so. As we develop new
products or increase sales of any existing product, we must establish and
maintain relationships with manufacturers to produce and package sufficient
supplies of our finished pharmaceutical products. We have established a
relationship with SynCo Bio Partners B.V., a leading biopharmaceutical
manufacturer, to produce Protectan CBLB502 under cGMP specifications, and have
completed an agreement to produce sufficient amounts for clinical trials and a
commercial launch. As discussed above, the yields from the established
manufacturing process at SynCo have been very high and the current process is
expected to handle up to several million estimated human doses per year without
need for any additional scale up. For CBLC102, we have contracted with Regis
Technologies, Inc. to manufacture sufficient amounts for clinical
trials.




GOVERNMENT
REGULATION





The
R&D, manufacturing and marketing of drug candidates are subject to
regulation, primarily by the FDA in the U.S. and by comparable authorities in
other countries. These national agencies and other federal, state, local and
foreign entities regulate, among other things, R&D activities (including
testing in primates and in humans) and the testing, manufacturing, handling,
labeling, storage, record keeping, approval, advertising and promotion of the
products that we are developing. Noncompliance with applicable requirements can
result in various adverse consequences, including approval delays or refusals to
approve drug licenses or other applications, suspension or termination of
clinical investigations, revocation of approvals previously granted, fines,
criminal prosecution, recalls or seizures of products, injunctions against
shipping drugs, and total or partial suspension of production and/or refusal to
allow a company to enter into governmental supply contracts.




14





The
process of obtaining FDA approval for a new drug may take many years and
generally involves the expenditure of substantial resources. The steps required
before a new drug can be produced and marketed for human use include clinical
trials and the approval of an NDA or BLA and typically proceed as
follows:




Preclinical
Testing





In the
preclinical phase of development, the promising compound is subjected to
extensive laboratory and animal testing to determine if the compound is
biologically active and safe.




Investigational
New Drug (IND)





Before
human tests can start, the drug sponsor must file an IND application with the
FDA, showing how the drug is made and the results of animal testing. IND status
allows initiation of clinical investigation within 30 days of filing if the FDA
does not respond with questions during the 30-day period.




Human
Clinical Testing





The human
clinical testing program usually involves three phases that generally are
conducted sequentially, but which, particularly in the case of anti-cancer and
other life-saving drugs, may overlap or be combined. Clinical trials are
conducted in accordance with protocols that detail the objectives of the study,
the parameters to be used to monitor safety and the efficacy criteria to be
evaluated. Each protocol is submitted to the FDA as part of the IND filing. Each
clinical study is conducted under the direction of an independent Institutional
Review Board, or IRB, for each institution at which the study will be conducted.
The IRB will consider, among other things, all existing pharmacology and
toxicology information on the product, ethical factors, the risk to human
subjects and the potential benefits of therapy relative to risk.





In Phase
I clinical trials, studies usually are conducted on healthy volunteers or, in
the case of certain terminal illnesses such as advanced prostate cancer,
patients with the disease who have failed to respond to other treatment, to
determine the maximum tolerated dose, side effects and pharmacokinetics of a
product. Phase II studies are conducted on a small number of patients having a
specific disease to determine initial efficacy in humans for that specific
disease, the most effective doses and schedules of administration, and possible
adverse effects and safety risks. Phase II/III differs from Phase II in that the
trials involved may include more patients and, at the sole discretion of the
FDA, be considered the “pivotal” trials, or trials that will form the basis for
FDA approval. Phase III normally involves the pivotal trials of a drug,
consisting of wide-scale studies on patients with the same disease, in order to
evaluate the overall benefits and risks of the drug for the treated disease
compared with other available therapies. The FDA continually reviews the
clinical trial plans and results, and may suggest design changes or may
discontinue the trials at any time if significant safety or other issues
arise.





As
described above, for several of the product opportunities we are pursuing, we
may apply for approval based upon a rule adopted by the FDA in 2002, titled
“Approval of New Drugs When Human Efficacy Studies Are Not Ethical or Feasible”
(Part 314, Subpart I), which is also referred to as the animal efficacy
rule.Pursuant to
this new rule, in situations where it would be unethical to conduct traditional
Phase II and Phase III efficacy studies in humans, as is the case with
countermeasures to a number of weapons of mass destruction, the FDA will review
new drugs for approval on the basis of safety in humans and efficacy in relevant
animal models.




New
Drug Application (NDA) /
Biologic License Application (BLA)





Upon
successful completion of Phase III clinical trials, the drug sponsor files an
NDA or BLA with the FDA for approval, containing all information that has
been gathered. The NDA or BLA must include the chemical composition of the drug,
scientific rationale, purpose, animal and laboratory studies, results of human
tests, formation and production details, and proposed labeling.




Post-Approval
Regulation





Following
any initial regulatory approval of any drugs we may develop, we will also be
subject to continuing regulatory review, including the review of adverse
experiences and clinical results that are reported after our drug candidates are
made commercially available. This will include results from any post-marketing
tests or vigilance required as a condition of approval. The manufacturer and
manufacturing facilities we use to make any of our drug candidates will also be
subject to periodic review and inspection by the FDA. The discovery of any
previously unknown problems with the drug, manufacturer or facility may result
in restrictions on the drug, manufacturer or facility, including withdrawal of
the drug from the market. We do not have, and currently do not intend to
develop, the ability to manufacture material for our clinical trials or on a
commercial scale. Reliance on third-party manufacturers entails risks to which
we would not be subject if we manufactured drugs ourselves, including reliance
on the third-party manufacturer for regulatory compliance, and which are
discussed in more detail below under Item 1A – Risk Factors. Our drug promotion
and advertising is also subject to regulatory requirements and continuing FDA
review.





The
testing and approval process is likely to require substantial time and effort,
and there can be no assurance that any FDA approval will be granted on a timely
basis, if at all. The approval process is affected by a number of factors,
primarily the side effects of the drug (safety) and its therapeutic benefits
(efficacy). Additional preclinical or clinical trials may be required during the
FDA review period and may delay marketing approval. The FDA may also deny an NDA
if applicable regulatory criteria are not met.




15





The FDA
reviews the results of the clinical trials and may order the temporary or
permanent discontinuation of clinical trials at any time if it believes the drug
candidate exposes clinical subjects to an unacceptable health risk.




Sales
outside the U.S. of products that we develop will also be subject to regulatory
requirements governing human clinical trials and marketing for drugs and
biological products and devices. The requirements vary widely from country to
country, but typically the registration and approval process takes several years
and requires significant resources. In most cases, even if the FDA has not
approved a product for sale in the U.S., the product may be exported to any
country if it complies with the laws of that country and has valid marketing
authorization by the appropriate authority. There are specific FDA regulations
that govern this process.




EMPLOYEES





As of
March 5, 2010, we had 38employees, 36 of whom
were full-time employees.




ENVIRONMENT





We have
made, and will continue to make, expenditures for environmental compliance and
protection. Expenditures for compliance with environmental laws and regulations
have not had, and are not expected to have, a material effect on our capital
expenditures, results of operations, or competitive position.





Furthermore,
the Company currently has no known exposures to any current or proposed climate
change legislation which could negatively impact the Company’s operations or
require capital expenditures to become compliant.  Nonetheless, it is too
soon to predict with any certainty the ultimate impact, either directionally or
quantitatively, of climate change and related regulatory responses.




COMPETITION





Non-Medical
Applications




In the
area of radiation-protective antidotes, various companies, such as RxBio, Inc.,
Exponential Biotherapies Inc., Osiris Therapeutics, Inc., ImmuneRegen
BioSciences, Inc., Neumedicines, Inc., Cellerant Therapeutics, Onconova
Therapeutics, Inc., Araim Pharmaceuticals, Inc., EVA Pharmaceuticals, Terapio,
Aeolus Pharmaceuticals, Cangene Corporation and Humanetics Corporation are
developing biopharmaceutical products that potentially directly compete with our
non-medical application drug candidates, even though their approaches to such
treatment are different.




We
believe that due to the global political environment, the progress of
development is the critical factor in the marketing of an effective MRC for
federal agencies, such as DoD and HHS.  New developments in this area
are expected to continue at a rapid pace in both industry and
academia.




Medical
Applications





The
arsenal of medical radiation-protectors is limited to ETHYOLTM (amifostine), sold
by MedImmune, and acquired by AstraZeneca International. This
radiation-protector is limited because of the serious side effects of the drug.
Other radiation-protectors may enter the market.





Biomedical
research for anticancer therapies is a large industry, with many companies,
universities, research institutions and foreign government-sponsored companies
competing for market share. The top ten public U.S.-based companies involved in
cancer therapy have a combined market capitalization exceeding $1 trillion. In
addition, there are several hundred biotech companies who have as their mission
anticancer drug development. These companies account for the approximately 150
anticancer compounds currently in drug trials. However, despite the numerous
companies in this field, there is still a clear, unmet need in the anticancer
drug development market.





Each of
the approximately 200 types of cancer recognized by the National Cancer
Institute, or NCI, has dozens of subtypes, both etiological and on a treatment
basis. Due to this market segmentation, the paradigm of a one-size-fits-all,
super-blockbuster approach to drug treatments does not work well in cancer
therapy. Currently, even the most advanced therapeutics on the market do not
provide substantial health benefits.





This
suggests that innovative anticancer therapies are driven by the modest success
of current therapeutics, the need for an improved understanding of the
underlying science, and a shift in the treatment paradigm towards more
personalized medicine. Our technology addresses this need for an improved
understanding of the underlying science and implements a fundamental shift in
the approach to developing anticancer therapies.




16




Stem
Cell Mobilization





G-CSF is
the current standard against which all other mobilization agents for stem cells
are measured. This is because it has been shown to both mobilize more CD34+ stem
cells and have less toxicity than any other single agent against which it has
been tested to date. In a few cases, the use of G-SCF has caused deaths
attributed to thrombosis (acute myocardial infarction and stroke) in sibling
donors. Other side effects include pain, nausea, vomiting, diarrhea, insomnia,
chills, fevers, and night sweats.





Mozobil
(Genzyme Corporation) is a more recently FDA approved drug designed to help
increase the number of stem cells collected in a patient’s blood before being
transplanted back into the body after chemotherapy.





Sargramostim
(Bayer HealthCare Pharmaceuticals Inc.) as a single agent is used less often
today for mobilization than G-CSF, because it mobilizes somewhat less well than
G-CSF and because of a relatively higher incidence of both mild and severe side
effects. Erythropoietin (Amgen, Inc.), now commonly used among cancer patients
undergoing chemotherapy to maintain hemoglobin in the near normal range, also
has some ability to mobilize CD34+ cells.




Other
Sources of Competition





In
addition to the direct competition outlined above, there is potential for
adverse market effects from other outside developments. For example, producing a
new drug with fewer side effects reduces the need for anti-side effects
therapies. Because of this, we must monitor a broad area of anticancer R&D
and be ready to fine-tune our development as needed.




The
biotechnology and biopharmaceutical industries are characterized by rapid
technological developments and intense competition. This competition comes both
from biotech firms and from major pharmaceutical and chemical companies. Many of
these companies have substantially greater financial, marketing and human
resources than we do (including, in some cases, substantially greater experience
in clinical testing, manufacturing and marketing of pharmaceutical products).
Our drug candidates’ competitive position among other biotech and
biopharmaceutical companies may be based on, among other things, patent
position, product efficacy, safety, reliability, availability, patient
convenience, delivery devices, and price, as well as the development and
marketing of new competitive products.




We also
experience competition in the development of our drug candidates from
universities and other research institutions and compete with others in
acquiring technology from such universities and institutions. In addition,
certain of our drug candidates may be subject to competition from products
developed using other technologies, some of which have completed numerous
clinical trials. As a result, our actual or proposed drug candidates could
become obsolete before we recoup any portion of our related R&D and
commercialization expenses. However, we believe our competitive position is
enhanced by our commitment to research leading to the discovery and development
of new products and manufacturing methods.





Some of
our competitors are actively engaged in R&D in areas where we also are
developing drug candidates. The competitive marketplace for our drug candidates
is significantly dependent upon the timing of entry into the market. Early
entrants may have important advantages in gaining product acceptance and market
share contributing to the product’s eventual success and profitability.
Accordingly, in some cases, the relative speed with which we can develop
products, complete the testing, receive approval, and supply commercial
quantities of the product to the market is vital towards establishing a strong
competitive position.





Our
ability to sell to the government also can be influenced by indirect competition
from other providers of products and services. For instance, a major
breakthrough in an unrelated area of biodefense could cause a major reallocation
of government funds from radiation protection. Likewise, an outbreak or
threatened outbreak of some other form of disease or condition may also cause a
reallocation of funds away from the condition that Protectan CBLB502 is intended
to address.




Item
1A. Risk Factors





Risks
Relating to our Operations





We
have a history of operating losses. We expect to continue to incur losses and
may not continue as a going concern.





We have a
history of losses and can provide no assurance as to future operating results.
As a result of losses that will continue throughout our development stage, we
may exhaust our financial resources and be unable to complete the development of
our drug candidates.





We expect
losses to continue for the next few years as we spend substantial additional
sums on the continued R&D of proprietary drugs and technologies, and there
is no certainty that we will ever become profitable as a result of these
expenditures.





Our
ability to become profitable depends primarily on the following
factors:





·
            our
      ability to obtain approval for, and if approved, to successfully
      commercialize, Protectan CBLB502;




17




·
            our
      ability to bring to market other proprietary drugs that are progressing
      through our development process;




·
            our
      R&D efforts, including the timing and cost of clinical trials;
      and




·
            our
      ability to enter into favorable alliances with third-parties who can
      provide substantial capabilities in clinical development, manufacturing,
      regulatory affairs, sales, marketing and
  distribution.





Even if
we successfully develop and market our drug candidates, we may not generate
sufficient or sustainable revenue to achieve or sustain
profitability.




We
will likely require substantial additional financing in order to meet our
business objectives.





Upon
expiration of current capital reserves or sooner if we experience unanticipated
cash requirements, we may be required to issue additional equity or debt
securities or enter into other financial arrangements, including relationships
with corporate and other partners, in order to raise substantial additional
capital during the period of product development and clinical testing. Depending
upon market conditions and subject to limitations imposed by the terms of our
outstanding securities and contractual obligations, we may not be successful in
raising sufficient additional capital for our long-term requirements. If we fail
to raise sufficient additional financing, we will not be able to develop our
product candidates, and may be required to reduce staff, reduce or eliminate
R&D, slow the development of our product candidates, outsource or eliminate
several business functions or shut down operations. Even if we are successful in
raising such additional financing, we may not be able to successfully complete
planned clinical trials, development, and marketing of all, or of any, of our
product candidates. In such event, our business, prospects, financial condition
and results of operations could be materially adversely affected.




If
we lose our funding from R&D contracts and grants, we may not be able to
fund future R&D and implement technological improvements, which would
materially harm our financial conditions and operating results.





We
receive over 85% of our revenues from grant and contract development work in
connection with grants from the DoD, NIH, BARDA and NASA.





These
revenues have funded some of our personnel and other R&D costs and expenses.
However, 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.




We
can provide no assurance of the successful and timely development of new
products.





Our
products are in their developmental stage. Further development and extensive
testing will be required to determine their technical feasibility and commercial
viability. Our success will depend on our ability to achieve scientific and
technological advances and to translate such advances into reliable,
commercially competitive products on a timely basis. Products that we may
develop are not likely to be commercially available for a few years. The
proposed development schedules for our products may be affected by a variety of
factors, including technological difficulties, proprietary technology of others,
and changes in government regulation, many of which will not be within our
control. Any delay in the development, introduction or marketing of our products
could result either in such products being marketed at a time when their cost
and performance characteristics would not be competitive in the marketplace or
in the shortening of their commercial lives. In light of the long-term nature of
our projects and the unproven technology involved, we may not be able to
complete successfully the development or marketing of any products.





We may
fail to successfully develop and commercialize our products because
they:





·
            are
      found to be unsafe or ineffective in clinical
  trials;




·
            do
      not receive necessary approval from the FDA or foreign regulatory
      agencies;




·
            fail
      to conform to a changing standard of care for the diseases they seek to
      treat; or




·
            are
      less effective or more expensive than current or alternative treatment
      methods.




18




Product
development failure can occur at any stage of clinical trials and as a result of
many factors and there can be no assurance that we or our collaborators will
reach our anticipated clinical targets. Even if we or our collaborators complete
our clinical trials, we do not know what the long-term effects of exposure to
our product candidates will be. Furthermore, our products may be used in
combination with other treatments and there can be no assurance that such use
will not lead to unique safety issues. Failure to complete clinical trials or to
prove that our product candidates are safe and effective would have a material
adverse effect on our ability to generate revenue and could require us to reduce
the scope of or discontinue our operations.




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  NDA/BLA,
      preparation, discussions with the 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 cause the
      product to be not economically
      unfeasible; and




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




Our
R&D expenses are subject to uncertainty.





We are
highly dependent on the success of our R&D efforts and, ultimately, upon
regulatory approval and market acceptance of our products under development. Our
ability to complete our R&D on schedule is, however, subject to a number of
risks and uncertainties. Because we expect to expend substantial resources on
R&D, our success depends in large part on the results as well as the costs
of our R&D. R&D expenditures are uncertain and subject to much
fluctuation. Factors affecting our R&D expenses include, but are not limited
to:





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




·
            the
      number of products entering into development from late-stage research; for
      example, 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;




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




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




19




U.S.
government agencies have special contracting requirements, which create
additional risks.





We have
entered into contracts with various U.S. government agencies. For the near
future, substantially all of our revenue may be derived from government
contracts and grants. In contracting with government agencies, we will be
subject to various federal contract requirements. Future sales to U.S.
government agencies will depend, in part, on our ability to meet these
requirements, certain of which we may not be able to satisfy.





U.S.
government contracts typically contain unfavorable termination provisions and
are subject to audit and modification by the government at its sole discretion,
which subjects us to additional risks. These risks include the ability of the
U.S. government to unilaterally:





·
            suspend
      or prevent us for a set period of time from receiving new contracts or
      extending existing contracts based on violations or suspected violations
      of laws or regulations;




·
            terminate
      our existing contracts;




·
            reduce
      the scope and value of our existing
contracts;




·
            audit
      and object to our contract-related costs and fees, including allocated
      indirect costs;




·
            control
      and potentially prohibit the export of our products;
  and




·
            change
      certain terms and conditions in our
contracts.




As a U.S.
government contractor, we may become subject to periodic audits and reviews.
Based on the results of these audits, the U.S. government may adjust our
contract-related costs and fees, including allocated indirect costs. As part of
any such audit or review, the U.S. government may review the adequacy of, and
our compliance with, our internal control systems and policies, including those
relating to our purchasing, property, compensation and/or management information
systems. In addition, if an audit or review uncovers any improper or illegal
activity, we may be subject to civil and criminal penalties and administrative
sanctions, including termination of our contracts, forfeiture of profits,
suspension of payments, fines and suspension or prohibition from doing business
with the U.S. government. We could also suffer serious harm to our reputation if
allegations of impropriety were made against us. In addition, under U.S.
government purchasing regulations, some of our costs, including most financing
costs, amortization of intangible assets, portions of our R&D costs and some
marketing expenses, may not be reimbursable or allowed under our contracts.
Further, as a U.S. government contractor, we may become subject to an increased
risk of investigations, criminal prosecution, civil fraud, whistleblower
lawsuits and other legal actions and liabilities to which purely private sector
companies are not.




We
are subject to numerous risks inherent in conducting clinical trials any of
which could delay or prevent us from developing or commercializing our
products.





Before
obtaining required regulatory approvals for the commercial sale of any of our
product candidates, we must demonstrate through pre-clinical testing and
clinical trials that our product candidates are safe and effective for use in
humans. We must outsource our clinical trials and negotiate with third parties
to conduct such trials. We are not certain that we will successfully or promptly
finalize agreements for the conduct of all our clinical trials. Delay in
finalizing such agreements would delay the commencement of the Phase I/II trials
of Protectan CBLB502 for medical applications and Phase II/III clinical trials
of Curaxin CBLC102 in multiple cancers.





Agreements
with clinical investigators and medical institutions for clinical testing and
with other third parties for data management services place substantial
responsibilities on these parties, which could result in delays in, or
termination of, our clinical trials if these parties fail to perform as
expected. For example, if any of our clinical trial sites fail to comply with
FDA-approved good clinical practices, we may be unable to use the data gathered
at those sites. If these clinical investigators, medical institutions or other
third parties do not carry out their contractual duties or obligations or fail
to meet expected deadlines, or if the quality or accuracy of the clinical data
they obtain is compromised due to their failure to adhere to our clinical
protocols or for other reasons, our clinical trials may be extended, delayed or
terminated, and we may be unable to obtain regulatory approval for or
successfully commercialize Protectan CBLB502, Curaxin CBLC102 or other product
candidates.




20





We or
regulators may suspend or terminate our clinical trials for a number of reasons.
We may voluntarily suspend or terminate our clinical trials if at any time we
believe that they present an unacceptable risk to the patients enrolled in our
clinical trials. In addition, regulatory agencies may order the temporary or
permanent discontinuation of our clinical trials at any time if they believe
that the clinical trials are not being conducted in accordance with applicable
regulatory requirements or that they present an unacceptable safety risk to the
patients enrolled in our clinical trials.





Our
clinical trial operations will be subject to regulatory inspections at any time.
If regulatory inspectors conclude that we or our clinical trial sites are not in
compliance with applicable regulatory requirements for conducting clinical
trials, we may receive reports of observations or warning letters detailing
deficiencies, and we will be required to implement corrective actions. If
regulatory agencies deem our responses to be inadequate, or are dissatisfied
with the corrective actions that we or our clinical trial sites have
implemented, our clinical trials may be temporarily or permanently discontinued,
we may be fined, we or our investigators may be precluded from conducting any
ongoing or any future clinical trials, the government may refuse to approve our
marketing applications or allow us to manufacture or market our products or we
may be criminally prosecuted.




We
cannot assure that our products will obtain regulatory approval or that the
results of clinical studies will be favorable.





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




Our
collaborative relationships with third parties could cause us to expend
significant resources and incur substantial business risk with no assurance of
financial return.





We
anticipate substantial reliance upon strategic collaborations for marketing and
the commercialization of our drug candidates and we may rely even more on
strategic collaborations for R&D of our other drug candidates. Our business
depends on our ability to sell drugs to both government agencies and to the
general pharmaceutical market. Offering our drug candidates for non-medical
applications to government agencies does not require us to develop new sales,
marketing or distribution capabilities beyond those already existing in the
company. Selling anticancer drugs, however, does require such development. We
plan to sell anticancer drugs through strategic partnerships with pharmaceutical
companies. If we are unable to establish or manage such strategic collaborations
on terms favorable to us in the future, our revenue and drug development may be
limited. To date, we have not entered into any strategic collaborations with
third parties capable of providing these services. In addition, we have not yet
marketed or sold any of our drug candidates or entered into successful
collaborations for these services in order to ultimately commercialize our drug
candidates.





We also
rely on third-party collaborations with our
manufacturers.  Manufacturers producing our drug candidates must
follow cGMP regulations enforced by the FDA and foreign
equivalents.  If a manufacturer of our drug candidates does not
conform to the cGMP regulations and cannot be brought up to such a standard, we
will be required to find alternative manufacturers that do conform. This may be
a long and difficult process, and may delay our ability to receive FDA or
foreign regulatory approval of our drug candidates and cause us to fall behind
on our business objectives.





Establishing
strategic collaborations is difficult and time-consuming. Our discussion with
potential collaborators may not lead to the establishment of collaborations on
favorable terms, if at all. Potential collaborators may reject collaborations
based upon their assessment of our financial, regulatory or intellectual
property position. Even if we successfully establish new collaborations, these
relationships may never result in the successful development or
commercialization of our drug candidates or the generation of sales revenue. In
addition to the extent that we enter into collaborative arrangements, our drug
revenues are likely to be lower than if we directly marketed and sold any drugs
that we may develop.




21




We
rely upon licensed patents to protect our technology. We may be unable to obtain
or protect such intellectual property rights, and we may be liable for
infringing upon the intellectual property rights of others.





Our
ability to compete effectively will depend on our ability to maintain the
proprietary nature of our technologies and the proprietary technology of others
with which we have entered into licensing agreements. We have exclusively
licensed ten patent applications from the Cleveland Clinic and have filed seven
patent applications on our own or in collaboration with RPCI and
ChemBridge.  We do not know whether, any of these patent
applications still in
the approval process will ultimately result in the issuance of a patent
with respect to the technology owned by us or licensed to us. The patent
position of pharmaceutical or biotechnology companies, including ours, is
generally uncertain and involves complex legal and factual considerations. The
standards that the United States Patent and Trademark Office use to grant
patents are not always applied predictably or uniformly and can change. There is
also no uniform, worldwide policy regarding the subject matter and scope of
claims granted or allowable in pharmaceutical or biotechnology patents.
Accordingly, we do not know the degree of future protection for our proprietary
rights or the breadth of claims that will be allowed in any patents issued to us
or to others.





We also
rely on a combination of trade secrets, know-how, technology and nondisclosure,
and other contractual agreements and technical measures to protect our rights in
the technology. If any trade secret, know-how or other technology not protected
by a patent were to be disclosed to or independently developed by a competitor,
our business and financial condition could be materially adversely
affected.




We do not
believe that any of the products we are currently developing infringe upon the
rights of any third parties or are infringed upon by third parties; however,
there can be no assurance that our technology will not be found in the future to
infringe upon the rights of others or be infringed upon by others. In such a
case, others may assert infringement claims against us, and should we be found
to infringe upon their patents, or otherwise impermissibly utilize their
intellectual property, we might be forced to pay damages, potentially including
treble damages, if we are found to have willfully infringed on such parties’
patent rights. In addition to any damages we might have to pay, we may be
required to obtain licenses from the holders of this intellectual property,
enter into royalty agreements, or redesign our products so as not to utilize
this intellectual property, each of which may prove to be uneconomical or
otherwise impossible. Conversely, we may not always be able to successfully
pursue our claims against others that infringe upon our technology and the
technology exclusively licensed or developed with our collaborative partners.
Thus, the proprietary nature of our technology or technology licensed by us may
not provide adequate protection against competitors.





Moreover,
the cost to us of any litigation or other proceeding relating to our patents and
other intellectual property rights, even if resolved in our favor, could be
substantial, and the litigation would divert our management’s efforts and our
resources. Uncertainties resulting from the initiation and continuation of any
litigation could limit our ability to continue our operations.




If we fail to comply with our
obligations under our license agreement with the Cleveland Clinic and other
parties, we could lose our ability to develop our drug candidates.





The
manufacture and sale of any products developed by us may involve the use of
processes, products or information, the rights to certain of which are owned by
others. Although we have obtained licenses with regard to the use of the
Cleveland Clinic’s patent applications as described above and certain processes,
products and information of others, we cannot be certain that these licenses
will not be terminated or expire during critical periods, that we will be able
to obtain licenses for other rights that may be important to us, or, if
obtained, that such licenses will be obtained on commercially reasonable terms.
If we are unable 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 and introduction or precluding
the development, manufacture, or sale of planned products. Additionally, we
cannot assure that the patents underlying any licenses will be valid and
enforceable. To the extent any products developed by us are based on licensed
technology, royalty payments on the licenses will reduce our gross profit from
such product sales and may render the sales of such products
uneconomical.





Our
current exclusive license with the Cleveland Clinic imposes various development,
royalty, diligence, record keeping, insurance and other obligations on us. If we
breach any of these obligations and do not cure such breaches within the 90 day
period provided, the licensor may have the right to terminate the license, which
could result in us being unable to develop, manufacture and sell products that
are covered by the licensed technology or enable a competitor to gain access to
the licensed technology. In addition, while we cannot currently determine the
dollar amount of the royalty obligations we will be required to pay on sales of
future products, if any, the amounts may be significant. The dollar amount of
our future royalty obligations will depend on the technology and intellectual
property we use in products that we successfully develop and commercialize, if
any.




22




We
may incur substantial liabilities from any product liability claims if our
insurance coverage for those claims is inadequate.





We face
an inherent risk of product liability exposure related to the testing of our
product candidates in human clinical trials, and will face an even greater risk
if the product candidates are sold commercially. An individual may bring a
product liability claim against us if one of the product candidates causes, or
merely appears to have caused, an injury. If we cannot successfully defend
ourselves against the product liability claim, we will incur substantial
liabilities. Regardless of merit or eventual outcome, product liability claims
may result in:





·
            decreased
      demand for our product candidates;




·
            injury
      to our reputation;




·
            withdrawal
      of clinical trial participants;





·
            costs
      of related litigation;




·
            diversion
      of our management’s time and
attention;




·
            substantial
      monetary awards to patients or other
claimants;




·
            loss
      of revenues;




·
            the
      inability to commercialize product candidates;
  and




·
            increased
      difficulty in raising required additional funds in the private and public
      capital markets.




We
currently have product liability insurance and intend to expand such coverage
from coverage for clinical trials to include the sale of commercial products if
marketing approval is obtained for any of our product candidates. However,
insurance coverage is increasingly expensive. We may not be able to maintain
insurance coverage that will be adequate to satisfy any liability that may
arise.




Our
laboratories use certain chemical and biological agents and compounds that may
be deemed hazardous and we are therefore subject to various safety and
environmental laws and regulations. Compliance with these laws and regulations
may result in significant costs, which could materially reduce our ability to
become profitable.





We use
hazardous materials, including chemicals and biological agents and compounds
that could be dangerous to human health and safety or the environment. As
appropriate, we safely store these materials and wastes resulting from their use
at our laboratory facility pending their ultimate use or disposal. We contract
with a third party to properly dispose of these materials and wastes. We are
subject to a variety of federal, state and local laws and regulations governing
the use, generation, manufacture, storage, handling and disposal of these
materials and wastes. We may incur significant costs complying with
environmental laws and regulations adopted in the future.




Risks
Relating to our Industry and Other External Factors





Adverse
conditions in the capital and credit markets may significantly affect our
ability to obtain financing. If we are unable to obtain financing in the amounts
and on terms and dates acceptable to us, we may not be able to expand or
continue our operations and development, and thus may be forced to curtail or
cease operations or discontinue our business.




We cannot
be certain that we will be able to obtain financing when it is needed. Over the
past two years, the capital and credit markets have reached unprecedented levels
of volatility and disruption, and if such adverse conditions continue, our
ability to obtain financing may be significantly diminished. Our internal
sources of liquidity may prove to be insufficient, and in such case, we may not
be able to successfully obtain financing on favorable terms, or at all. If we
are unable to obtain financing in the amounts and on terms and dates acceptable
to us, we may not be able to continue our operations and development, and thus
may be forced to curtail or cease operations or discontinue our
business.




23




The
successful development of biopharmaceuticals is highly uncertain.





Successful
development of biopharmaceuticals is highly uncertain and is dependent on
numerous factors, many of which are beyond our control. Products that appear
promising in the early phases of development may fail to reach the market for
several reasons including:





·
            pre-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 BLA, preparation,
      discussions with the 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 economically
      feasible; and




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





Success
in pre-clinical and early clinical studies does not ensure that large-scale
clinical studies will be successful. Clinical results are frequently susceptible
to varying interpretations that may delay, limit or prevent regulatory
approvals. The length of time necessary to complete clinical studies and to
submit an application for marketing approval for a final decision by a
regulatory authority varies significantly from one product to the next, and may
be difficult to predict.




Political
or social factors may delay or impair our ability to market our
products.





Products
developed to treat diseases caused by or to combat the threat of bio-terrorism
will be subject to changing political and social environments. The political and
social responses to bio-terrorism have been highly charged and unpredictable.
Political or social pressures may delay or cause resistance to bringing our
products to market or limit pricing of our products, which would harm our
business. Changes to favorable laws, such as the Project BioShield Act, could
have a material adverse effect on our ability to generate revenue and could
require us to reduce the scope of or discontinue our operations.





We hope
to continue receiving funding from the DoD, BARDA and other government agencies
for the development of our bio-defense product candidates. Changes in government
budgets and agendas, however, may result in future funding being decreased and
de-prioritized, and government contracts contain provisions that permit
cancellation in the event that funds are unavailable to the government agency.
Furthermore, we cannot be certain of the timing of any future funding, and
substantial delays or cancellations of funding could result from protests or
challenges from third parties. If the U.S. government fails to continue to
adequately fund R&D programs, we may be unable to generate sufficient
revenues to continue operations. Similarly, if we develop a product candidate
that is approved by the FDA, but the U.S. government does not place sufficient
orders for this product, our future business may be harmed.





Failure
to comply with the United States Foreign Corrupt Practices Act could subject us
to penalties and other adverse consequences




We are
required to comply with the United States ForeignCorruptPractices Act , or FCPA, which prohibits U.S.
companies from engaging in bribery or other prohibited payments to foreign
officials for the purpose of obtaining or retaining business.  Foreign
companies, including some that may compete with us, are not subject to these
prohibitions.  This may place us at a significant competitive
disadvantage.  Corruption, extortion, bribery, pay-offs, theft and
other fraudulent practices may occur from time to time in the in the foreign
markets where we conduct business.  Although we inform our personnel
that such practices are illegal, we can make no assurance, that our employees or
other agents will not engage in illegal conduct for which we might be held
responsible. If our employees or other agents are found to have engaged in such
practices, we could suffer severe penalties and other consequences that may have
a material adverse effect on our business, financial condition and results of
operations.





The FCPA
also obligates companies whose securities are listed in the United States to
comply with certain accounting provisions requiring the company to maintain
books and records that accurately and fairly reflect all transactions of the
corporation, including international subsidiaries, and to devise and maintain an
adequate system of internal accounting controls for international
operations.




24





Compliance
with the FCPA is expensive and difficult, particularly in countries in which
corruption is a recognized problem. In addition, the FCPA presents particular
challenges in the biotech or pharmaceutical industry, because, in many
countries, hospitals are operated by the government, and doctors and other
hospital employees may be considered foreign officials.




Risks
Relating to our Securities





The
price of our common stock may be volatile, which may in turn expose us to
securities litigation.





Our
common stock is listed on the NASDAQ Capital Market. The listing of our common
stock on the NASDAQ Capital Market does not assure that a meaningful, consistent
and liquid trading market will exist, and in recent years, the market has
experienced extreme price and volume fluctuations that have particularly
affected the market prices of many smaller companies like us. Our common stock
is thus subject to this volatility. Factors that could cause fluctuations
include, but are not limited to, the following:





·
            price
      and volume fluctuations in the overall stock market from time to
      time;




·
            fluctuations
      in stock market prices and trading volumes of similar
      companies;





·
            actual
      or anticipated changes in our earnings or fluctuations in our operating
      results or in the expectations of securities
  analysts;




·
            general
      economic conditions and trends;




·
            major
      catastrophic events;




·
            sales
      of large blocks of our stock;




·
            departures
      of key personnel;




·
            changes
      in the regulatory status of our product candidates, including results of
      our clinical trials;




·
            events
      affecting the Cleveland Clinic, RPCI or any other
      collaborators;




·
            announcements
      of new products or technologies, commercial relationships or other events
      by us or our competitors;




·
            regulatory
      developments in the United States and other
  countries;




·
            failure
      of our common stock to be listed or quoted on the NASDAQ Capital Market,
      other national market system or any national stock
    exchange;




·
            changes
      in accounting principles; and




25




·
            discussion
      of us or our stock price by the financial and scientific press and in
      online investor communities.




In the
past, following periods of volatility in the market price of a company’s
securities, securities class action litigation has occasionally been brought
against that company. Due to the potential volatility of our stock price, we may
therefore be the target of securities litigation in the future. Regardless of
its outcome, securities litigation could result in substantial costs and divert
management’s attention and Company resources from our business.




Sales
of additional equity securities may adversely affect the market price of our
common stock.





We expect
to continue to incur product development and selling, general and administrative
costs, and in order to satisfy our funding requirements, we may need to sell
additional equity securities. The sale or the proposed sale of substantial
amounts of our common stock in the public markets may adversely affect the
market price of our common stock and our stock price may decline substantially.
Any new securities issued may have greater rights, preferences or privileges
than our existing common stock.




Additional
authorized shares of common stock available for issuance may adversely affect
the market price of our common stock.





We are
currently authorized to issue 80,000,000 shares of our common stock and
10,000,000 of our preferred stock As of December 31, 2009, we had 20,203,508
shares of our common stock and 467 shares of our preferred stock issued and
outstanding, excluding shares issuable upon the exercise of our outstanding
warrants and options. In February 2010, the preferred stock converted into
4,576,979 shares of common stock. As of March 5, 2010, we had 26,632,040shares of our common
stock and 0 shares of our preferred stock issued and outstanding and
9,793,405warrants
and 2,600,745 options outstanding, of which 2,299,120 options are currently
fully vested. To the extent the shares of common stock are issued or options and
warrants are exercised, holders of our common stock will experience dilution. In
addition, in the event of any future issuances of equity securities or
securities convertible into or exchangeable for, common stock, holders of our
common stock may experience dilution.




Item
1B. Unresolved Staff Comments





None




Item 2. Description of
Property





Our
corporate headquarters is located at 73 High Street, Buffalo, New
York 14203. We have approximately 28,000 square feet of laboratory and
office space under a five year lease through June of 2012. This space serves as
the corporate headquarters and primary research facilities. In addition, we have
leased approximately 2,500 square feet of office space located at 9450 W. Bryn
Mawr Rd., Rosemont, Illinois, 60018 through July 2011. We do not own any real
property.




Item
3. Legal Proceedings





As of
March 5, 2010, we were not a party to any litigation or other legal
proceeding.




Item
4. Removed and Reserved




26




PART
II





Item
5: Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities





Stock
Exchange Listing





Our
common stock trades on the NASDAQ Capital Market under the symbol “CBLI.” We
have not paid dividends on our common stock. We currently intend to retain all
future income for use in the operation of our business and for future stock
repurchases and, therefore, we have no plans to pay cash dividends on our common
stock at this time.





Stock
Prices





The
following table sets forth the range of high and low sale prices on The NASDAQ
Stock Market and/or NASDAQ Capital Market, as applicable, for each quarter
during 2009 and 2008. On March 5, 2010, the last reported sale price of our
common stock was $3.96 per share.





2009
              
              High
              
              
              LowFirst
      Quarter
              
              $
              3.87
              
              
              $
              1.15Second
      Quarter
              
              $
              4.50
              
              
              $
              1.75Third
      Quarter
              
              $
              6.35
              
              
              $
              3.40Fourth
      Quarter
              
              $
              4.97
              
              
              $
              3.31





2008
              
              High
              
              
              LowFirst
      Quarter
              
              $
              8.79
              
              
              $
              2.03Second
      Quarter
              
              $
              6.40
              
              
              $
              3.82Third
      Quarter
              
              $
              5.65
              
              
              $
              3.70Fourth
      Quarter
              
              $
              4.59
              
              
              $
              1.51


Common
Stockholders





As of
December 31, 2009, there were approximately 40 stockholders of record of our
Common Stock. Because many of our shares are held by brokers and other
institutions on behalf of stockholders, we are unable to estimate the total
number of beneficial stockholders represented by these record
holders.





We made
no repurchases of our securities during the year ended December 31,
2009.





Item
6: Selected Financial Data





The
following selected financial data has been derived from our audited financial
statements. The information below is not necessarily indicative of the results
of future operations and should be read in conjunction with Item 7,
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations,” and Item 1A, “Risk Factors,” of this Form 10-K, and the financial
statements and related notes thereto included in Item 8 of this Form 10-K, in
order to fully understand factors that may affect the comparability of the
information presented below:





SELECTED
FINANCIAL DATA
 (in
thousands, except per share data)


2009
              
              
              2008
              
              
              2007
              
              
              2006
              
              
              2005Total
      Operating Revenue
              
              $
              14,346
              
              
              $
              4,706
              
              
              $
              2,019
              
              
              $
              1,708
              
              
              $
              1,139Government
      contract or grant
              
              
              12,696
              
              
              
              4,586
              
              
              
              1,729
              
              
              
              1,503
              
              
              
              1,000Commercial
              
              
              1,650
              
              
              
              120
              
              
              
              290
              
              
              
              205
              
              
              
              139Net
      loss
              
              $
              (12,826
              )(1)
              
              $
              (14,026
              )(1)
              
              $
              (26,997
              )(1)
              
              $
              (7,223
              )(1)
              
              $
              (2,678
              )Net
      loss per share, basic and diluted
              
              $
              (0.82
              )
              
              $
              (1.13
              )
              
              $
              (2.34
              )
              
              $
              (0.84
              )
              
              $
              (0.43
              )Total
      assets
              
              $
              6,554
              
              
              $
              4,706
              
              
              $
              17,422
              
              
              $
              6,417
              
              
              $
              4,253Long-term
      debt
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              50
              
              
              
              303Stockholder's
      equity (deficit)
              
              
              (6,800
              )
              
              
              538
              
              
              
              14,194
              
              
              
              5,593
              
              
              
              3,557





We have
not paid any dividends on common stock.







(1)
            Net
      loss in 2009, 2008, 2007 and 2006 included employee stock-based
      compensation costs of $2.8 million, $1.5 million, $7.8 million and $0.5
      million, net of tax, respectively, due to our adoption of the provisions
      of the Codification on stock-based compensation on January 1, 2005. No
      employee stock-based compensation expense was recognized in reported
      amounts in any period prior to January 1,
2005.





27




Item
7. 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 R&D efforts and clinical
trials, product demand, market acceptance and other factors discussed in this
annual report under the heading “Risk Factors” and the Company’s other
Securities and Exchange Commission, or SEC,  filings. 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.




Financial
Overview





Including
several non-cash charges, our net loss decreased from $14,025,927 for the year
ended December 31, 2008 to $12,826,409 for the year ended December 31, 2009, a
decrease of $1,199,518 or 8.6%.  For the years ended December 31, 2009
and 2008, we incurred non-cash charges of depreciation and amortization of
$362,143 and $324,351, non-cash salaries and consulting fees of $2,760,446 and
$1,527,600 and a change in value of Series D warrants of $6,267,665 and $0,
respectively.  Excluding these non-cash charges, our net loss
decreased $8,737,821 or 71.8% from $12,173,976 for the year ended December 31,
2008 to $3,436,155 for the year ended December 31, 2009. This decrease was due
to increased government funding and our cost containment efforts.





Equity
Overview





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





On
February 13, 2009, March 20, 2009, and March 27, 2009, we entered into purchase
agreements with various accredited investors, pursuant to which we agreed to
sell to these investors an aggregate of 542.84 shares of Series D Preferred and
warrants to purchase an aggregate of 3,877,386 shares of the Company’s Common
Stock.  The warrants have a seven-year term and a per share exercise
price of $1.60. Each share of Series D Preferred was convertible into the number
of shares of Common Stock equal to (1) the stated value of the share ($10,000),
divided by (2) the then-current Conversion Price (initially $1.33, but subject
to adjustment as described below).  At the time of its issuance, each
share of Series D Preferred was convertible into approximately 7,519 shares of
Common Stock.





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





In
consideration for its services as exclusive placement agent, Garden State
Securities received cash compensation and warrants to purchase an aggregate of
approximately 387,736 shares of Common Stock.





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





Upon completion of the Series D
Preferred transaction, the exercise prices of the Company’s Series B Warrants and Series C
Warrants were adjusted, pursuant to weighted-average anti-dilution provisions,
to $6.79 and $7.20 respectively, from the original exercise prices of $10.36 and
$11.00.In addition to the
adjustment to the exercise prices of the Series B Warrants and the Series C
Warrants, the aggregate number of shares issuable upon exercise of the Series B
Warrants and the Series C Warrants increased to 3,609,300and 408,036, respectively, from
2,365,528 and
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 281,042 to
379,792.





Pursuant
to the terms of the Certificate of Designation of Preferences, Rights and
Limitations of the Series D Preferred, the Conversion Price of the Series D
Preferred was automatically reduced from $1.40 to $1.33 on August 13, 2009. This
adjustment caused the number of shares of Common Stock into which the 542.84
outstanding shares of Series D Preferred could be converted to increase from
3,877,386 to 4,081,445.  In addition, pursuant to the weighted-average
anti-dilution provisions of the Series B Warrants and the Series C Warrants,
this adjustment caused:





·
            the
      exercise price of the Series B Warrants to be reduced from $6.79 to $6.73,
      and the aggregate number of shares of Common Stock issuable upon exercise
      of the Series B Warrants to increase from 3,609,300 to 3,641,479;
      and





28





·
            the
      exercise price of the Series C Warrants to be reduced from $7.20 to $7.13,
      and the aggregate number of shares of Common Stock issuable upon exercise
      of the Series C Warrants to increase from 408,036 to
    412,042.




Certain
other warrants issued prior to the Company’s initial public offering were also
affected by this adjustment, which caused their exercise price to reduce from
$1.48 to $1.47 and the aggregate number of shares of Common Stock issuable to
increase from 343,537 to 345,855.





On
November 13, 2009, the Conversion Price of the Series D Preferred automatically
reduced from $1.33 to $1.28. This second adjustment caused the number of shares
of Common Stock into which the 470.25 outstanding shares of Series D Preferred
could be converted to increase from 3,627,041 to 3,673,844.





In
addition, pursuant to the weighted-average anti-dilution provisions of the
Series B Warrants and the Series C Warrants, the second adjustment
caused:





·
            the
      exercise price of the Series B Warrants to be reduced from $6.73 to $6.68,
      and the aggregate number of shares of Common Stock issuable upon exercise
      of the Series B Warrants to increase from 3,641,479 to 3,668,727;
      and








·
            the
      exercise price of the Series C Warrants to be reduced from $7.13 to $7.08,
      and the aggregate number of shares of Common Stock issuable upon exercise
      of the Series C Warrants to increase from 412,042 to
    414,952.




Certain
other warrants issued prior to the Company’s initial public offering were also
affected by this second adjustment, which caused their exercise price to reduce
from $1.47 to $1.46 and the aggregate number of shares of Common Stock issuable
to increase from 111,447 to 112,210.





On
December 31, 2009, the Conversion Price of the Series D Preferred again
automatically reduced from $1.33 to $1.02 because the Company failed to meet a
particular development milestone by the end of 2009. This milestone-based
adjustment caused the number of shares of Common Stock into which the 466.85
outstanding shares of Series D Preferred could be converted to increase from
3,647,281 to 4,576,979.





In
addition, pursuant to the weighted-average anti-dilution provisions of the
Series B Warrants and the Series C Warrants, the milestone adjustment
caused:





·
            the
      exercise price of the Series B Warrants to be reduced from $6.68 to $6.37,
      and the aggregate number of shares of Common Stock issuable upon exercise
      of the Series B Warrants to increase from 3,668,727 to 3,847,276;
      and








·
            the
      exercise price of the Series C Warrants to be reduced from $7.08 to $6.76,
      and the aggregate number of shares of Common Stock issuable upon exercise
      of the Series C Warrants to increase from 414,952 to
    434,956.




Certain
other warrants issued prior to the Company’s initial public offering were also
affected by the milestone adjustment causing their exercise price to reduce from
$1.46 to $1.39 and the aggregate number of shares of Common Stock issuable to
increase from 112,210 to 117,861.





On
February 9, 2010, all outstanding shares of Series D Preferred automatically
converted into approximately 4,576,979 shares of common stock at the Conversion
Price of $1.02 as a result of the Company’s closing sales price being above a
certain level for 20 consecutive trading days as well as the satisfaction of
certain other conditions, discussed in more detail below under “Subsequent
Events.”




Critical
Accounting Policies





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




29


Note 2 to
our financial statements includes disclosure of our significant accounting
policies. Critical accounting estimates, as defined by the SEC, are those that
are most important to the portrayal of our financial condition and results of
operations and require our most difficult and subjective judgments and estimates
of matters that are inherently uncertain. While all decisions regarding
accounting policies are important, we believe that our policies regarding
revenue recognition, R&D expenses, intellectual property related costs,
stock-based compensation expense and fair value measurements could be considered
critical. For additional information, see our audited financial statements and
notes thereto which are included with this Annual Report on Form 10-K, which
contain accounting policies and estimates and other disclosures required by
accounting principles generally accepted in the United States.





Accounting
policies that we deem to be most critical include policies relating to: revenue
recognition, research and development expenses, intellectual property costs,
stock based compensation expenses, and fair value measurement of financial
instruments, and are discussed in more detail below.




Revenue
Recognition





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





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





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





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





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





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




Research
and Development Expenses





R&D
costs are expensed as incurred. These expenses consist primarily of our
proprietary R&D efforts, including salaries and related expenses for
personnel, costs of materials used in our R&D costs of facilities and costs
incurred in connection with our third-party collaboration efforts. Pre-approved
milestone payments made by us to third parties under contracted R&D
arrangements are expensed when the specific milestone has been achieved. As of
December 31, 2009, $50,000 has been paid to the Cleveland Clinic for milestone
payments relating to the filing of an IND with the FDA for Curaxin CBLC102,
$250,000 has been paid to the Cleveland Clinic as a result of commencing Phase
II clinical trials for Curaxin CBLC102 and $50,000 has been paid to the
Cleveland Clinic relating to the filing of an IND with the FDA for Protectan
CBLB502. Once a drug receives regulatory approval, we will record any subsequent
milestone payments in identifiable intangible assets, less accumulated
amortization, and amortize them evenly over the remaining agreement term or the
expected drug life cycle, whichever is shorter. We expect our R&D expenses
to increase as we continue to develop our drug candidates.




Intellectual
Property Related Costs





We
capitalize costs associated with the preparation, filing and maintenance of our
intellectual property rights. Capitalized intellectual property is reviewed
annually for impairment. If a patent application is approved, costs paid by us
associated with the preparation, filing and maintenance of the patent will be
amortized on a straight line basis over the shorter of 20 years 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.





30


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, 2009. We capitalized an additional
$237,064, amortized $4,575 and expensed $35,564 of previously capitalized
expenditures relating to these costs incurred for the year ended December 31,
2009, resulting in a balance of capitalized intellectual property totaling
$929,976.




Stock-based
Compensation





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





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





During
the year ended December 31, 2009, the Company granted 787,932 stock options. The
Company recognized a total of $1,784,240 in expense related to options for the
year ended December 31, 2009.  The Company also recaptured $50,197 of
previously recognized expense due to stock option forfeitures. During the year
ended December 31, 2008, the Company granted 997,721 stock options pursuant to
stock award agreements. We recognized a total of $828,377 in expense related to
options for the year ended December 31, 2008.  The weighted average,
estimated grant date fair values of stock options granted during the year ended
December 31, 2009 and 2008 was $1.95 and $3.16, respectively.





For the
year ended December 31, 2009 the Company also recognized a total of $991,612
expense for shares issued under the Company’s Equity Incentive Plan and a total
of $33,333 in expense related to the amortization of restricted
shares.





Fair
Value Measurement





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




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





The
Company carries the warrants issued in the Series D Private Placement at fair
value using Level 3 inputs for its valuation methodology totaling $8,410,379 and
$0 as of December 31, 2009 and 2008, respectively.  The Company
recognized a fair value measurement loss of $6,267,665 and $0 for the year ended
December 31, 2009 and 2008, respectively.





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




Recently
Issued Accounting Pronouncements





See Note
2U to financial statements in Item 8.




Results
of Operations





The
following table sets forth our statement of operations data for the years ended
December 31, 2009, 2008 and 2007 and should be read in conjunction with our
financial statements and the related notes appearing elsewhere in this annual
report on Form 10-K.





Year
      Ended
                December
      31,
                2009
              
              Year
      Ended
                December
      31,
                2008
              
              Year
      Ended
                December
      31,
                2007Revenues
              
              $
              14,345,908
              
              
              $
              4,705,597
              
              
              $
              2,018,558Operating
      expenses
              
              
              20,728,837
              
              
              
              19,050,965
              
              
              
              27,960,590Other
      expense (income)
              
              
              6,463,208
              
              
              
              (59,597
              )
              
              
              2,058,236Net
      interest expense (income)
              
              
              (19,728
              )
              
              
              (259,844
              )
              
              
              (1,003,766
              )Net
      income (loss)
              
              $
              (12,826,409
              )
              
              $
              (14,025,927
              )
              
              $
              (26,996,502
              )




31




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





Revenue





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





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





Agency
              Program
              
              Amount
              
              Period
      of
                Performance
              
              Revenue
                2009
              
              
              Revenue
                2008DoD
              DTRA
      Contract
              
              $
              1,263,836
              
              03/2007-02/2009
              
              $
              183,613
              
              
              $
              613,901NIH
              Phase
      II NIH SBIR program
              
              $
              750,000
              
              07/2006-06/2008
              
              $
              -
              
              
              $
              77,971NY
      State/RPCI
              Sponsored
      Research Agreement
              
              $
              3,000,000
              
              03/2007-02/2012
              
              $
              35,696
              
              
              $
              305,298NIH
              NCI
      Contract
              
              $
              750,000
              
              09/2006-08/2008
              
              $
              -
              
              
              $
              219,618DoD
              DOD
      Contract
              
              $
              8,900,000
              
              05/2008-09/2009
              
              $
              4,843,303
              
              
              $
              2,938,357HHS
              BARDA
      Contract
              
              $
              13,300,000
              
              09/2008-09/2011
              
              $
              5,374,535
              
              
              $
              219,412NIH
              NIAID
      Grant
              
              $
              1,232,695
              
              09/2008-02/2010
              
              $
              1,021,095
              
              
              $
              211,040NIH
              NIAID
      GO Grant
              
              $
              5,329,543
              
              09/2009-09/2011
              
              $
              1,237,666
              
              
              $
              -Totals
              
              $
              12,695,908
              
              
              $
              4,585,597




We
anticipate our revenue over the next year to continue to be derived mainly from
government grants and contracts. We have been awarded 19 government contracts
and grants totaling over $27 million in funding for R&D.  We plan to
submit or have submitted proposals for additional government contracts and
grants over the next two years totaling over $50 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 RPCI
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. 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.





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





32


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





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




Year
      Ended
                December
      31,
                2009
              
              
              Year
      Ended
                December
      31,
                2008
              
              
              Year
      Ended
                December
      31,
                2007
              
              
              Total
                Since
                InceptionResearch
      and development
              
              $
              14,331,673
              
              
              $
              13,160,812
              
              
              $
              17,429,652
              
              
              $
              57,588,395General
              
              $
              -
              
              
              $
              931,441
              
              
              $
              892,456
              
              
              $
              5,106,630Protectan
      CBLB502 - non-medical applications
              
              $
              13,676,289
              
              
              $
              7,264,813
              
              
              $
              9,885,776
              
              
              $
              35,277,485Protectan
      CBLB502 - medical applications
              
              $
              56,127
              
              
              $
              756,227
              
              
              $
              815,399
              
              
              $
              1,833,056Protectan
      CBLB612
              
              $
              6,567
              
              
              $
              974,459
              
              
              $
              1,127,248
              
              
              $
              3,136,941Curaxin
      CBLC102
              
              $
              262,637
              
              
              $
              1,741,194
              
              
              $
              2,712,521
              
              
              $
              6,729,120Other
      Curaxins
              
              $
              330,053
              
              
              $
              1,492,678
              
              
              $
              1,996,252
              
              
              $
              5,505,163





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





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




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.





Operating
Expenses





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 $7,789,305 of non-cash,
stock-based compensation for the year December 31, 2007 compared to $1,527,600
for the year ended December 31, 2008. 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 $17,523,365 for the
year ended December 31, 2008. This represents a decrease in operating expenses
of $2,647,920 or 13.1%.





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 was 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 $632,253 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 $12,528,559 for the year ended December 31, 2008; a decrease of
$3,064,306 or 19.7%.





33


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
$895,347 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 $4,994,806 for the year ended December
31, 2008; an increase of $416,385 or 9.1%.





Liquidity
and Capital Resources





We have
incurred annual operating losses since our inception, and, as of December 31,
2009 we had an accumulated deficit of $69,687,932.  Our principal
sources of liquidity have been cash provided by sales of our securities,
government grants and contracts and licensing agreements. Our principal
uses of cash have been R&D and working capital. We expect our future sources
of liquidity to be primarily government contracts and grants, equity financing,
licensing fees and milestone payments in the event we enter into licensing
agreements with third parties, and research collaboration fees in the event we
enter into research collaborations with third parties, which to date we have
not.




Net cash
used in operating activities totaled $4,244,944 for the year ended December 31,
2009, compared to $12,121,102 used in operating activities for the same period
in 2008. This decrease in cash used in operating activities resulted from a
reduction in our net loss due to increase contract and grant
revenues.  In addition, the cost containment efforts combined with
focusing our R&D efforts on projects where grant and contract funding was
awarded contributed to this decrease in cash used in operating
activities.  Net cash used in operating activities totaled $16,607,922
for the same period in 2007.





Net cash
provided by investing activities was $626,536 for the year ended December 31,
2009, compared to net cash used in investing activities of $558,407 for the same
period in 2008. The increase in cash provided by investing activities resulted
primarily from the liquidation of a short-term investment in 2009. Net cash used
in investing activities was $442,523 for the same period in 2007.





Net cash
provided by financing activities totaled $4,281,659 for the year ended December
31, 2009, compared to $1,232,831 used by financing activities for the same
period in 2008. The increase in cash provided by financial activities was
attributed to the issuance of the Series D Preferred Shares and Series D
Warrants as compared to the cash used in financing activities to pay dividends
on the Series B Preferred during the same period in 2008. Net cash provided by
financing activities totaled $28,200,591 for the same period in 2007. The
decrease in cash provided by financing activities was attributed to the
dividends paid on the Series B Preferred in 2008 as compared to the proceeds
from the issuance of Series B Preferred in connection with our private placement
offering in 2007.





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





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





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





Subsequent
Events





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





34


On
February 25, 2010, we entered into a Securities Purchase Agreement with various
accredited investors, pursuant to which we agreed to sell an aggregate of
1,538,462 shares of our common stock and warrants to purchase an aggregate
of 1,015,385 shares of our common stock, for an aggregate purchase price of
$5,000,000. The transaction closed on March 2, 2010. After related fees and
expenses, the Company received net proceeds totaling approximately $4,500,000.
The Company intends to use the proceeds of the private placement for working
capital purposes.





The
common stock was sold at a price of $3.25 per share, and the warrants had
an exercise price of $4.50 per share, subject to future adjustment for various
events, such as stock splits or dilutive issuances. The warrants are exercisable
commencing six months following issuance and expire on March 2,
2015.





For its
services as placement agent, Rodman & Renshaw, LLC received gross cash
compensation in the amount of approximately $350,000, and it and its designees
collectively received warrants to purchase 123,077 shares of common
stock.





The
common stock and the shares of common stock underlying the warrants issued to
the purchasers and Rodman and Renshaw have not been and will not be registered
under the Securities Act of 1933.





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





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





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




Impact
of Inflation





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





Impact
of Exchange Rate Fluctuations





We
believe that our results of operations are somewhat dependent upon changes in
foreign currency exchange rates. We have entered into agreements with foreign
third parties to produce one of our drug compounds and are required to make
payments in the foreign currency. As a result, our financial results could be
affected by changes in foreign currency exchange rates. As of December 31, 2009,
we are obligated to make payments under these agreements of 790,242 Euros. We
have established means to purchase forward contracts to hedge against this
risk.





Off-Balance
Sheet Arrangements





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





Item
7A: Quantitative and Qualitative Disclosures About Market Risk





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





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





Our
revolving credit facility also would have been affected by fluctuations in
interest rates as it is based on prime minus 1%. As of December 31, 2009, we had
not drawn on this facility.





Foreign Currency Risk. As of
December 31, 2009, we have agreements with third parties that require payment in
the foreign currency. As a result, our financial results could be affected by
changes in foreign currency exchange rates. Currently, the Company’s exposure
primarily exists with the Euro.  As a consequence, movements in
exchange rates could cause our foreign currency denominated expenses to
fluctuate as a percentage of net revenue, affecting our profitability and cash
flows. At this time, our exposure to foreign currency fluctuations is not
material.





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




35


Item
8: Financial Statements and Supplementary Data




Meaden Logo




REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





Board of
Directors and Stockholders of


Cleveland
BioLabs, Inc.





We have
audited the accompanying balance sheets of CLEVELAND BIOLABS, INC. as of
December 31, 2009 and 2008, and the related statements of operations,
stockholders’ equity and comprehensive income, and cash flows for each of the
years in the three-year period ended December 31, 2009. Cleveland BioLabs,
Inc.’s management is responsible for these financial statements. Our
responsibility is to express an opinion on these financial statements based on
our audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.





In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Cleveland BioLabs Inc. as of
December 31, 2009 and 2008, and the results of its operations and its cash flows
for each of the years in the three-year period ended December 31, 2009 in
conformity with accounting principles generally accepted in the United States of
America.





MEADEN
& MOORE, LTD.


Certified
Public Accountants





Cleveland,
Ohio


March 15,
2010





36






CLEVELAND
      BIOLABS, INC.
  BALANCE
      SHEETSDecember
      31, 2009 and December 31, 2008
  December
      31
              
              
              December
      312009
              
              
              2008ASSETSCURRENT
      ASSETSCash
      and equivalents
              
              $
              963,100
              
              
              $
              299,849Short-term
      investments
              
              
              -
              
              
              
              1,000,000Accounts
      receivable:Trade
              
              
              3,391,347
              
              
              
              1,043,821Interest
              
              
              -
              
              
              
              9,488Other
      current assets
              
              
              381,030
              
              
              
              510,707Total
      current assets
              
              
              4,735,477
              
              
              
              2,863,865EQUIPMENTComputer
      equipment
              
              
              323,961
              
              
              
              309,323Lab
      equipment
              
              
              1,159,478
              
              
              
              1,102,465Furniture
              
              
              376,882
              
              
              
              312,1341,860,321
              
              
              
              1,723,922Less
      accumulated depreciation
              
              
              995,408
              
              
              
              637,840864,913
              
              
              
              1,086,082OTHER
      ASSETSIntellectual
      property
              
              
              929,976
              
              
              
              733,051Deposits
              
              
              23,482
              
              
              
              23,482953,458
              
              
              
              756,533TOTAL
      ASSETS
              
              $
              6,553,848
              
              
              $
              4,706,480




37




CLEVELAND
      BIOLABS, INC.BALANCE
      SHEETSDecember
      31, 2009 and December 31, 2008December
      31
              
              
              December
      312009
              
              
              2008LIABILITIES AND
      STOCKHOLDERS' EQUITYCURRENT
      LIABILITIESAccounts
      payable
              
              $
              1,208,632
              
              
              $
              1,101,961Deferred
      revenue
              
              
              2,329,616
              
              
              
              2,365,312Dividends
      payable
              
              
              -
              
              
              
              321,293Accrued
      expenses
              
              
              1,405,715
              
              
              
              379,653Accrued
      warrant liability
              
              
              8,410,379
              
              
              
              -Total
      current liabilities
              
              
              13,354,342
              
              
              
              4,168,219STOCKHOLDERS'
      EQUITYPreferred
      stock, $.005 par valueAuthorized
      - 10,000,000 shares at December 31, 2009and
      December 31, 2008Series
      B convertible preferred stock,Issued
      and outstanding 0 and 3,160,974shares
      at December 31, 2009 and December 31, 2008, respectively
              
              
              -
              
              
              
              15,805Series
      D convertible preferred stock,Issued
      and outstanding 466.85 and 0 shares
      at December 31, 2009 and December 31, 2008,
      respectively
              
              
              2
              
              
              
              -Common
      stock, $.005 par valueAuthorized
      - 80,000,000 and 40,000,000 shares at December 31, 2009and
      December 31, 2008, respectivelyIssued
      and outstanding 20,203,508 and 13,775,805shares
      at December 31, 2009 and December 31, 2008, respectively
              
              
              101,018
              
              
              
              68,879Additional
      paid-in capital
              
              
              62,786,418
              
              
              
              56,699,750Accumulated
      deficit
              
              
              (69,687,932
              )
              
              
              (56,246,173
              )Total
      stockholders' equity
              
              
              (6,800,494
              )
              
              
              538,261TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY
              
              $
              6,553,848
              
              
              $
              4,706,480




38




CLEVELAND
      BIOLABS, INC.STATEMENTS
      OF OPERATIONSYears
      Ended December 31, 2009, 2008, and 2007December 31
                    
                    
                    December 31
                    
                    
                    December 312009
                    
                    
                    2008
                    
                    
                    2007REVENUESGrant
      and Contract
                    
                    $
                    12,695,908
                    
                    
                    $
                    4,585,597
                    
                    
                    $
                    1,728,558Commercial
                    
                    
                    1,650,000
                    
                    
                    
                    120,000
                    
                    
                    
                    290,00014,345,908
                    
                    
                    
                    4,705,597
                    
                    
                    
                    2,018,558OPERATING
      EXPENSESResearch
      and development
                    
                    
                    14,331,673
                    
                    
                    
                    13,160,812
                    
                    
                    
                    17,429,652Selling,
      general and administrative
                    
                    
                    6,397,164
                    
                    
                    
                    5,890,153
                    
                    
                    
                    10,530,938Total
      operating expenses
                    
                    
                    20,728,837
                    
                    
                    
                    19,050,965
                    
                    
                    
                    27,960,590LOSS
      FROM OPERATIONS
                    
                    
                    (6,382,929
                    )
                    
                    
                    (14,345,368
                    )
                    
                    
                    (25,942,032
                    )OTHER
      INCOMEInterest
      income
                    
                    
                    21,688
                    
                    
                    
                    259,844
                    
                    
                    
                    1,004,853Buffalo
      relocation reimbursement
                    
                    
                    -
                    
                    
                    
                    220,000
                    
                    
                    
                    -Sublease
      revenue
                    
                    
                    71,427
                    
                    
                    
                    12,475
                    
                    
                    
                    4,427Gain
      on disposal of fixed assets
                    
                    
                    -
                    
                    
                    
                    1,394
                    
                    
                    
                    -Gain
      on investment
                    
                    
                    -
                    
                    
                    
                    3,292
                    
                    
                    
                    -Total
      other income
                    
                    
                    93,115
                    
                    
                    
                    497,005
                    
                    
                    
                    1,009,280OTHER
      EXPENSEWarrant
      issuance costs
                    
                    
                    266,970
                    
                    
                    
                    -
                    
                    
                    
                    -Interest
      expense
                    
                    
                    1,960
                    
                    
                    
                    -
                    
                    
                    
                    1,087Corporate
      relocation
                    
                    
                    -
                    
                    
                    
                    177,564
                    
                    
                    
                    1,741,609Loss
      on disposal of fixed assets
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    15,575Loss
      on investment
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    305,479Change
      in value of warrant liability
                    
                    
                    6,267,665
                    
                    
                    
                    -
                    
                    
                    
                    -6,536,595
                    
                    
                    
                    177,564
                    
                    
                    
                    2,063,750NET
      LOSS
                    
                    
                    (12,826,409
                    )
                    
                    
                    (14,025,927
                    )
                    
                    
                    (26,996,502
                    )DIVIDENDS
      ON CONVERTIBLE PREFERRED STOCK
                    
                    
                    (615,352
                    )
                    
                    
                    (1,182,033
                    )
                    
                    
                    (1,265,800
                    )NET
      LOSS AVAILABLE TO COMMON STOCKHOLDERS
                    
                    $
                    (13,441,761
                    )
                    
                    $
                    (15,207,960
                    )
                    
                    $
                    (28,262,302
                    )NET
      LOSS AVAILABLE TO COMMON STOCKHOLDERSPER
      SHARE OF COMMON STOCK - BASIC ANDDILUTED
                    
                    $
                    (0.82
                    )
                    
                    $
                    (1.13
                    )
                    
                    $
                    (2.34
                    )WEIGHTED
      AVERAGE NUMBER OF SHARES USEDIN
      CALCULATING NET LOSS PER SHARE, BASIC ANDDILUTED
                    
                    
                    16,405,129
                    
                    
                    
                    13,492,391
                    
                    
                    
                    12,090,430




39




CLEVELAND
      BIOLABS, INC.STATEMENTS
      OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSSPeriod
      From January 1, 2007 to December 31,
2009




Stockholders'
      EquityCommon
      StockShares
              
              
              AmountBalance
      at January 1, 2007
              
              
              11,826,389
              
              
              $
              59,132Issuance
      of options
              
              
              -
              
              
              
              -Options
      to be issued in 2008
              
              
              -
              
              
              
              -Issuance
      of shares - Series B financing
              
              
              -
              
              
              
              -Fees
      associated with Series B Preferred offering
              
              
              -
              
              
              
              -Issuance
      of restricted shares
              
              
              190,000
              
              
              
              950Exercise
      of options
              
              
              126,046
              
              
              
              630Exercise
      of warrants
              
              
              48,063
              
              
              
              240Conversion
      of Series B Preferred Shares to Common
              
              
              708,743
              
              
              
              3,544Dividends
      on Series B Preferred shares
              
              
              -
              
              
              
              -Net
      Loss
              
              
              -
              
              
              
              -Other
      comprehensive incomeUnrealized
      gains (losses) on short term investmentsChanges
      in unrealized holding gains (losses)arising
      during period
              
              
              -
              
              
              
              -Less
      reclassification adjustment for (gains) lossesincluded
      in net loss
              
              
              -
              
              
              
              -Comprehensive
      lossBalance
      at December 31, 2007
              
              
              12,899,241
              
              
              $
              64,496Issuance
      of options
              
              
              -
              
              
              
              -Partial
      recapture of expense for options expensed in 2007 but issued in
      2008
              
              
              -
              
              
              
              -Issuance
      of restricted shares
              
              
              130,000
              
              
              
              650Restricted
      stock awards
              
              
              -
              
              
              
              -Exercise
      of options
              
              
              37,271
              
              
              
              186Conversion
      of Series B Preferred Shares to Common
              
              
              709,293
              
              
              
              3,547Dividends
      on Series B Preferred shares
              
              
              -
              
              
              
              -Net
      Loss
              
              
              -
              
              
              
              -Balance
      at December 31, 2008
              
              
              13,775,805
              
              
              $
              68,879Issuance
      of options
              
              
              -
              
              
              
              -Issuance
      of restricted shares
              
              
              291,532
              
              
              
              1,458Recapture
      of expense for nonvested options forfeited
              
              
              -
              
              
              
              -Restricted
      stock awards
              
              
              
              
              
              
              -Exercise
      of options
              
              
              194,675
              
              
              
              973Conversion
      of Series B Preferred Shares to Common
              
              
              4,693,530
              
              
              
              23,468Dividends
      on Series B Preferred shares
              
              
              -
              
              
              
              -Issuance
      of shares - Series D financing
              
              
              -
              
              
              
              -Allocation
      of financing proceeds to fair value of Series D warrants
              
              
              -
              
              
              
              -Fees
      associated with Series D Preferred offering
              
              
              -
              
              
              
              -Conversion
      of Series D Preferred Shares to Common
              
              
              572,353
              
              
              
              2,862Exercise
      of warrants
              
              
              675,613
              
              
              
              3,378Net
      Loss
              
              
              -
              
              
              
              -Balance
      at December 31, 2009
              
              
              20,203,508
              
              
              $
              101,018




40




CLEVELAND
      BIOLABS, INC.STATEMENTS
      OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSSPeriod
      From January 1, 2007 to December 31,
2009


Stockholders'
      EquityPreferred
      StockSeries
      B
              
              
              Amount
              
              
              Series
      D
              
              
              AmountBalance
      at January 1, 2007
              
              
              -
              
              
              $
              -
              
              
              
              -
              
              
              $
              -Issuance
      of options
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Options
      to be issued in 2008
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Issuance
      of shares - Series B financing
              
              
              4,579,010
              
              
              
              22,895
              
              
              
              4,579,010
              
              
              
              22,895Fees
      associated with Series B Preferred offering
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Issuance
      of restricted shares
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Exercise
      of options
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Exercise
      of warrants
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Conversion
      of Series B Preferred Shares to Common
              
              
              (708,743
              )
              
              
              (3,544
              )
              
              
              708,743
              
              
              
              3,544Dividends
      on Series B Preferred shares
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Net
      Loss
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Other
      comprehensive incomeUnrealized
      gains (losses) on short term investmentsChanges
      in unrealized holding gains (losses)arising
      during period
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Less
      reclassification adjustment for (gains) lossesincluded
      in net loss Comprehensive loss
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Balance
      at December 31, 2007
              
              
              3,870,267
              
              
              $
              19,351
              
              
              
              -
              
              
              $
              -Issuance
      of options
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Partial
      recapture of expense for options expensed in 2007 but issued in
      2008
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Issuance
      of restricted shares
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Restricted
      stock awards
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Exercise
      of options
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Conversion
      of Series B Preferred Shares to Common
              
              
              (709,293
              )
              
              
              (3,547
              )
              
              
              -
              
              
              
              -Dividends
      on Series B Preferred shares
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Net
      Loss
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Balance
      at December 31, 2008
              
              
              3,160,974
              
              
              $
              15,805
              
              
              
              -
              
              
              $
              -Issuance
      of options
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Issuance
      of restricted shares
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Recapture
      of expense for nonvested options forfeited
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Restricted
      stock awards
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Exercise
      of options
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Conversion
      of Series B Preferred Shares to Common
              
              
              (3,160,974
              )
              
              
              (15,805
              )
              
              
              -
              
              
              
              -Dividends
      on Series B Preferred shares
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Issuance
      of shares - Series D financing
              
              
              -
              
              
              
              -
              
              
              
              543
              
              
              
              3Allocation
      of financing proceeds to fair value of Series D warrants
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Fees
      associated with Series D Preferred offering
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Conversion
      of Series D Preferred Shares to Common
              
              
              
              
              
              
              
              
              
              
              (76
              )
              
              
              (1
              )Exercise
      of warrantsNet
      Loss
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Balance
      at December 31, 2009
              
              
              -
              
              
              $
              -
              
              
              
              467
              
              
              $
              2




41




Stockholders'
      EquityAdditional
              
              
              Other
              
              
              
              
              
              
              
              
              ComprehensivePaid-in
              
              
              Comprehensive
              
              
              Accumulated
              
              
              
              
              
              IncomeCapital
              
              
              Income/(Loss)
              
              
              Deficit
              
              
              Total
              
              
              (Loss)Balance
      at January 1, 2007
              
              $
              18,314,097
              
              
              $
              (4,165
              )
              
              $
              (12,775,910
              )
              
              $
              5,653,754Issuance
      of options
              
              
              3,401,499
              
              
              
              -
              
              
              
              -
              
              
              
              3,401,499Options
      to be issued in 2008
              
              
              2,687,355
              
              
              
              -
              
              
              
              -
              
              
              
              2,687,355Issuance
      of shares - Series B financing
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              4,624,800Fees
      associated with Series B Preferred offering
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Issuance
      of restricted shares
              
              
              1,699,500
              
              
              
              -
              
              
              
              -
              
              
              
              1,700,450Exercise
      of options
              
              
              110,650
              
              
              
              -
              
              
              
              -
              
              
              
              111,280Exercise
      of warrants
              
              
              90,275
              
              
              
              -
              
              
              
              -
              
              
              
              90,515Conversion
      of Series B Preferred Shares to Common
              
              
              4,461,537
              
              
              
              -
              
              
              
              -
              
              
              
              5,173,824Dividends
      on Series B Preferred shares
              
              
              -
              
              
              
              -
              
              
              
              (1,265,800
              )
              
              
              (1,265,800
              )Net
      Loss
              
              
              -
              
              
              
              -
              
              
              
              (26,996,502
              )
              
              
              (26,996,502
              )
              
              
              (26,996,502
              )Other
      comprehensive incomeUnrealized
      gains (losses) on short term investmentsChanges
      in unrealized holding gains (losses)arising
      during period
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              $
              -Less
      reclassification adjustment for (gains) lossesincluded
      in net loss Comprehensive loss
              
              
              -
              
              
              
              4,165
              
              
              
              -
              
              
              
              4,165
              
              
              $
              4,165Balance
      at December 31, 2007
              
              $
              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 but issued in
      2008
              
              
              (1,459,425
              )
              
              
              -
              
              
              
              -
              
              
              
              (1,459,425
              )Issuance
      of restricted shares
              
              
              625,850
              
              
              
              -
              
              
              
              -
              
              
              
              626,500Restricted
      stock awards
              
              
              72,722
              
              
              
              -
              
              
              
              -
              
              
              
              72,722Exercise
      of options
              
              
              24,191
              
              
              
              -
              
              
              
              -
              
              
              
              24,378Conversion
      of Series B Preferred Shares to Common
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Dividends
      on Series B Preferred shares
              
              
              -
              
              
              
              -
              
              
              
              (1,182,033
              )
              
              
              (1,182,033
              )Net
      Loss
              
              
              -
              
              
              
              -
              
              
              
              (14,025,927
              )
              
              
              (14,025,927
              )
              
              $
              (14,025,927
              )Balance
      at December 31, 2008
              
              $
              56,699,750
              
              
              $
              -
              
              
              $
              (56,246,172
              )
              
              $
              538,261Issuance
      of options
              
              
              1,784,240
              
              
              
              -
              
              
              
              -
              
              
              
              1,784,240Issuance
      of restricted shares
              
              
              991,612
              
              
              
              -
              
              
              
              -
              
              
              
              993,070Recapture
      of expense for nonvested options forfeited
              
              
              (50,197
              )
              
              
              -
              
              
              
              -
              
              
              
              (50,197
              )Restricted
      stock awards
              
              
              33,333
              
              
              
              -
              
              
              
              -
              
              
              
              33,333Exercise
      of options
              
              
              361,884
              
              
              
              -
              
              
              
              -
              
              
              
              362,857Conversion
      of Series B Preferred Shares to Common
              
              
              (7,663
              )
              
              
              -
              
              
              
              -
              
              
              
              -Dividends
      on Series B Preferred shares
              
              
              -
              
              
              
              -
              
              
              
              (615,351
              )
              
              
              (615,351
              )Issuance
      of shares - Series D financing
              
              
              5,428,304
              
              
              
              -
              
              
              
              -
              
              
              
              5,428,307Allocation
      of financing proceeds to fair value of Series D warrants
              
              
              (3,016,834
              )
              
              
              
              
              
              
              
              
              
              
              (3,016,834
              )Fees
      associated with Series D Preferred offering
              
              
              (720,175
              )
              
              
              -
              
              
              
              -
              
              
              
              (720,175
              )Conversion
      of Series D Preferred Shares to Common
              
              
              (2,861
              )
              
              
              
              
              
              
              
              
              
              
              -Exercise
      of warrants
              
              
              1,285,026
              
              
              
              
              
              
              
              
              
              
              
              1,288,404Net
      Loss
              
              
              -
              
              
              
              -
              
              
              
              (12,826,409
              )
              
              
              (12,826,409
              )
              
              $
              (12,826,409
              )Balance
      at December 31, 2009
              
              $
              62,786,418
              
              
              $
              -
              
              
              $
              (69,687,932
              )
              
              $
              (6,800,494
              )




42




CLEVELAND
      BIOLABS, INC.STATEMENTS
      OF CASH FLOWSFor
      the Years Ended December 31, 2009, 2008 and 20072009
              
              
              2008
              
              
              2007CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      loss
              
              $
              (12,826,409
              )
              
              $
              (14,025,927
              )
              
              $
              (26,996,502
              )Adjustments
      to reconcile net loss to net cashused
      by operating activities:Depreciation
              
              
              357,568
              
              
              
              324,351
              
              
              
              188,395Amortization
              
              
              4,575
              
              
              
              -
              
              
              
              -Noncash
      salaries and consulting expense
              
              
              2,760,446
              
              
              
              1,527,600
              
              
              
              7,789,305Series
      D warrant issuance costs
              
              
              266,970
              
              
              
              -
              
              
              
              -Change
      in value of warrant liability
              
              
              6,267,665
              
              
              
              -
              
              
              
              -Loss
      on disposal of fixed assets
              
              
              -
              
              
              
              -
              
              
              
              15,575Loss
      on investments
              
              
              
              
              
              
              -
              
              
              
              305,479Loss
      on abandoned patents
              
              
              35,564
              
              
              
              60,045
              
              
              
              -Changes
      in operating assets and liabilities:Accounts
      receivable - trade
              
              
              (2,347,526
              )
              
              
              (880,419
              )
              
              
              (3,652
              )Accounts
      receivable - interest
              
              
              9,488
              
              
              
              40,553
              
              
              
              (12,870
              )Other
      current assets
              
              
              129,677
              
              
              
              (185,081
              )
              
              
              109,049Deposits
              
              
              -
              
              
              
              1,963
              
              
              
              (10,390
              )Accounts
      payable
              
              
              106,672
              
              
              
              391,232
              
              
              
              65,923Deferred
      revenue
              
              
              (35,696
              )
              
              
              694,702
              
              
              
              1,670,610Accrued
      expenses
              
              
              1,026,062
              
              
              
              (70,121
              )
              
              
              321,206Milestone
      payments
              
              
              -
              
              
              
              -
              
              
              
              (50,000
              )Total
      adjustments
              
              
              8,581,465
              
              
              
              1,904,825
              
              
              
              10,388,630Net
      cash (used by) provided by operatingactivities
              
              
              (4,244,944
              )
              
              
              (12,121,102
              )
              
              
              (16,607,872
              )CASH
      FLOWS FROM INVESTING ACTIVITIESPurchase
      of short-term investments
              
              
              -
              
              
              
              (2,000,000
              )
              
              
              (1,000,000
              )Sale
      of short-term investments
              
              
              1,000,000
              
              
              
              2,000,000
              
              
              
              2,000,000Issuance
      of notes receivable
              
              
              -
              
              
              
              -
              
              
              
              (250,000
              )Purchase
      of equipment
              
              
              (136,400
              )
              
              
              (224,413
              )
              
              
              (987,649
              )Sale
      of equipment
              
              
              -
              
              
              
              -
              
              
              
              1,250Costs
      of patents pending
              
              
              (237,064
              )
              
              
              (333,994
              )
              
              
              (206,124
              )Net
      cash (used in) provided by investing activities
              
              
              626,536
              
              
              
              (558,407
              )
              
              
              (442,523
              )CASH
      FLOWS FROM FINANCING ACTIVITIESIssuance
      of preferred stock
              
              
              5,428,307
              
              
              
              -
              
              
              
              30,020,984Financing
      costs on preferred stock
              
              
              (720,175
              )
              
              
              -
              
              
              
              (1,152,857
              )Series
      D warrant issuance costs
              
              
              (266,970
              )Dividends
              
              
              (936,644
              )
              
              
              (1,257,209
              )
              
              
              (869,331
              )Exercise
      of stock options
              
              
              362,857
              
              
              
              24,378
              
              
              
              111,280Exercise
      of warrants
              
              
              414,284
              
              
              
              -
              
              
              
              90,515Net
      cash (used in) provided by financing activities
              
              
              4,281,659
              
              
              
              (1,232,831
              )
              
              
              28,200,591INCREASE
      (DECREASE) IN CASH AND EQUIVALENTS
              
              
              663,251
              
              
              
              (13,912,340
              )
              
              
              11,150,196CASH
      AND EQUIVALENTS AT BEGINNING OF
              
              
              299,849
              
              
              
              14,212,189
              
              
              
              3,061,993PERIODCASH
      AND EQUIVALENTS AT END OF PERIOD
              
              $
              963,100
              
              
              $
              299,849
              
              
              $
              14,212,189




43




CLEVELAND
      BIOLABS, INC.STATEMENTS
      OF CASH FLOWSFor
      the Years Ended December 31, 2009, 2008 and 20072009
              
              
              2008
              
              
              2007Supplemental
      disclosures of cash flow information:Cash
      paid during the period for interest
              
              $
              1,960
              
              
              $
              -
              
              
              $
              1,087Cash
      paid during the period for income taxes
              
              $
              -
              
              
              $
              -
              
              
              $
              -Supplemental
      schedule of noncash financing activities:Issuance
      of stock options to employees, consultants, and
              
              $
              1,784,240
              
              
              $
              2,287,803
              
              
              $
              3,401,499independent
      board membersExpense
      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
              
              $
              (50,197
              )
              
              $
              -
              
              
              $
              -Stock
      options due to employees and a consultant
              
              $
              -
              
              
              $
              -
              
              
              $
              2,687,355Issuance
      of shares to consultants and employees
              
              $
              993,070
              
              
              $
              626,500
              
              
              $
              1,700,450Amortization
      of restricted shares to be issued to employees and
    consultants
              
              $
              33,333
              
              
              $
              72,722
              
              
              $
              -Issuance
      of non-cash financing fees
              
              $
              -
              
              
              $
              -
              
              
              $
              2,032,086Accrual
      of Series B preferred stock dividends
              
              $
              -
              
              
              $
              321,293
              
              
              $
              396,469Conversion
      of warrant liability to equity due to exercise of warrants
              
              $
              874,119
              
              
              $
              -
              
              
              $
              -




44




CLEVELAND
BIOLABS, INC.





NOTES
TO FINANCIAL STATEMENTS





Note 1.
Organization





Cleveland
BioLabs, Inc. (“CBLI” or “Company”) is a drug discovery and development company
leveraging its proprietary discoveries around programmed cell death to develop
treatments for cancer 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.





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





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





Note 2. Summary of Significant
Accounting Policies





A.
            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.





B.
            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.





C.
            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 December 31, 2009 and December 31,
      2008.





D.
            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 $357,568, $324,351, and $188,395
      for the years ended December 31, 2009, 2008 and 2007,
      respectively.





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





F.
            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 annually for
      impairment.




45




A portion
of this intellectual property is owned by the Cleveland Clinic Foundation
(“CCF”) and granted to the Company through an exclusive licensing agreement. As
part of the licensing agreement, CBLI agrees to bear the costs associated with
the preparation, filing and maintenance of patent applications relating to this
intellectual property. Gross capitalized patents and patents pending costs were
$688,355 and $629,363 for ten and thirteen patent applications as of December
31, 2009 and December 31, 2008, respectively. One of the CCF patent applications
was approved by several nations and is being amortized on a straight-line basis
over the weighted average estimated remaining life of approximately fifteen
years. The remainder of the CCF patent applications are still pending approval.
During 2009, the Company abandoned two patent applications due to developing an
improved drug for the same application and expensed $35,564 in selling, general
and administrative expenses.  During 2008, the Company abandoned one
patent application due to developing another drug for the same application and
expensed $44,790 in selling, general and administrative expenses.  The
Company recognized $4,575, $0 and $0 in amortization expense for the years ended
December 31, 2009, 2008 and 2007, respectively.





The
Company also has submitted patent applications as a result of intellectual
property exclusively developed and owned by the Company. Gross capitalized
patents pending costs were $199,371 and $103,688 for four and five patent
applications as of December 31, 2009 and December 31, 2008, respectively. The
patent applications are still pending approval. During 2008, the Company
abandoned one patent application due to discovering that the patent would
provide no future economic benefit and expensed $15,256 in selling, general and
administrative expenses.





The
Company has also submitted two patent applications as a result of the
collaborative research agreement with the Roswell Park Cancer Institute
(“RPCI”).  As part of this collaborative agreement, CBLI agrees to
bear the costs associated with the preparation, filing and maintenance of patent
applications related to the intellectual property being
developed.  Gross capitalized patents pending costs were $8,340 and 0
for two patent applications as of December 31, 2009 and 2008,
respectively.





The
Company has also submitted one patent application as a result of the
collaborative research agreement with the ChemBridge Corporation
(“ChemBridge”).  As part of this collaborative agreement, CBLI agrees
to bear the costs associated with the preparation, filing and maintenance of
patent applications related to the intellectual property being
developed.  Gross capitalized patents pending costs were $38,484 and
$22,441 for this patent application as of December 31, 2009 and 2008,
respectively.





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





As
      of December 31, 2009Intangible
      Assets
            
            Cost
            
            
            Accumulated
              Amortization
            
            
            Net
      Intangible
              Asset
            
            
            Weighted
              Average
              Amortization
              Period
      (Years)Patents
            
            $
            150,888
            
            
            $
            4,574
            
            
            $
            146,314
            
            
            
            14.9Patent
      Applications
            
            
            783,662
            
            
            
            -
            
            
            
            783,663
            
            
            n.a.$
            934,550
            
            
            $
            4,574
            
            
            $
            929,976




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





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





G.
            Line
      of Credit - The Company has a working capital line of credit that is fully
      secured by cash equivalents and short-term investments. This
      fully-secured, working capital line of credit carries an interest rate of
      prime minus 1%, a borrowing limit of $600,000, and expires on May 31,
      2010. At December 31, 2009 and 2008, there were no outstanding borrowings
      under this credit facility.





H.
            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




46




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





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





The
Company carries its warrants issued in connection with the Series D Private
Placement at fair value totaling $8,410,379 and $0 as of December 31, 2009 and
December 31, 2008, respectively.  The Company used Level 3 inputs for
its valuation methodology for the warrant liability, and the fair values were
determined using the Black-Scholes option pricing model based on the following
assumptions:





Warrant
              Value
      at
              December
      31,
              2009Stock
      price
            
            $
            3.31Exercise
      price
            
            $
            1.60Term
      in years
            
            
            1.25Volatility
            
            
            105.81
            %Annual
      rate of quarterly dividends
            
            
            -Discount
      rate- bond equivalent yield
            
            
            0.52
            %




Fair
      Value As
              of December
      31,
              2009
            
            
            Fair
      Value Measurements at
              December
      31, 2009
              Using
      Fair Value HierarchyLiabilities
            
            
            
            
            Level
      1
            
            
            Level
      2
            
            
            Level
      3Warrant
      liability
            
            $
            8,410,379
            
            
            $
            -
            
            
            $
            -
            
            
            $
            8,410,379




I.
            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.




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




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




47





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 RPCI as allowable costs are
incurred. The Company recognizes revenue on research laboratory services and the
use of related equipment. The amount paid 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.





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





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





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





The
following table summarizes the deferred revenue activity for the years ended
December 31, 2009 and 2008, respectively:





ActivityBeginning
      Balance, December 31, 2007
                
                $
                1,670,610Funds
      Recived From State of NY
                
                $
                1,000,000Funds
      Recognized as Revenue
                
                $
                (305,298
                )Ending
      Balance, December 31, 2008
                
                $
                2,365,312Funds
      Recived From State of NY
                
                $
                -Funds
      Recognized as Revenue
                
                $
                (35,696
                )Ending
      Balance, December 31, 2009
                
                $
                2,329,616




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





M.
            Equity
      Incentive Plan - On May 26, 2006, the Company's Board of Directors adopted
      the 2006 Equity Incentive Plan (“Plan”) to attract and retain persons
      eligible to participate in the Plan, motivate participants to achieve
      long-term Company goals, and further align participants' interests with
      those of the Company's other stockholders. The Plan was to expire on May
      26, 2016 and the aggregate number of shares of stock which could be
      delivered under the Plan may not exceed 2,000,000 shares. On February 14,
      2007, these 2,000,000 shares were registered with the SEC by filing a Form
      S-8 registration statement. On April 29, 2008, the stockholders of the
      Company approved an amendment and restatement of the Plan (“Amended
      Plan”). The Amended Plan increased the number of shares available for
      issuance by an additional 2,000,000 shares, clarified other aspects of the
      Plan, contained updates that reflected changes and developments in federal
      tax laws and extended the expiration date to April 29, 2018.  As
      of December 31, 2009 there were 2,490,653 stock options and 446,532 shares
      granted under the Amended Plan and 43,177 shares forfeited leaving
      1,105,992 shares of stock to be awarded under the Amended
      Plan.





N.
            Executive
      Compensation Plan - On May 11, 2007, the Compensation Committee of the
      Board of Directors (“Compensation Committee”) approved an executive
      compensation program designed to reward each of the Company’s Chief
      Executive Officer, Chief Operating Officer, Chief Financial Officer and
      Chief Scientific Officer (“Executive Officers”) for the achievement of
      certain pre-determined milestones. The purpose of the program is to link
      each Executive Officer’s compensation to the achievement of key Company
      milestones that the Compensation Committee believes have a strong
      potential to create long-term stockholder
value.




48




Under the
terms of this program, after each fiscal year beginning with the fiscal year
ended December 31, 2007, each component of the Executive Officers’ compensation
packages - base salary, cash bonus and stock option awards - will be measured
against the Company’s achievement of (1) stock performance milestones, (2)
scientific milestones, (3) business milestones (4) financial milestones and (5)
corporate governance, each of which will be weighted by the Compensation
Committee. The milestones will be set at the beginning of each fiscal year. Each
set of milestones has a minimum threshold performance level, a target level and
a high performance level. For base salary, increases will range between 2% for
threshold performance to 6% for high performance. For cash bonuses, increases
will range between 15% for threshold performance and 60% for high performance.
For stock option awards, awards will range between 50,000 stock options for
threshold performance and 200,000 for high performance.





For the
year ended December 31, 2009 the Compensation Committee awarded $264,141 in cash
bonuses and $970,200 in non-cash, stock-based compensation for stock option
awards to be granted in 2010 under this executive compensation program
(“ECP”).  For the year ended December 31, 2008, the Compensation
Committee made no awards under the ECP.





O.
            Stock-Based
      Compensation - The Company recognizes and values stock-based compensation
      under the provisions of the Codification on stock
      compensation.




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




The
Company issued 787,932, 997,721 and 660,000 stock options during the years ended
December 31, 2009, 2008, and 2007, respectively, pursuant to various stock award
agreements. The Company recognized a total of $1,784,240, $828,377, and
$3,401,499 in expense related to options and recaptured $50,197, $0 and $0 of
previously recognized expense due to the forfeiture of non-vested options for
the years ended December 31, 2009, 2008, and 2007, respectively. The weighted
average, estimated grant date fair values of stock options granted was $1.95,
$3.16, and $6.08 during the years ended December 31, 2009, 2008, and 2007,
respectively.




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





2009
            
            
            2008
            
            
            2007Risk-free
      interest rate
            
            
            1.87-2.74
            %
            
            
            2.43-3.58
            %
            
            
            3.38-5.11
            %Expected
      dividend yield
            
            
            0
            %
            
            
            0
            %
            
            
            0
            %Expected
      life
            
            5-6
      years
            
            
            5-6
      years
            
            
            2.74-6
      yearsExpected
      volatility
            
            
            84.13-90.06
            %
            
            
            64.25-82.47
            %
            
            
            71.86-76.29
            %




49




The
following tables summarize the stock option activity for the years ended
December 31, 2009 and 2008, respectively.





Shares
            
            
            Weighted
      Average Exercise Price per Share
            
            
            Weighted
      Average Remaining Contractual Term (in Years)Outstanding,
      December 31, 2008
            
            
            1,948,874
            
            
            $
            6.17Granted
            
            
            787,932
            
            
            $
            2.82Exercised
            
            
            (194,675
            )
            
            $
            1.86Forfeited,
      Canceled
            
            
            (25,124
            )
            
            $
            5.52Outstanding,
      December 31, 2009
            
            
            2,517,007
            
            
            $
            5.46
            
            
            
            8.02Exercisable,
      December 31, 2009
            
            
            2,185,632
            
            
            $
            5.12
            
            
            
            7.99




Shares
            
            
            Weighted
      Average Exercise Price per Share
            
            
            Weighted
      Average Remaining Contractual Term (in Years)Outstanding,
      December 31, 2007
            
            
            1,011,740
            
            
            $
            7.29Granted
            
            
            997,721
            
            
            $
            3.16Exercised
            
            
            (42,534
            )
            
            $
            1.04Forfeited,
      Canceled
            
            
            (18,053
            )
            
            $
            9.00Outstanding,
      December 31, 2008
            
            
            1,948,874
            
            
            $
            6.17
            
            
            
            8.53Exercisable,
      December 31, 2008
            
            
            1,597,837
            
            
            $
            5.52
            
            
            
            8.50




For the
years ended December 31, 2009, 2008 and 2007, the Company recognized a total of
$993,070, $626,500 and $1,700,450 in expense for shares issued under the Amended
Plan, respectively. For the years ended December 31, 2009, 2008 and 2007, the
Company also recognized a total of $33,333, $72,722 and $0 in expense related to
the amortization of restricted shares, respectively.





At
December 31, 2009, the non-cash, stock-based compensation related to
unvested awards granted under the Equity Incentive Plan, but not yet recognized
was $191,245. This cost will be amortized over a weighted-average period of
approximately .66 years and will be adjusted for subsequent forfeitures. Future
option grants will increase the amount of stock-based compensation expense to be
recorded in these periods.





At the
2009 Annual Meeting of Stockholders, the stockholders approved an amendment to
the Company’s Certificate of Incorporation to increase the number of authorized
shares of common stock from 40,000,000 to 80,000,000. As of December 31,
2009, the Company had 59,796,492 authorized shares available for future
issuances.





P.
            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.




50




The
following table presents the calculation of basic and diluted net loss per share
for the years ended December 31, 2009, 2008 and 2007:




2009
              
              
              2008
              
              
              2007Net
      loss available to common stockholders
              
              $
              (13,441,761
              )
              
              $
              (15,207,960
              )
              
              $
              (28,262,302
              )Net
      loss per share, basic and diluted
              
              $
              (0.82
              )
              
              $
              (1.13
              )
              
              $
              (2.34
              )Weighted-average
      shares used in computing net loss per share, basic and
    diluted
              
              
              16,405,129
              
              
              
              13,492,391
              
              
              
              12,090,430




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





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





Common
      Equivalent Securities
            
            December
      31,
              2009
            
            
            December
      31,
              2008
            
            
            December
      31,
              2007Preferred
      Shares
            
            
            4,576,979
            
            
            
            3,160,974
            
            
            
            3,870,267Warrants
            
            
            8,641,893
            
            
            
            3,453,268
            
            
            
            3,453,268Options
            
            
            2,517,007
            
            
            
            1,948,874
            
            
            
            1,011,740Total
            
            
            15,735,879
            
            
            
            8,563,116
            
            
            
            8,335,275




Such
securities, had they been dilutive, would have been included in the computation
of diluted earnings per share.





Q.
            Concentrations
      of Risk - Grant revenue accounted for 88.5%, 97.4% and 85.6% of total
      revenue for the years ended December 31 2009, 2008 and 2007, respectively.
      Although the Company anticipates ongoing federal government contract and
      grant 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.





R.
            Foreign
      Currency Exchange Rate Risk - The Company has entered into a manufacturing
      agreement to produce one of its drug compounds with a foreign third party
      and is required to make payments in the foreign currency. As a result, the
      Company's financial results could be affected by changes in foreign
      currency exchange rates. Currently, the Company's exposure primarily
      exists with the Euro. As of December 31, 2009, the Company is obligated to
      make payments under the agreements of 790,242 Euros. As of December 31,
      2009, the Company has not purchased any forward contracts for Euros
      and, therefore, at December 31, 2009, had foreign currency commitments of
      $1,138,423 for Euros given prevailing currency exchange spot
      rates.





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





T.
            Segment
      Reporting – As of December 31, 2009, the Company has determined that it
      operates in only one segment.  Accordingly, no segment
      disclosures have been included in the notes to the consolidated financial
      statements.





U.
            Recently
      Issued Accounting Pronouncements





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




51





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





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





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





Note
3. Significant Alliances and Related Parties





The
Cleveland Clinic Foundation





Effective
July 2004, the Company entered into a strategic alliance with CCF. Under the
agreement, the Company received an exclusive license to use CCF licensed patents
and CCF technology for the benefit of the Company for research and drug
development. The Company has the primary responsibility to fund all newly
developed patents; however, CCF retains patent ownership on those contained in
the agreement. The Company also has the responsibility to secure applicable
regulatory approvals. In partial consideration of this agreement, in December
2004, the Company issued 1,341,000 shares of its common stock to CCF and
recognized $2,250,000 as non-cash research and development expense in exchange
for the stock. The calculation of this expense was based in part on an estimate
of the Company’s value based on discussions in 2004 with potential investors, in
which the Company was estimated to have a value of approximately $12,500,000.
This valuation was reflected in an agreement between the Company and an
investment bank dated September 30, 2004. This agreement set forth the terms on
which the investment bank was to raise equity capital for the Company. In light
of the preliminary and subjective nature of that estimate, the Company
discounted that estimate to arrive at a valuation of $10,000,000.





CCF will
receive milestone payments for each product developed with CCF technology as
development passes through major developmental stages. In addition, the Company
will pay CCF royalties and sublicense royalties as a percentage of net sales of
all commercial products developed with CCF technology. Milestone payments
amounted to $0, $350,000, and $0 for the years ended December 31, 2009, 2008,
and 2007, respectively.




52





The
Company also incurred $143,256, $518,904, and $927,347 in subcontract expense to
CCF related to research grants and other agreements for the years ended December
31, 2009, 2008 and 2007, respectively. The balance remaining in accrued payables
is $0 and $15,209 at December 31, 2009 and 2008, respectively. There were no
accounts receivable balances at December 31, 2009, and 2008,
respectively.





Roswell
Park Cancer Institute





In
January 2007, the Company entered into a sponsored research agreement with RPCI
to develop the Company’s cancer and radioprotectant drug candidates. The Company
received $2,000,000 in funds from RPCI during the second quarter of 2007 and
received an additional $1,000,000 in the second quarter of 2008. This money was
funded by the State of New York as part of an incentive package for the Company
to relocate and establish a major research/clinical facility in Buffalo, New
York. The Company has an open-ended license to any intellectual property
resulting from any basic research conducted within, or in collaboration with
RPCI.





The
Company incurred $1,599,359 $1,120,571, and $414,389 in subcontract expense to
RPCI related to research grants and agreements for the years ended December 31,
2009, 2008 and 2007, respectively. The balance remaining in accrued payables is
$35,781 and $174,693 at December 31, 2009 and 2008, respectively. There were no
accounts receivable balances at December 31, 2009, and 2008,
respectively.





ChemBridge
Corporation





In April
2004, ChemBridge acquired 357,600 shares of the Company’s common stock valued at
$6,081 (subject to antidilution provisions for future equity issues) and
acquired warrants to purchase an additional 264,624 shares of the Company’s
common stock for $1.13 per share. In September 2009, ChemBridge exercised these
warrants.





In
connection with the ChemBridge investment, the Company entered into a chemical
libraries license agreement with ChemBridge, under which the Company has a
non-exclusive worldwide license to use certain chemical compound libraries for
drug research conducted on its own or in collaboration with others. In return,
ChemBridge will receive royalty payments on any revenue received by the Company
for all contracts, excluding CCF, in which the libraries are used. No revenues
or royalties are due or have been paid through the year ended December 31,
2009.





The
Company has also agreed to collaborate with ChemBridge on two optimization
projects, wherein ChemBridge will have the responsibility of providing the
chemistry compounds of the project and the Company will have the responsibility
of providing the biological expertise. ChemBridge will retain a 50% ownership
interest in two selected “confirmed hits” that make up the optimization
projects. The parties will jointly manage the development and commercialization
of any compounds arising from an optimization project. No “confirmed hits” have
been selected during the year ended December 31, 2009.





The
Company incurred ChemBridge $0, $916, and $41,780 for the purchase of chemical
compounds for the years ended December 31, 2009, 2008 and 2007, respectively.
There were no accounts receivable or accrued payable balances at December 31,
2009 and 2008, respectively.





Cooperative
Research and Development Agreement





In August
2004, the Company entered into a five-year cooperative research and development
agreement (“CRADA”) with (i) the Uniformed Service University of the Health
Sciences, which includes the Armed Forces Radiobiology Research Institute, (ii)
the Henry M. Jackson Foundation for the Advancement of Military Medicine, Inc.,
and (iii) CCF, to evaluate the Company’s radioprotective drug candidates and
their effects on intracellular and extracellular signaling pathways. Under the
terms of the agreement, all parties are financially responsible for their own
expenses related to the agreement.





In
February 2008, the Company extended the CRADA with the Uniformed Service
University of the Health Sciences to August 2010 to evaluate the efficacy of the
Company’s radioprotective drug candidate Protectan CBLB502 against radiation in
non-human primates. Under the terms of the agreement, the Company paid $628,465
to Henry M. Jackson Foundation for the Advancement of Military Medicine, Inc to
purchase, house and irradiate animals and perform blood and cytokine analysis.
The agreement may be unilaterally terminated by any party upon 30 days prior
written notice.




53





The
Company incurred $0, $405,696 and $222,769 as part of the research and
development agreement in 2009, 2008 and 2007, respectively. There were no
accounts receivable or accrued payable balances at December 31, 2009 and
2008, respectively.





Incuron
LLC





On
December 30, 2009, the Company entered into a Participation Agreement with
Bioprocess Capital Partners, LLC, a Russian limited liability company (“BCP”),
for the formation of Incuron LLC, a Russian limited liability company
(“Incuron”), for the further development of certain of the registrant’s oncology
products (the “Products”).





Pursuant
to the Participation Agreement, the Company will make a capital contribution of
certain intellectual property rights to Incuron, and BCP will make cash capital
contributions of approximately $18.3 million.  BCP will make an
initial cash capital contribution to Incuron of approximately $5.85 million and
will be obligated to make additional cash capital contributions to Incuron upon
the achievement of specified development milestones relating to the issuance of
certain governmental approvals for, and the progress of clinical trials of, the
Products. Upon the achievement of the specified milestones and the completion of
the specified capital contributions, the Company will own a 51% participation
interest in Incuron and BCP will own a 49% participation
interest.  The Company and BCP have also agreed to enter into a
Development Agreement pursuant to which Incuron will retain the Company for
certain research services related to certain of the Products. Incuron is
expected to start operations in 2010.




Consultants





A Company
stockholder, who serves as the Company’s Chief Scientific Officer, received
payments for consulting services performed on certain grant awards and internal
research and development. Total cash consultant expense made to this person
amounted to $110,000, $114,215, and $120,580 for the years ended December 31,
2009, 2008 and 2007, respectively. In 2009, the Company also expensed $69,300 in
subcontractor expense and an additional $242,550 in non-cash, stock based
compensation related to the 2009 ECP. In 2008, the Company recaptured $378,810
in non-cash, stock-based compensation expense previously expensed in 2007 to
this consultant related to the 2007 ECP.  In 2007, the Company
incurred $198,375 in non-cash, stock-based compensation expense to this
consultant, accrued an additional $732,915 in non-cash, stock-based compensation
and an additional $19,215 in subcontractor expense related to the 2007
ECP.  The balance remaining in accrued payables is $94,644 and $0 at
December 31, 2009 and 2008, respectively. There were no accounts receivable
balances at December 31, 2009, and 2008, respectively.





A Company
stockholder, who serves as the Company’s Vice President of Research -
Radioprotectant Group, received payment for consulting services performed
related to the Company’s research efforts. Total consultant expense made to this
person amounted to $81,750, $78,380, and $95,520 for the years ended December
31, 2009, 2008, and 2007, respectfully. There were no accounts receivable
or accrued payable balances at December 31, 2009 and 2008,
respectively.





Note
4. Equity Transactions





On
February 14, 2007, the Company issued 99,500 stock options to various employees
and consultants of the Company under non-qualified stock option agreements.
These options allow for the purchase of 99,500 shares of common stock at a price
of $9.14. These options have various vesting schedules from immediate vesting to
three years and expire on February 14, 2017.




On
February 26, 2007, the Company issued 55,000 warrants at an exercise price of
$9.19 per share, to a placement agent as incentive for work on the private
placement offering.




On March
16, 2007, the Company entered into a Securities Purchase Agreement with various
accredited investors (the “Buyers”), pursuant to which the Company agreed to
sell to the Buyers Series B Convertible Preferred Stock (“Series B Preferred”)
convertible into an aggregate of 4,288,712 shares of common stock and Series B
Warrants that were exercisable for an aggregate of 2,144,356 shares of common
stock. The Series B Preferred had an initial conversion price of $7.00 per
share, paid an annual dividend of $.35 per share, and in the event of a
conversion at such conversion price, one share of Series B Preferred would
convert into one share of common stock. The Series B Warrants had an exercise
price of $10.36 per share, the closing bid price on the day prior to the private
placement. To the extent, however, that the conversion price of the Series B
Preferred or the exercise price of the Series B Warrants was reduced as a result
of certain anti-dilution protections, the number of shares of common stock into
which the Series B Preferred were convertible or for which the Series B Warrants
were exercisable could increase.




The
Company also issued to the placement agents in the private placement (the
“Agents”), as compensation for their services, Series B Preferred, Series B
Warrants, and Series C Warrants. The Agents collectively received Series B
Preferred that were convertible into an aggregate of 290,298 shares of common
stock, Series B Warrants that were exercisable for an aggregate of 221,172
shares of the Company’s common stock, and Series C Warrants that were
exercisable for 267,074 shares of the Company’s common stock. The Series C
Warrants had an exercise price of $11.00 per share, and were also subject to
anti-dilution protections that could increase the number of shares of common
stock for which they were exercisable.




54




In total,
the securities issued in the private placement were initially convertible into,
or exercisable for, up to approximately 7,211,612 shares of common stock, which
amount was subject to adjustment in the event of certain corporate events such
as stock splits or issuances of securities at a price below the conversion price
of the Series B Preferred or exercise price of the warrants, as the case may
be.  On September 13, 2007, the Company paid $807,913 to the Series B
Preferred stockholders for the semiannual dividend.




On March
19, 2007, the Company issued 20,000 stock options to members of the Scientific
Advisory Board of the Company under non-qualified stock option agreements. These
options were immediately exercisable and allowed for the purchase of 20,000
shares of common stock at a price of $8.82. These options expire on March 18,
2017.




On April
6, 2007, the Company issued 152,500 stock options to officers and consultants
under non-qualified stock option agreements. These options were immediately
exercisable and allowed for the purchase of 152,500 shares of common stock at a
price of $8.36.  These options expire on April 5, 2017.  The
Company also issued 115,000 shares of common stock to consultants under the
Plan.




On June
12, 2007, 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 were immediately exercisable and allowed
for the purchase of 140,000 shares of common stock at a price of
$9.40.  These options expire on June 11, 2017.




On June
15, 2007, the Company issued 110,000 stock options to various key employees and
consultants under non-qualified stock option agreements.  These
options had various vesting schedules including immediate vesting, up to three
year vesting, and vesting upon the company stock price obtaining certain
levels.  These options allowed for the purchase of 110,000 shares of
common stock at a price ranging from $9.93 to $17.00.  These options
expire on June 14, 2017. The Company also issued 30,000 shares of common stock
to the same consultants under the Plan.




On June
21, 2007, the Company issued 3,000 stock options to a consultant under a
non-qualified stock option agreement.  These options vested over a six
month period and allowed for the purchase of 3,000 shares of common stock at a
price of $10.84.  These options expire on June 20, 2017.




On June
27, 2007, the Company issued 30,000 shares of common stock to various outside
consultants under the Plan.




On July
18, 2007, the Company issued 15,000 shares of common stock to an outside
consultant under the Plan.  On that date, the Company also issued
18,000 stock options to another consultant under a non-qualified stock option
agreement.  These options were immediately exercisable and allowed for
the purchase of 18,000 shares of common stock at a price of
$10.61.  These options expire on December 31, 2012.




On
December 4, 2007, the Company issued 117,000 stock options to various key
employees and consultants under non-qualified stock option
agreements.  These options had up to three year
vesting.  These options allowed for the purchase of 117,000 shares of
common stock at an exercise price of $10.00 per share.  These options
expire on or before December 3, 2017.




On
December 11, 2007, the SEC declared effective a registration statement of the
Company registering up to 5,514,999 shares of common stock for resale from time
to time by the selling stockholders named in the prospectus contained in the
registration statement. This number represents 5,514,999 shares of common stock
issuable upon the conversion or exercise of the securities issued in the
Company’s March 2007 private placement at the current conversion and exercise
prices. Of these 5,514,999 shares of common stock, 3,717,515 shares were
issuable upon conversion of Series B Preferred and 1,797,484 shares were
issuable upon exercise of the Series B Warrants. The Company would not receive
any proceeds from the sale of the underlying shares of common stock, although to
the extent the selling stockholders exercised warrants for the underlying shares
of common stock, the Company would receive the exercise price of those warrants.
The registration statement was filed to satisfy registration rights that the
Company had previously granted.  Subsequent to the effectiveness of
the registration statement, 708,743 Series B Preferred were converted and
$61,418 in dividends earned were paid as of December 31, 2007. At December 31,
2007, $396,469 in dividends were accrued on the outstanding Series B
Preferred.





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 under the Plan.  The
options vested over a period from one to three years and allowed for the
purchase of 160,000 shares of common stock at a price of $8.00 per
share.  These options expire on December 31, 2017.





On
January 4, 2008, the Company issued 20,000 restricted shares of common stock to
a new employee.  These shares vested 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.




55





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 ECP.  These options were originally expensed
in 2007 at the December 31, 2007 closing price of $8.80.  These
options vested immediately, contained 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 vested immediately, contained 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 vested
immediately and allowed 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
consultant under the Plan.




On April
8, 2008, the Company issued 40,000 stock options to three consultants under
non-qualified stock option agreements.  These options vested
immediately and allowed 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 vested 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 vested immediately and allowed 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 vested immediately and allowed 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 vested immediately and allowed 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 a non-qualified stock option agreement.  These options vested
over a three-year period and allowed 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 vested immediately and allowed for the purchase of 19,341 shares
of common stock at an exercise price of $3.10 per share.  These
options expire on November 13, 2018.




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




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





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





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




56




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





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





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





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





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





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





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




The
Company recorded a 40% reduction in the calculated value as shown above due to
the restrictions on marketability, liquidity and other credit
factors.





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




57





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




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




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




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




On June
26, 2009, the Company issued 60,000 stock options to a consultant under a
non-qualified stock option agreement under the Amended Plan.  These
options vested immediately and allowed for the purchase of 60,000 shares of
common stock at an exercise price of $3.48 per share.  These options
expire on June 25, 2019.  The Company also issued 62,540 shares of
common stock to two consultants and an employee of the Company under the Amended
Plan.




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




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





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




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




On
October 1, 2009, the Company issued 56,444 shares of common stock to several
consultants of the Company under the Amended Plan.




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





On
November 10, 2009, the Company issued 17,712 shares of common stock to several
consultants of the Company under the Amended Plan.




58




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





On
November 17, 2009, the Company issued 64,656 stock options to various employees
and consultants under non-qualified stock option agreements under the Amended
Plan. These options vested immediately and allowed for the purchase of 64,656
shares of common stock at an exercise price of $3.89 per share.  These
options expire on November 16, 2019.




On
December 1, 2009, the Company issued 24,064 shares of common stock to several
consultants of the Company under the Amended Plan.




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





For the
year ended December 31, 2009, the remaining 3,160,974 Series B Preferred Shares
were converted into 4,693,530 shares of common stock as of September 16, 2009.
At December 31, 2009, there were 0 outstanding Series B Preferred for which $0
in dividends were accrued.





For the
year ended December 31, 2009, 75.99 Series D Preferred Shares were converted
into 572,375 shares of common stock. At December 31, 2009, there were 466.85
outstanding Series D Preferred which are convertible into 4,576,979 shares of
common stock.





Note
5. Income Taxes





As part
of the process of preparing the Company’s financial statements, management is
required to estimate income taxes in each of the jurisdictions in which it
operates.  The Company accounts for income taxes using the guidance
from the Codification on income taxes.  The Codification requires the
use of the asset and liability method of accounting for income
taxes.  Under this method, deferred taxes are determined by
calculating the future tax consequences attributable to differences between the
financial accounting and tax bases of existing assets and
liabilities.  A valuation allowance is recorded against deferred tax
assets when, in the opinion of management, it is more likely than not that the
Company will not be able to realize the benefit from its deferred tax
assets.





The
Company files income tax returns, as prescribed by Federal tax laws and the tax
laws of the state and local jurisdictions in which it operates.  The
Company’s uncertain tax positions are related to tax years that remain subject
to examination and are recognized in the financial statements when the
recognition threshold and measurement attributes are met.  Interest
and penalties related to unrecognized tax benefits are recorded as income tax
expense.





The
provision for income taxes charged to continuing operations is $0 for the years
ended December 31, 2009, 2008, and 2007, respectively.




59





Deferred
tax assets (liabilities) are comprised of the following at December
31:





2009
            
            
            2008
            
            
            2007Deferred
      tax assets:Operating
      loss carryforwards
            
            $
            22,784,000
            
            
            $
            18,383,000
            
            
            $
            13,289,000Tax
      credit carryforwards
            
            
            2,149,000
            
            
            
            1,772,000
            
            
            
            737,000Accrued
      expenses
            
            
            4,226,000
            
            
            
            3,102,000
            
            
            
            2,765,000Other
            
            
            4,000
            
            
            
            4,000
            
            
            
            -Total
      deferred tax assets
            
            
            29,163,000
            
            
            
            23,261,000
            
            
            
            16,791,000Deferred
      tax liabilitiesEquipment
            
            
            (32,000
            )
            
            
            (83,000
            )
            
            
            (61,000
            )Net
      deferred tax asset
            
            
            29,131,000
            
            
            
            23,178,000
            
            
            
            16,730,000Valuation
      allowance
            
            
            (29,131,000
            )
            
            
            (23,178,000
            )
            
            
            (16,730,000
            )$
            -
            
            
            $
            -
            
            
            $
            -




The
provision for income taxes differs from the amount of income tax determined by
applying the applicable U.S. statutory federal income tax rate to the pretax
loss from continuing operations as a result of the following
differences:





2009
            
            
            2008
            
            
            2007Tax
      at the U.S. statutory rate
            
            $
            (4,570,000
            )
            
            $
            (4,769,000
            )
            
            $
            (9,474,000
            )Stock
      option exercises
            
            
            (56,000
            )
            
            
            (20,000
            )
            
            
            (363,000
            )Valuation
      allowance
            
            
            4,699,000
            
            
            
            4,879,000
            
            
            
            9,831,000Other
            
            
            (73,000
            )
            
            
            (90,000
            )
            
            
            6,000$
            -
            
            
            $
            -
            
            
            $
            -




At
December 31, 2009, the Company has federal net operating loss carryforwards of
approximately $57,366,000, which begin to expire if not utilized by 2023, and
approximately $1,913,000 of tax credit carryforwards that begin to expire if not
utilized by 2024.  The utilization of approximately $142,000 of the
tax credit carryforwards is limited through 2011 as a result of ownership
changes. The Company also has state net operating loss carryforwards of
approximately $46,195,000, which begin to expire if not utilized by 2027, and
state tax credit carryforwards of approximately $547,000, which begin to expire
if not utilized by 2010.





The
Company files a United States federal tax return, along with various state and
local income tax returns. The federal, state and local tax returns for the years
ended December 31, 2008, 2007 and 2006 are still open for
examination.





The
Company adheres to the Codification on income taxes which prescribes a minimum
recognition threshold and measurement methodology that a tax position taken or
expected to be taken in a tax return is required to meet before being recognized
in the financial statements.  The Company accounts for interest and
penalties related to uncertain tax positions as part of its provision for income
taxes.




60





The
following presents a rollforward of the unrecognized tax benefits, and the
associated interest and penalties:





Unrecognized
            
            
            InterestTax
      Benefits
            
            
            and
      PenaltiesBalance
      at January 1, 2008
            
            $
            230,000
            
            
            $
            --Prior
      year tax positions
            
            
            -
            
            
            
            -Current
      year tax positions
            
            
            -
            
            
            
            -Deferred
      tax positions
            
            
            24,000
            
            
            
            -Settlements
      with tax authorities
            
            
            -
            
            
            
            -Expiration
      of the statute of limitations
            
            
            -
            
            
            
            -Balance
      at December 31, 2008
            
            
            254,000
            
            
            
            -Prior
      year tax positions
            
            
            -
            
            
            
            -Current
      year tax positions
            
            
            -
            
            
            
            -Deferred
      tax positions
            
            
            57,000
            
            
            
            -Settlements
      with tax authorities
            
            
            -
            
            
            
            -Expiration
      of the statute of limitations
            
            
            -
            
            
            
            -Balance
      at December 31, 2009
            
            $
            311,000
            
            
            $
            -




The
Company’s 2009 and 2008 New York State income tax returns include approximately
$835,000 of refundable state incentive tax credits, which are based upon
research and development activities, real estate tax payments, employee hires
and equipment purchases.  At December 31, 2009, these refunds have not
been received from the New York State tax authorities, and accordingly, no
benefit has been recorded in the accompanying financial statements.  A
refund of $283,000 was received during 2009 for incentive tax credits claimed on
the 2007 New York State tax return.  Since there was no New York State
tax liability, and because these tax credits represent a refund of research and
development and property tax payments, the refund was applied against 2009
research and development and property tax expense.





Note
6. Other Balance Sheet Details





Available-For-Sale
Cash Equivalents and Marketable Securities





Available-for-Sale
Marketable Securities consist of the following:





Cost
            
            
            Accrued
              Interest
            
            
            Gross
              Unrealized
              Gains
            
            
            Gross
              Unrealized
              Losses
            
            
            Fair
              ValueDecember
      31, 2009 - Current Marketable Securities
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -December
      31, 2008 - Current Marketable Securities
            
            $
            1,000,000
            
            
            $
            9,488
            
            
            $
            -
            
            
            $
            -
            
            
            $
            1,009,488




The
Company considers investments with a maturity date of more than three months
from the date of purchase 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. As a result of
changes in market interest rates on investment, the Company recognized
unrealized gains/ (losses) of $0, $0, and $4,165 for the years ending December
31, 2009, 2008, and 2007, respectively.





61




Note
7. Employee Benefit Plan





The
Company maintains an active defined contribution retirement plan for its
employees (the “Benefit Plan”). All employees satisfying certain service
requirements are eligible to participate in the Benefit Plan. The Company makes
cash contributions each payroll period up to specified percentages of employees’
contributions as approved by management. The Company’s contributions to the
Benefit Plan were $102,577, $127,994 and $99,530 for the years ended December
31, 2009, 2008 and 2007, respectively.





Note
8. Commitments and Contingencies





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





The
Company is also party to three agreements that require it to make milestone
payments, royalties on net sales of the Company's products and payments on
sublicense income received by the Company. As of December 31, 2009, $350,000 in
milestone payments have been made under one of these
agreements.  There are no milestone payments or royalties on net sales
accrued for any of the three agreements as of December 31, 2009 and December 31,
2008.





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.





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 expense recognized were $367,607, $332,584
and $218,635 for the years ended December 31, 2009, 2008 and 2007,
respectively.





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





Operating
              Leases2010
            
            $
            343,6572011
            
            
            311,8032012
            
            
            144,3752013
            
            
            -2014
            
            
            -$
            799,835




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




62





The
following tables summarize the stock option activity for the years ended
December 31, 2009 and 2008:





Number
      of
            
            
            WeightedAverageOptions
            
            
            Exercise PriceOutstanding
      at December 31, 2007
            
            
            1,011,740
            
            
            $
            7.29Granted
            
            
            997,721
            
            
            $
            3.16Exercised
            
            
            (42,534
            )
            
            $
            1.04Forfeited
            
            
            (18,053
            )
            
            $
            9.00Outstanding
      at December 31, 2008
            
            
            1,948,874
            
            
            $
            6.17Granted
            
            
            787,932
            
            
            $
            2.82Exercised
            
            
            (194,675
            )
            
            $
            1.86Forfeited
            
            
            (25,124
            )
            
            $
            5.52Outstanding
      at December 31, 2009
            
            
            2,517,007
            
            
            $
            5.46




The
number of options and weighted average exercise price of options fully vested
and exercisable for the years ending December 31, 2009, 2008 and 2007 were
2,185,632, 1,597,837, and 646,930 options at $5.12, $5.52, and $6.89
respectively. A table showing the number of options outstanding and exercisable
(fully vested) at December 31, 2009 appears below:





Outstanding
            
            
            ExercisableExercise
      Price
            
            
            Number
              of
      Options
            
            
            WeightedAverage
              Years
      toExpiration
            
            
            Number
              of
      Options$
            0.66
            
            
            
            92,558
            
            
            
            5.50
            
            
            
            92,558$
            0.67
            
            
            
            35,849
            
            
            
            5.50
            
            
            
            35,849$
            1.90
            
            
            
            238,015
            
            
            
            9.27
            
            
            
            139,015$
            3.10
            
            
            
            14,842
            
            
            
            8.87
            
            
            
            14,842$
            3.33
            
            
            
            140,000
            
            
            
            9.49
            
            
            
            140,000$
            3.48
            
            
            
            60,000
            
            
            
            9.49
            
            
            
            60,000$
            3.89
            
            
            
            64,656
            
            
            
            9.88
            
            
            
            64,656$
            3.91
            
            
            
            56,174
            
            
            
            9.39
            
            
            
            56,174$
            3.98
            
            
            
            24,986
            
            
            
            8.54
            
            
            
            24,986$
            4.00
            
            
            
            550,012
            
            
            
            8.09
            
            
            
            545,887$
            4.18
            
            
            
            40,000
            
            
            
            8.27
            
            
            
            40,000$
            4.50
            
            
            
            111,500
            
            
            
            6.17
            
            
            
            111,500$
            4.57
            
            
            
            65,221
            
            
            
            9.62
            
            
            
            65,221$
            4.69
            
            
            
            35,000
            
            
            
            8.73
            
            
            
            17,500$
            4.81
            
            
            
            1,000
            
            
            
            8.20
            
            
            
            1,000$
            5.28
            
            
            
            14,694
            
            
            
            8.35
            
            
            
            14,694$
            5.33
            
            
            
            140,000
            
            
            
            8.33
            
            
            
            140,000$
            6.00
            
            
            
            45,000
            
            
            
            6.56
            
            
            
            45,000$
            8.00
            
            
            
            160,000
            
            
            
            8.01
            
            
            
            80,000$
            8.36
            
            
            
            152,500
            
            
            
            7.27
            
            
            
            152,500$
            8.82
            
            
            
            20,000
            
            
            
            7.22
            
            
            
            20,000$
            9.14
            
            
            
            77,000
            
            
            
            7.12
            
            
            
            58,000$
            9.40
            
            
            
            140,000
            
            
            
            7.45
            
            
            
            140,000$
            9.93
            
            
            
            20,000
            
            
            
            7.46
            
            
            
            17,500$
            10.00
            
            
            
            117,000
            
            
            
            7.93
            
            
            
            87,750$
            10.61
            
            
            
            18,000
            
            
            
            3.00
            
            
            
            18,000$
            10.84
            
            
            
            3,000
            
            
            
            7.48
            
            
            
            3,000$
            11.00
            
            
            
            25,000
            
            
            
            7.46
            
            
            
            -$
            14.00
            
            
            
            25,000
            
            
            
            7.46
            
            
            
            -$
            17.00
            
            
            
            30,000
            
            
            
            7.46
            
            
            
            -Total
            
            
            
            2,517,007
            
            
            
            8.02
            
            
            
            2,185,632




63


The
Company has entered into warrant agreements with strategic partners, consultants
and investors with exercise prices ranging from $1.39 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 for the years
ended December 31, 2009 and 2008 appears below:





Number
      of
              
              
              Weighhted
      Average
              
              
              Number
      of Common Shares ExeriseableWarrants
              
              
              Exercise
      Price
              
              
              IntoOutstanding
      at December  31, 2007
              
              
              3,453,268
              
              
              $
              8.86
              
              
              
              3,453,268Granted
              
              
              -
              
              
              
              n/a
              
              
              
              -Exercised
              
              
              -
              
              
              
              n/a
              
              
              
              -Forfeited,
      Canceled
              
              
              -
              
              
              
              n/a
              
              
              
              -Outstanding
      at December  31, 2008
              
              
              3,453,268
              
              
              $
              8.86
              
              
              
              3,453,268Granted
              
              
              4,265,122
              
              
              $
              1.60
              
              
              
              4,265,122Exercise
      Price Adjustment
              
              
              -
              
              
              $
              (3.08
              )
              
              
              1,756,772Exercised
              
              
              (761,717
              )
              
              $
              1.52
              
              
              
              (833,269
              )Forfeited,
      Canceled
              
              
              -
              
              
              
              n/a
              
              
              
              -Outstanding
      at December  31, 2009
              
              
              6,956,673
              
              
              $
              3.71
              
              
              
              8,641,893




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





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





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





Note
9. Subsequent Events





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





On
February 25, 2010, the Company entered into a Securities Purchase Agreement with
various accredited investors, pursuant to which the Company agreed to
sell an aggregate of 1,538,462 shares of the Company’s common
stock and warrants to purchase an aggregate of 1,015,385 shares of the
Company’s common
stock, for an aggregate purchase price of $5,000,000. The transaction closed on
March 2, 2010. After related fees and expenses, the Company received net
proceeds totaling approximately $4,500,000. The Company intends to use the
proceeds of the private placement for working capital purposes.





The
common stock was sold at a price of $3.25 per share, and the warrants had an
exercise price of $4.50 per share, subject to future adjustment for various
events, such as stock splits or dilutive issuances. The warrants are exercisable
commencing six months following issuance and expire on March 2,
2015.





For its
services as placement agent, Rodman & Renshaw, LLC received gross cash
compensation in the amount of approximately $350,000, and it and its designees
collectively received warrants to purchase 123,077 shares of common
stock.





The
common stock and the shares of common stock underlying the warrants issued to
the purchasers and Rodman and Renshaw have not been and will not be registered
under the Securities Act of 1933.





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





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





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





64




Item
9: Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure





None





Item
9A: 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 December 31, 2009 as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, as amended, or the Exchange Act. Our
management recognizes that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving their
objectives and management necessarily applies its judgment in evaluating the
cost-benefit relationship of possible controls and procedures. Based on the
evaluation of our disclosure controls and procedures as of December 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





Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act Rules
13a-15(f).  Under the supervision and with the participation of
management, including our principal executive officer and principal financial
officer, we conducted an evaluation of the effectiveness of our internal control
over financial reporting based on the framework inInternal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission.  Based on our evaluation under the framework
inInternal Control –
Integrated Framework, our management concluded that our internal control
over financial reporting was effective as of December 31, 2009.





This
annual report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial
reporting.  Management’s report was not subject to attestation by the
Company’s registered public accounting firm pursuant to temporary rules of the
Securities and Exchange Commission that permit the Company to provide only
management’s report in this annual report on Form 10-K.





There was
no change in our internal control over financial reporting during our fourth
fiscal quarter ended December 31, 2009 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.





Item
9B: Other Information





On March
18, 2010, the Company filed with the Secretary of State for the State of
Delaware Certificates of Elimination with respect to each of the Company’s
previously issued Series A Participating Convertible Preferred Stock, Series B
Convertible Preferred Stock and Series D Convertible Preferred Stock, each of
which have converted into common stock and of which no further issuance shall be
made. The Company also filed with the Secretary of State for the State of
Delaware a Restated Certificate of Incorporation, which only restates and
integrates, and does not further amend, the provisions of the Company’s
Certificate of Incorporation.





The
Restated Certificate of Incorporation was filed pursuant to Section 245 of the
General Corporation Law of Delaware and is attached hereto as Exhibit
3.1.




65




PART
III





Pursuant
to General Instruction G(3) of Form 10-K, Items 10 through 14, inclusive, have
not been restated or answered in this annual report on Form 10-K because the
Company intends to file within 120 days after the close of its fiscal year with
the Securities and Exchange Commission a definitive proxy statement pursuant to
Regulation 14A under the Securities Exchange Act of 1934, which proxy statement
involves the election of directors. The information required in these Items 10
through 14, inclusive, is incorporated by reference to that proxy
statement.




PART
IV





Item
15. Exhibits and Financial Statement Schedules





(a) The
following financial statements and supplementary data are filed as a part of
this annual report on Form 10-K.





Report of
Independent Registered Public Accounting Firm


Balance
Sheets at December 31, 2009 and 2008


Statements
of Operations for years ended December 31, 2009, 2008, and 2007


Statements
of Stockholders’ Equity for period from January 1, 2007 to December 31,
2009


Statements
of Cash Flows for years ended December 31, 2009, 2008, and 2007


Notes to
Financial Statements





(b) The
following exhibits are incorporated herein by reference or attached
hereto.




Exhibit
              No.
            
            Description3.1
            
            Restated
      Certificate of Incorporation filed with the Secretary of State of Delaware
      on March 18, 20103.2
            
            Second
      Amended and Restated By-Laws*******4.1
            
            Form
      of Specimen Common Stock Certificate*4.2
            
            Form
      of Warrants issued to designees of Sunrise Securities Corp., dated March
      2005*




4.3
            
            Form
      of Warrants issued to underwriters***4.4
            
            Warrant
      to Purchase Common Stock issued to ChemBridge Corporation, dated April 27,
      2004*4.5
            
            Form
      of Series B Warrant ******4.6
            
            Form
      of Series C Warrant ******4.7
            
            Form
      of Common Stock Purchase Warrant (Series D
  Transaction).†4.8
            
            Form
      of Common Stock Purchase Warrant (Private Placement closed on March 2,
      2010). ††††††10.1
            
            Restricted
      Stock Agreement between Cleveland BioLabs, Inc. and Michael Fonstein,
      dated as of July 5, 2003*10.2
            
            Restricted
      Stock Agreement between Cleveland BioLabs, Inc. and Yakov Kogan, dated as
      of July 5, 2003*10.3
            
            Restricted
      Stock Agreement between Cleveland BioLabs, Inc. and Andrei Gudkov, dated
      as of July 5, 2003*




66




10.4
            
            Library
      Access Agreement by and between ChemBridge Corporation and Cleveland
      BioLabs, Inc., effective as of April 27, 2004*10.5
            
            Restricted
      Stock and Investor Rights Agreement between Cleveland BioLabs, Inc. and
      ChemBridge Corporation, dated as of April 27, 2004*10.6
            
            Common
      Stockholders Agreement by and among Cleveland BioLabs, Inc. and the
      stockholders named therein, dated as of July 1, 2004*10.7
            
            Exclusive
      License Agreement by and between The Cleveland Clinic Foundation and
      Cleveland BioLabs, Inc., effective as of July 1, 2004*10.8
            
            Employment
      Agreement by and between Cleveland BioLabs, Inc. and Dr. Michael Fonstein,
      dated August 1, 2004*10.9
            
            Employment
      Agreement by and between Cleveland BioLabs, Inc. and Dr. Yakov Kogan,
      dated August 1, 2004*10.10
            
            Consulting
      Agreement between Cleveland BioLabs, Inc. and Dr. Andrei Gudkov, dated
      August 1, 2004*10.11
            
            Cooperative
      Research and Development Agreement by and between the Uniformed Services
      University of the Health Sciences, the Henry M. Jackson Foundation for the
      Advancement of Military Medicine, Inc., the Cleveland Clinic Foundation,
      and Cleveland BioLabs, Inc., dated as of August 1,
  2004**




10.12
            
            Employment
      Agreement by and between Cleveland BioLabs, Inc. and Dr. Farrel Fort,
      dated June 1, 2005*10.13
            
            Amendment
      to Employment Agreement by and between Cleveland BioLabs, Inc. and Dr.
      Farrel Fort, dated September 30, 2005*10.14
            
            Amendment
      to Consulting Agreement between Cleveland BioLabs, Inc. and Dr. Andrei
      Gudkov, dated as of January 23, 2006*10.15
            
            Amendment
      to Restricted Stock Agreement between Cleveland BioLabs, Inc. and Michael
      Fonstein, dated as of January 23, 2006*10.16
            
            Amendment
      to Restricted Stock Agreement between Cleveland BioLabs, Inc. and Yakov
      Kogan, dated as of January 23, 2006*10.17
            
            Amendment
      to Restricted Stock Agreement between Cleveland BioLabs, Inc. and Andrei
      Gudkov, dated as of January 23, 2006*10.18
            
            Amendment
      to Common Stockholders Agreement by and among Cleveland BioLabs, Inc. and
      the parties thereto, dated as of January 26, 2006*10.19
            
            Cleveland
      BioLabs, Inc. 2006 Equity Incentive Plan***10.20
            
            Cleveland
      BioLabs, Inc. Equity Incentive Plan††10.21
            
            Process
      Development and Manufacturing Agreement between Cleveland BioLabs, Inc.
      and SynCo Bio Partners B.V., effective as of August 31,
      2006****10.22
            
            Sponsored
      Research Agreement between Cleveland BioLabs, Inc. and Roswell Park Cancer
      Institute Corporation, effective as of January 12,
    2007*****




67




10.23
            
            Securities
      Purchase Agreement, dated March 16, 2007******10.24
            
            Registration
      Rights Agreement, dated March 16, 2007******10.25
            
            Amendment
      to Employment Agreement by and between Cleveland BioLabs, Inc. and Dr.
      Michael Fonstein, dated as of December 31, 2008.10.26
            
            Amendment
      to Employment Agreement by and between Cleveland BioLabs, Inc. and Dr.
      Yakov Kogan, dated as of December 31, 2008.10.27
            
            Form
      of Securities Purchase Agreement. †10.28
            
            Form
      of Registration Rights Agreement.†




10.29
            
            Form
      of Voting Agreement.†10.30
            
            Amendment
      and Waiver Agreement, dated March 20, 2009.†10.31
            
            Form
      of Amendment and Reaffirmation Agreement.†10.32
            
            License
      Agreement between Cleveland BioLabs, Inc. and Zhejiang Hisun
      Pharmaceutical Co., Ltd., dated September 3, 2009. †††10.33
            
            Participation
      Agreement, dated December 30, 2009, by and between Cleveland BioLabs, Inc.
      and Bioprocess Capital Partners, LLC. ††††10.34
            
            Form
      of Securities Purchase Agreement dated February 25, 2010.
      †††††23.1
            
            Consent
      of Meaden & Moore, Ltd.31.1
            
            Rule
      13a-14(a)/15d-14(a) Certification of Michael Fonstein31.2
            
            Rule
      13a-14(a)/15d-14(a) Certification of John A. Marhofer,
  Jr.32.1
            
            Section
      1350 Certification.




*
            Incorporated
      by reference to Amendment No. 1 to Registration Statement on Form SB-2 as
      filed on April 25, 2006 (File No. 333-131918).**
            Incorporated
      by reference to Amendment No. 2 to Registration Statement on Form SB-2 as
      filed on May 31, 2006 (File No. 333-131918).***
            Incorporated
      by reference to Amendment No. 3 to Registration Statement on Form SB-2 as
      filed on July 10, 2006 (File No. 333-131918).****
            Incorporated
      by reference to Form 8-K as filed on October 25, 2006.*****
            Incorporated
      by reference to Form 8-K as filed on January 12, 2007.******
            Incorporated
      by reference to Form 8-K as filed on March 19, 2007.*******
            Incorporated
      by reference to Form 8-K as filed on December 5, 2007.†
            Incorporated
      by reference to Form 8-K as filed on March 30, 2009.




68




††
            Incorporated
      by reference to Proxy Statement on Schedule 14A as filed on April 1,
      2008.†††
            Incorporated
      by reference to Form 8-K as filed on September 3, 2009.††††
            Incorporated
      by reference to Form 8-K as filed on December 30, 2009.†††††
            Incorporated
      by reference to Form 8-K as filed on February 25, 2010.††††††
            Incorporated
      by reference to Form 8-K/A as filed on February 26,
  2010.





(c) Not
applicable.




69




SIGNATURES




Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.




CLEVELAND
      BIOLABS, INC.Dated:
      March 22, 2010
            By:
            /s/ MICHAEL
      FONSTEINMichael
      FonsteinChief
      Executive Officer




CLEVELAND
      BIOLABS, INC.Dated:
      March 22, 2010
            By:
            /s/ JOHN
      A. MARHOFER, JR.John
      A. Marhofer, Jr.Chief
      Financial Officer




Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed by the following persons in the capacities and on the dates
indicated.




Signature
            
            Title
            
            Date/ S
      / Michael Fonstein
            
            Chief
      Executive Officer, President, and Director (Principal Executive
      Officer)
            
            March
      22, 2010Michael
      Fonstein/ S
      / John A. Marhofer, Jr.
            
            Chief
      Financial Officer (Principal Financial and Accounting
    Officer)
            
            March
      22, 2010John
      A. Marhofer, Jr./ S
      / James Antal
            
            Director
            
            March
      22, 2010James
      Antal/
      S / Paul DiCorleto
            
            Director
            
            March
      22, 2010Paul
      DiCorleto/
      S / Andrei Gudkov
            
            Chief
      Scientific Officer, and Director
            
            March
      22, 2010Andrei
      Gudkov/
      S / Bernard L. Kasten
            
            Director
            
            March
      22, 2010Bernard
      L. Kasten/
      S / Yakov Kogan
            
            Chief
      Operating Officer, Secretary, and Director
            
            March
      22, 2010Yakov
      Kogan/
      S / H. Daniel Perez
            
            Director
            
            March
      22, 2010H.
      Daniel Perez




70





EXHIBIT
INDEX





Exhibit
              No.
            
            Description3.1
            
            Restated
      Certificate of Incorporation filed with the Secretary of State of Delaware
      on March 18, 20103.2
            
            Second
      Amended and Restated By-Laws*******4.1
            
            Form
      of Specimen Common Stock Certificate*4.2
            
            Form
      of Warrants issued to designees of Sunrise Securities Corp., dated March
      2005*




4.3
            
            Form
      of Warrants issued to underwriters***4.4
            
            Warrant
      to Purchase Common Stock issued to ChemBridge Corporation, dated April 27,
      2004*4.5
            
            Form
      of Series B Warrant ******4.6
            
            Form
      of Series C Warrant ******4.7
            
            Form
      of Common Stock Purchase Warrant (Series D
  Transaction).†4.8
            
            Form
      of Common Stock Purchase Warrant (Private Placement closed on March 2,
      2010). ††††††10.1
            
            Restricted
      Stock Agreement between Cleveland BioLabs, Inc. and Michael Fonstein,
      dated as of July 5, 2003*10.2
            
            Restricted
      Stock Agreement between Cleveland BioLabs, Inc. and Yakov Kogan, dated as
      of July 5, 2003*10.3
            
            Restricted
      Stock Agreement between Cleveland BioLabs, Inc. and Andrei Gudkov, dated
      as of July 5, 2003*10.4
            
            Library
      Access Agreement by and between ChemBridge Corporation and Cleveland
      BioLabs, Inc., effective as of April 27, 2004*10.5
            
            Restricted
      Stock and Investor Rights Agreement between Cleveland BioLabs, Inc. and
      ChemBridge Corporation, dated as of April 27, 2004*10.6
            
            Common
      Stockholders Agreement by and among Cleveland BioLabs, Inc. and the
      stockholders named therein, dated as of July 1, 2004*10.7
            
            Exclusive
      License Agreement by and between The Cleveland Clinic Foundation and
      Cleveland BioLabs, Inc., effective as of July 1, 2004*10.8
            
            Employment
      Agreement by and between Cleveland BioLabs, Inc. and Dr. Michael Fonstein,
      dated August 1, 2004*10.9
            
            Employment
      Agreement by and between Cleveland BioLabs, Inc. and Dr. Yakov Kogan,
      dated August 1, 2004*10.10
            
            Consulting
      Agreement between Cleveland BioLabs, Inc. and Dr. Andrei Gudkov, dated
      August 1, 2004*




71




10.11
            
            Cooperative
      Research and Development Agreement by and between the Uniformed Services
      University of the Health Sciences, the Henry M. Jackson Foundation for the
      Advancement of Military Medicine, Inc., the Cleveland Clinic Foundation,
      and Cleveland BioLabs, Inc., dated as of August 1,
  2004**




10.12
            
            Employment
      Agreement by and between Cleveland BioLabs, Inc. and Dr. Farrel Fort,
      dated June 1, 2005*10.13
            
            Amendment
      to Employment Agreement by and between Cleveland BioLabs, Inc. and Dr.
      Farrel Fort, dated September 30, 2005*10.14
            
            Amendment
      to Consulting Agreement between Cleveland BioLabs, Inc. and Dr. Andrei
      Gudkov, dated as of January 23, 2006*10.15
            
            Amendment
      to Restricted Stock Agreement between Cleveland BioLabs, Inc. and Michael
      Fonstein, dated as of January 23, 2006*10.16
            
            Amendment
      to Restricted Stock Agreement between Cleveland BioLabs, Inc. and Yakov
      Kogan, dated as of January 23, 2006*10.17
            
            Amendment
      to Restricted Stock Agreement between Cleveland BioLabs, Inc. and Andrei
      Gudkov, dated as of January 23, 2006*10.18
            
            Amendment
      to Common Stockholders Agreement by and among Cleveland BioLabs, Inc. and
      the parties thereto, dated as of January 26, 2006*10.19
            
            Cleveland
      BioLabs, Inc. 2006 Equity Incentive Plan***10.20
            
            Cleveland
      BioLabs, Inc. Equity Incentive Plan††10.21
            
            Process
      Development and Manufacturing Agreement between Cleveland BioLabs, Inc.
      and SynCo Bio Partners B.V., effective as of August 31,
      2006****10.22
            
            Sponsored
      Research Agreement between Cleveland BioLabs, Inc. and Roswell Park Cancer
      Institute Corporation, effective as of January 12,
    2007*****10.23
            
            Securities
      Purchase Agreement, dated March 16, 2007******10.24
            
            Registration
      Rights Agreement, dated March 16, 2007******10.25
            
            Amendment
      to Employment Agreement by and between Cleveland BioLabs, Inc. and Dr.
      Michael Fonstein, dated as of December 31, 2008.10.26
            
            Amendment
      to Employment Agreement by and between Cleveland BioLabs, Inc. and Dr.
      Yakov Kogan, dated as of December 31, 2008.10.27
            
            Form
      of Securities Purchase Agreement. †10.28
            
            Form
      of Registration Rights Agreement.†




10.29
            
            Form
      of Voting Agreement.†10.30
            
            Amendment
      and Waiver Agreement, dated March 20, 2009.†10.31
            
            Form
      of Amendment and Reaffirmation Agreement.†




72




10.32
            
            License
      Agreement between Cleveland BioLabs, Inc. and Zhejiang Hisun
      Pharmaceutical Co., Ltd., dated September 3, 2009. †††10.33
            
            Participation
      Agreement, dated December 30, 2009, by and between Cleveland BioLabs, Inc.
      and Bioprocess Capital Partners, LLC. ††††10.34
            
            Form
      of Securities Purchase Agreement dated February 25, 2010.
      †††††23.1
            
            Consent
      of Meaden & Moore, Ltd.31.1
            
            Rule
      13a-14(a)/15d-14(a) Certification of Michael Fonstein31.2
            
            Rule
      13a-14(a)/15d-14(a) Certification of John A. Marhofer,
  Jr.32.1
            
            Section
      1350 Certification.




*
            Incorporated
      by reference to Amendment No. 1 to Registration Statement on Form SB-2 as
      filed on April 25, 2006 (File No. 333-131918).**
            Incorporated
      by reference to Amendment No. 2 to Registration Statement on Form SB-2 as
      filed on May 31, 2006 (File No. 333-131918).***
            Incorporated
      by reference to Amendment No. 3 to Registration Statement on Form SB-2 as
      filed on July 10, 2006 (File No. 333-131918).****
            Incorporated
      by reference to Form 8-K as filed on October 25, 2006.*****
            Incorporated
      by reference to Form 8-K as filed on January 12, 2007.******
            Incorporated
      by reference to Form 8-K as filed on March 19, 2007.*******
            Incorporated
      by reference to Form 8-K as filed on December 5, 2007.†
            Incorporated
      by reference to Form 8-K as filed on March 30, 2009.††
            Incorporated
      by reference to Proxy Statement on Schedule 14A as filed on April 1,
      2008.†††
            Incorporated
      by reference to Form 8-K as filed on September 3, 2009.††††
            Incorporated
      by reference to Form 8-K as filed on December 30, 2009.†††††
            Incorporated
      by reference to Form 8-K as filed on February 25, 2010.††††††
            Incorporated
      by reference to Form 8-K/A as filed on February 26,
  2010.





73