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, 2008





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  ̈ No x





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  ̈ No x





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





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





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 $37,767,484. There were 14,014,137 shares of common stock
outstanding as of March 16, 2009.




DOCUMENTS
INCORPORATED BY REFERENCE





The
definitive proxy statement relating to the registrant’s Annual Meeting of
Stockholders, to be held on June 25, 2009, is incorporated by reference in Part
III to the extent described therein.









CLEVELAND
BIOLABS, INC.


FORM
10-K


03/30/09





Cleveland
BioLabs, Inc.





Form
10-K





For
the Fiscal Year Ended December 31, 2008





INDEX





PagePART IItem 1
              Description of
      Business
              1Item 1A
              Risk
      Factors
              20Item 1B
              Unresolved Staff
      Comments
              29Item 2
              Description of
      Property
              29Item 3
              Legal
      Proceedings
              29Item 4
              Submission of
      Matters to a Vote of Security Holders
              29Executive
      Officers of the RegistrantPART IIItem 5
              Market for
      Registrant’s Common Equity, Related Stockholder Matters and
      IssuerPurchases of
      Equity Securities
              31Item 6
              Selected
      Financial Data
              32Item 7
              Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
              33Item 7A
              Quantitative and
      Qualitative Disclosures About Market Risk
              44Item 8
              Financial
      Statements and Supplementary Data
              45Item 9
              Changes in and
      Disagreements with Accountants on Accounting and Financial
      Disclosures
              72Item 9A
              Controls and
      Procedures
              72Item 9B
              Other
      Information
              72PART IIIItem 10
              Directors,
      Executive Officers and Corporate Governance
              73Item 11
              Executive
      Compensation
              73Item 12
              Security
      Ownership of Certain Beneficial Owners and Management and
      RelatedStockholder
      Matters
              73Item 13
              Certain
      Relationships and Related Transactions, and DirectorIndependence
              73Item 14
              Principal
      Accountant Fees and Services
              73PART IVItem 15
              Exhibits and
      Financial Statement Schedules
              73SIGNATURES
              
              77









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 and specifically
decline 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





We
wereincorporated inDelawareand commenced business operations in
June 2003 as a development-stage, biotechnology company, with a very specific
and targeted focus on radiation drug discovery. 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. After our initial public offering, our
common stock was listed on the NASDAQ Capital Market under the symbol “CBLI” and
on the Boston Stock Exchange under the symbol “CFB.” Our trading symbol on the
Boston Stock Exchange was later changed to “CBLI.” On August 28, 2007, trading
of our common stock transferred from the NASDAQ Capital Market to the NASDAQ
Global Market. In September 2007, we ceased our listing on the Boston Stock
Exchange.  On November 28, 2008, trading of our common stock
transferred from the NASDAQ Global Market back to the NASDAQ Capital
Market.




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.




1





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.At the
present time,  the primary focus of our research is on the protection
of healthy tissues against external exposures resulting from military or defense
activities.





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.At the present time, our research
efforts in this area are limited as we dedicate the majority of our resources to
military and defense applications.





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 and tumors 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 100% or even 50% of all cancer patients. This
means that there likely will be a need for additional anticancer drugs for each
type of cancer.





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




INDUSTRY





CBLI is a biotechnology, or biotech,
company focused on developing cancer treatment, tissue protection and biodefense
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. Today biotech is a
$296 billion industry (based on total market capitalization) and includes large
companies such as Amgen, Inc. and Genentech, Inc.




2




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 in the market 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.




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 theU.S.government. Several biotech companies
have secured grants and contracts from theU.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
NIH;





·
            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 by the end of 2010.





Leveraging our
relationship with leading research and clinical development
institutions.The Cleveland
Clinic Foundation, one of the top research medical facilities in the world, is
one of our co-founders. In addition to providing us with drug leads and
technologies, the Cleveland Clinic will share valuable expertise with us as
clinical trials are performed on our drug candidates. In January 2007, we
entered into a strategic research partnership with Roswell Park Cancer
Institute, or RPCI, inBuffalo,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.




3





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





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




PRODUCTS IN
DEVELOPMENT





Protectans





We are exploring a new natural source of
factors that suppress the programmed cell death (apoptosis) response in human
cells, which can be rapidly developed into therapeutic products. These
inhibitors are anti-apoptotic factors developed by microorganisms of human
microflora throughout millions of years of co-evolution with mammalian
host.   We are using the same strategy that was applied for the
discovery of antibiotics, one of the biggest medical achievements of the
20thcentury.  We have
established a technological pipeline for screening of such factors, named
protectans, and their rapid preclinical evaluation. Such inhibitors can be used
as protection from cancer treatment side effects and antidotes against injuries
induced by radiation and other stresses associated with severe pathologies
(i.e., heart attack or stroke).





Fourteen families of patents have been
filed over the past five 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, including
Protectan CBLB502, was recently granted by the Eurasian Patent Organization
(nine countries) and two other countries.





We spent approximately $8,995,500 and
$11,828,423 on R&D for
protectans for all applicationsin the fiscal years ended December 31,
2008 and December 31, 2007, respectively. From our inception to December 31,
2008, we spent approximately $26,508,500 on R&D for protectans.




Protectan CBLB502





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





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





We spent approximately $8,021,040 and
$10,701,175 on R&D for Protectan CBLB502 in the fiscal years ended December
31, 2008 and December 31, 2007, respectively. From our inception to December 31,
2008, we spent approximately $23,378,126 on R&D for Protectan
CBLB502.





We intend to enter into negotiations for
contracts to purchase Protectan CBLB502 with variousU.S.and international government agencies
in the third quarter of 2009. If theU.S.government makes significant future
contract awards for the supply of its emergency stockpile to our competitors,
our business will be harmed and it is unlikely that we will be able to
ultimately commercialize our competitive product.




4




Non-medical
Applications





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





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





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





We are working towards filing a BLA for
FDA approval of Protectan CBLB502 for non-medical applications by the end of
2010.





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 the Armed Forces Radiobiology
Research Institute, which has also received significant independent funding for
work on Protectan CBLB502.





In March 2008, the U.S. Department of
Defense, or DoD, awarded us a contract valued at up to $8.9 million through the
Chemical Biological Medical Systems Joint Project Management Office Broad Agency
Announcement, or BAA, for selected tasks in the advanced development of
Protectan CBLB502 as a Medical Radiation Countermeasure to treat radiation
injury following exposure to radiation from nuclear or radiological
weapons.





On September 12, 2008, we were awarded a
$774,183 grant from the National Institute of Allergy and Infectious Diseases
(NIAID) of the National Institutes of Health (NIH), to further study certain
mitigating properties of Protectan CBLB502 in the context of hematopoietic
damage from radiation exposure. The grant program, Medical Countermeasures to
Enhance Platelet Regeneration and Increase Survival Following Radiation
Exposure, is funded through the Project BioShield Act of 2004 and administered
by the Department of Health and Human Services.





On September 16, 2008, the Biomedical
Advanced Research and Development Authority (BARDA) of the Department of Health
and Human Services (HHS) awarded us a contract under the Broad Agency
Announcement titled, "Therapies for Hematopoietic Syndrome, Bone Marrow Stromal
Cell Loss, and Vascular Injury Resulting from Acute Exposure to Ionizing
Radiation," for selected tasks in the advanced development of Protectan CBLB502.
The total contract value including all milestone-based options is $13.3 million
over a three-year period, with the first year's award of $3.4 million. BARDA
seeks to acquire developed medical countermeasures that will be clinically
useful in a civilian medical emergency situation that results from or involves
exposure of a large population to the effects of a nuclear detonation, a
radiologic dispersive device (such as a dirty bomb), or exposure to radioactive
material with or without combined injury or trauma.




5




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





We spent approximately $7,264,813 and
$9,885,776 on R&D for the non-medical applications of Protectan CBLB502 in
the fiscal years ended December 31, 2008 and December 31, 2007, respectively.
From our inception to December 31, 2008, we spent approximately $21,601,196 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 even more imminent
threats. The HHS opportunity is particularly positive for us as the agency’s
mandate is to protect theU.S.civilian population in the event of a
radiological emergency, including stockpiling radiation countermeasures for mass
distribution. Our contract awards from the DoD and from BARDA emphasize the
government’s focus on acquiring adequate protection against nuclear and
radiation threats for military and civilian populations. Upon FDA approval, our
Protectan CBLB502 will be well positioned to fulfill both of these needs, with
its demonstrated unprecedented efficacy and survival benefits, unique ability to
address both hematopoietic and 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.




Regulatory Status





Extraordinary radioprotective
properties, an excellent toxicity profile, outstanding stability and cost
efficient production of Protectan CBLB502 make it a primary candidate for
entering formal preclinical and clinical studies. Initially, Protectan CBLB502
will be developed for non-medical purposes — as a radioprotectant antidote for
the protection of people from severe 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 (rodents and non-human
primates). Based upon this expedited approval process, Protectan CBLB502 could
be approved for non-medical applications within 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, orIND, applications and New Drug
Applications, or NDAs, and to provide for accelerated review or approval of
certain medical products for counterterrorism applications, including granting
eligible applications “Fast Track” approval status. The Fast Track designation
ordinarily allows a product to be considered for accelerated approval through
the use of surrogate endpoints to demonstrate effectiveness. As a result of
these provisions, the FDA has broader authority to consider evidence of partial
tumor shrinkage or other surrogate endpoints of clinical benefit in deciding on
approval. This new policy is intended to facilitate the study of cancer
therapies and shorten the total time required for marketing approvals. 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 approval for Protectan CBLB502 for non-medical applications, we have
completed Good Manufacturing Practices compliant (cGMP) manufacturing of
Protectan CBLB502. The yields from the process and the purity of the final
product exceeded our expectations. We were able to develop a complicated,
high-yield manufacturing process for CBLB502 was and were able to 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.




6





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





·
            Performing a Phase I
      dose-escalation human study on a small number of volunteers. We expect to
      complete this study in March 2009 at an approximate cost of
      $1,500,000.





·
            Conducting pivotal animal efficacy
      studies with the cGMP manufactured drug candidate. We expect to complete
      these studies in mid 2010. At the present time, the costs of these studies
      cannot be approximated with any level of
  certainty.





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





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




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.





The DoD also awarded a $1 million grant
to our founding partner, the Cleveland Clinic, 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.




Medical Applications





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





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





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





Consistent with this strategy, we plan
to initiate a Phase I/II study for Protectan CBLB502 in head and neck cancer
patients in mid-2009. The 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 Cleveland Clinic, have
demonstrated that a single injection of Protectan CBLB502 effectively prevents
acute renal failure and subsequent death in a mouse model of
ischemia-reperfusion renal injury.





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





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





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





·
            Submitting an amendment to our
      CBLB502 IND application and receiving allowance from the FDA. We cannot
      estimate with any certainty when the FDA may allow the application. We
      expect to submit the amendment upon the receipt of dedicated federal
      funding. We estimate that the approximate cost of filing will be less than
      $100,000.





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





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





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




We spent approximately $756,227 and
$815,399 on R&D for the medical applications of Protectan CBLB502 in the
fiscal years ended December 31, 2008 and December 31, 2007, respectively. From
our inception to December 31, 2008, we spent approximately $1,776,929 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.





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.




8





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®, Amgen, Inc., Thousand Oaks, California), demonstrated a
stronger efficacy of Protectan CBLB612 as a propagator and mobilizer of HSC in
peripheral blood.





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





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





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





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





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





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





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





·
            Performing a Phase I
      dose-escalation human study;





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





·
            Filing a New Drug
      Application.




At this time, none of the above costs
are reasonably estimitable.





We spent approximately $974,459 and
$1,127,248 on R&D for Protectan CBLB612 in the fiscal years ended December
31, 2008 and December 31, 2007, respectively. From our inception to December 31,
2008, we spent approximately $3,130,374 on R&D for Protectan CBLB612.
Further development and extensive testing will be required to determine its
technical feasibility and commercial viability.




9




Curaxins





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





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





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





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





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





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





We spent approximately $3,233,872 and
$4,708,773 on R&D for curaxins overall in the fiscal years ended December
31, 2008 and December 31, 2007, respectively. From our inception to December 31,
2008, we spent approximately $11,641,592 on R&D for
curaxins.




Curaxin CBLC102





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





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




10





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





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





Thirty-one patients were enrolled in a
Phase II study of CBLC102 as a monotherapy in late stage, hormone-refractory
taxane-resistant prostate cancer.  All patients had previously
received hormonal treatment for advanced prostate cancer and 28 of the 31 had
also previously received chemotherapy.  One patient had a partial
response, while 50% of the patients exhibited a decrease or stabilization in PSA
velocity, a measure of the speed of prostate cancer
progression.  CBLC102 was well tolerated and there were no serious
adverse events attributed to the drug.  The trial demonstrated
indications of activity and a remarkable safety profile in one of the most
difficult groups of cancer patients.




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





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





We spent approximately $1,741,194 and
$2,712,521 on R&D for Curaxin CBLC102 in the fiscal years ended December 31,
2008 and December 31, 2007, respectively. From our inception to December 31,
2008, we spent approximately $6,466,483 on R&D for Curaxin
CBLC102.




Other Curaxins





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





As a result of this comprehensive
hit-to-lead optimization program, we have developed CBLC137, which is a drug
candidate with proprietary composition of matter intellectual property
protection belonging to our next generation of highly improved curaxins. CBLC137
has demonstrated reliable anti-tumor effects in animal models of colon, breast,
renal and prostate cancers.  CBLC137 has favorable pharmacological
characteristics, is suitable for oral administration and demonstrates a complete
lack of genotoxicity.  It shares all of the positive aspects of
CBLC102, but significantly exceeds the former compound’s activity and efficacy
in preclinical tumor models.  CBLC137 is currently undergoing
manufacturing and preclinical toxicology studies in preparation for clinic
trials in 2010.





We spent approximately $1,492,678 and
$1,996,252 on R&D for other curaxins in the fiscal years ended December 31,
2008 and December 31, 2007, respectively. From our inception to December 31,
2008, we spent approximately $5,175,110 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.




11




COLLABORATIVE RESEARCH
AGREEMENTS





ClevelandClinic 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%).




The schedule of milestone payments is as
follows:




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




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.





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 the Armed Forces
Radiobiology Research Institute, or 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 Armed Forces Radiobiology
Research Institute 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.




12





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 Roswell Park Cancer Institute, or 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
ofNew Yorkwill provide us with up to $5 million
of grant and other funding. We established a major research/clinical facility at
the RPCI campus inBuffalo,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.





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.  As is December 31, 2008 we have fully completed one
joint hit-to-lead optimization program with ChemBridge.  As a
resultof 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,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 have filed, on the Cleveland Clinic’s behalf,
thirteen patent applications covering new classes of anticancer and
radiation-protecting compounds, their utility and mode of
action.




13




Our intellectual property platform is
based primarily on these thirteen patent applications exclusively licensed to us
by the Cleveland Clinic and five patent applications, which we have filed and
own exclusively.





The aforementioned thirteen patent
applications licensed from the Cleveland Clinic are as
follows:





·
            Methods of Inhibiting Apoptosis
      Using Latent TFGß;





·
            Methods of Identifying Modulators
      of Apoptosis From Parasites and Uses
  Thereof;





·
            Methods of Inhibiting Apoptosis
      Using Inducers of NF-kB;





·
            Methods of Protecting Against
      Radiation Using Inducers of
NF-kB;





·
            Methods of Protecting Against
      Radiation Using Flagellin;





·
            Small Molecules Inhibitors of MRP1
      and Other Multidrug
Transporters;





·
            Flagellin Related Polypeptides and
      Uses Thereof;





·
            Modulation of Apoptosis Using
      Aminoacridines;





·
            Modulation of Immune
      Responses;





·
            Methods of Protecting Against
      Apoptosis Using
Lipopeptides;





·
            Modulation of Cell
      Growth;





·
            Mitochondrial Cytochrome B;
      and





·
            Methods of Reducing the Effects of
      Reperfusion.




The aforementioned five patent
applications, which we filed, are as follows:





·
            Modulation of Androgen Receptor
      for Treatment of Prostate
Cancer;





·
            Method of Increasing Hematopoietic
      Stem Cells;





·
            Method for Reducing the Effects of
      Chemotherapy Using Flagellin Related
  Polypeptides;





·
            Modulation of Heat Shock Response;
      and





·
            Carbozole Compounds and
      Therapeutic Uses of the
Compounds.




In 2008, four patent applications were
introduced and filed for approval with the U.S. Patent Office. One of the patent
applications is licensed from the Cleveland Clinic and three are licensed to
us.





We review our patent applications on a
continuing basis. In 2008, two patent applications were abandoned. The first was
an application licensed from the Cleveland Clinic titled ‘Activation of p53
and Inhibition of NF-kB for Cancer Treatment’. This patent application was abandoned
due to developing another Curaxin for the same application. The second patent
application was licensed to us and titled ‘Quinacrine
Isomers”.  The
patent application was abandoned due to the discovery of improved
technology.




14




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. or SynCo, 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.





Reliance on third party manufacturing
presents several risks, however,including the
following:





·
            Delays in the delivery of
      quantities needed for multiple clinical trials or failure to manufacture
      such quantities to our specifications, either of which could cause delays
      in clinical trials, regulatory submissions or commercialization of our
      drug candidates;





·
            Inability to fulfill our needs in
      the event market demand for our drug candidates suddenly increases, which
      may require us to seek new manufacturing arrangements, which, in turn,
      could be expensive and time consuming;
  and





·
            Ongoing inspections by the FDA or
      other regulators and other regulatory authorities for compliance with
      rules, regulations and standards, the failure to comply with which may
      subject us to, among other things, product seizures, recalls, fines,
      injunctions, suspensions or revocations of marketing licenses, operating
      restrictions and criminal
prosecution.




GOVERNMENT
REGULATION





The R&D, manufacturing and marketing
of drug candidates are subject to regulation, primarily by the FDA in theU.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.





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 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 anINDapplication with the FDA, showing how
the drug is made and the results of animal testing.INDstatus allows initiation of clinical
investigation within 30 days of filing if the FDA does not respond with
questions during the 30-day period.




15




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 theINDfiling. 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 two animal 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)





Upon successful completion of Phase III
clinical trials, the drug sponsor files an NDA with the FDA for approval,
containing all information that has been gathered. The NDA 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. 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.





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.




16





Sales outside theU.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 theU.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.





We also are subject to the following
risks and obligations relating to government regulation, among
others:





·
            The FDA or foreign regulators may
      interpret data from pre-clinical testing and clinical trials differently
      than we interpret them;





·
            If regulatory approval of a
      product is granted, the approval may be limited to specific indications or
      limited with respect to its distribution. In addition, many foreign
      countries control pricing and coverage under their respective national
      social security systems;





·
            The FDA or foreign regulators may
      not approve our manufacturing processes or manufacturing
      facilities;





·
            The FDA or foreign regulators may
      change their approval policies or adopt new
      regulations;





·
            Even if regulatory approval for
      any product is obtained, the marketing license will be subject to
      continual review, and newly discovered or developed safety or
      effectiveness data may result in suspension or revocation of the marketing
      license;




·
            If regulatory approval of the
      product candidate is granted, the marketing of that product would be
      subject to adverse event reporting requirements and a general prohibition
      against promoting products for unapproved or “off-label”
      uses;





·
            In some foreign countries, we may
      be subject to official release requirements that require each batch of the
      product we produce to be officially released by regulatory authorities
      prior to its distribution by us;
and





·
            We will be
      subject to continual regulatory review and periodic inspection and
      approval of manufacturing modifications, including compliance with current
      GMP regulations.




EMPLOYEES





As of March 16, 2009, we had 33
employees, 31 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.




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., Onconova
Therapeutics, Inc 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.




17





We believe that due to the global
political environment, the level of development advancement is the critical
factor in the marketing of an effective medical radiation countermeasure 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.




Anticancer
Applications





The arsenal of medical
radiation-protectors is limited to ETHYOLTM (amifostine), sold by MedImmune, and
recently 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.




Stem Cell
Mobilization





G-CSF (Neupogen® and Neulast@, Amgen,
Inc.,Thousand
Oaks,California) 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.





Mozibil (Genzyme Corporation (Cambridge,
Massachusetts)is a newly 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., Wayne, New Jersey) 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.




18





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.




19





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;





·
            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 FDA 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 90% of our revenues from
grant and contract development work in connection with grants from the
Department of Defense, NIH, NASA and the Defense Advanced Research Projects
Agency, or DARPA.





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.




20




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.





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 make the product not
      economical; and





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




21




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
research and development 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.




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





We have entered into contracts with
variousU.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 toU.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 theU.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.




22




As aU.S.government contractor, we may become
subject to periodic audits and reviews. Based on the results of these audits,
theU.S.government may adjust our
contract-related costs and fees, including allocated indirect costs. As part of
any such audit or review, theU.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 theU.S.government. We could also suffer
serious harm to our reputation if allegations of impropriety were made against
us. In addition, underU.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 aU.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/IItrials 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.





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.




23




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 theUnited Stateswill 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.




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.





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 salesrevenue. In addition to theextent 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.




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 thirteen patent applications from the
Cleveland Clinic and have filed five patent applications on our own. There can
be no assurance that any of these patent applications 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. Further, we 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.




24





We do not believe that any of the
products we are currently developing infringe upon the rights of any third
parties nor are they 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
from the Cleveland Clinic. 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. 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 theClevelandClinicand other
parties,
we could lose our ability to
developourdrug 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 assure you that such 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 preclude 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.




25




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





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 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, 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 assure that we will be able to
obtain financing when it is needed. Over the past year, 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.




26




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
      economical; 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 Department of Defense, 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 theU.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 theU.S.government does not place sufficient
orders for this product, our future business may be harmed.




27




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, Roswell Park Cancer Institute 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 NASDAQCapitalMarket, other national market
      system or any national stock
exchange;





·
            changes in accounting principles;
      and





·
            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 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.




28




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





We are currently authorized to issue
40,000,000 shares of our common stock and 10,000,000 of our preferred stock As
of December 31, 2008, we had 13,775,805 shares of our common stock and 3,160,974
shares of our preferred stock issued and outstanding, excluding shares issuable
upon the exercise of our outstanding warrants and options. As of March 16, 2009,
we had 14,014,137 shares of our common stockand 3,024,144 sharesof our preferred stock issued and
outstanding and 4,797,396 warrants and 1,938,742 options outstanding. 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 financing 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 at73 High Street,Buffalo,New York14203. 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 at9450 W. Bryn Mawr Rd.,Rosemont,Illinois,60018through July 2011. We do not own any
real property.




Item 3. Legal
Proceedings





As of March 16, 2009, we were not a
party to any litigation or other legal proceeding.




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





Not applicable.




Executive Officers of the Registrant as
of March 16, 2009




Name
              
              Age
              
              PositionMichael
      Fonstein. Ph.D.
              
              49
              
              President
      and Chief Executive OfficerAndrei
      Gudkov, Ph.D., D.Sci.
              
              52
              
              Chief
      Scientific OfficerYakov
      Kogan, Ph.D.
              
              35
              
              Chief
      Operating OfficerJohn
      A. Marhofer, Jr., CMA, CFM
              
              46
              
              Chief
      Financial Officer


The Board of Directors appoints all
executive officers annually and such officers serve at the discretion of the
Board of Directors. There is no family relationship between or among any of the
executive officers or directors.





Michael Fonstein,
Ph.D. Dr.Fonstein has served as our Chief
Executive Officer, President, and as one of our directors since our inception in
June 2003. He served as Director of theDNASequencingCenterat theUniversityofChicagofrom its creation in 1994 to 1998, when
he left to found Integrated Genomics, Inc. located inChicago,Illinois. He served as CEO and President of
Integrated Genomics from 1997 to 2003. Dr. Fonstein has won several business
awards, including the Incubator of the Year Award from the Association of
University Related Research Parks. He was also the winner of a coveted KPMG
Illinois High Tech Award.





Andrei Gudkov,
Ph.D., D. Sci.Dr. Gudkov
has served as one of our directors and as our Chief Scientific Officer since our
inception in June 2003. Prior to 1990, he worked at The National Cancer Research
Center inMoscow, where he led a broad research program
focused on virology and cancer drug resistance. In 1990, he reestablished his
lab at theUniversityofIllinoisatChicagowhere he became a tenured faculty
member in the Department of Molecular Genetics. His lab concentrated on the
development of new functional gene discovery methodologies and the
identification of new candidate cancer treatment targets. In 1999, he defined
p53 as a major determinant of cancer treatment side effects and suggested this
protein as a target for therapeutic suppression. In 2001, Dr. Gudkov moved his
laboratory to the Lerner Research Institute at the Cleveland Clinic where he
became Chairman of the Department of Molecular Biology and Professor of
Biochemistry atCaseWestern ReserveUniversity. In May 2007, Dr. Gudkov became Senior
Vice President of Research Programming and Development for Roswell Park Cancer
Institute. He continues in his capacity as a consultant with
CBLI.




29





Yakov Kogan,
Ph.D.Dr.Kogan has served as one of our
directors since our inception in June 2003, as Secretary since March 2006, and
as Chief Operating Officer since February 2008. Dr. Kogan also served as our
Executive Vice President of Business Development from our inception until
February 2008. From 2002 to 2003, as Director for Business Development at
Integrated Genomics, he was responsible for commercial sales and expansion of
the company’s capital base. Prior to his tenure in business development, Dr.
Kogan worked as a Group Leader/Senior Scientist at Integrated Genomics and
ThermoGen, Inc. and as Research Associate at theUniversityofChicago. Dr. Kogan holds a Ph.D. degree in
Molecular Biology from All-Union Research Institute of Genetics and Selection of
Industrial Microorganisms (VNIIGenetika) (Moscow,Russia), as well as an MBA degree from theUniversityofChicago Graduate School Of
Business.





John (Jack) A.
Marhofer, Jr., CMA, CFMMr.
Marhofer joined us as Controller and General Manager in February 2005 and was
subsequently appointed to be our Chief Financial Officer in August 2005. He was
Corporate Controller of Litehouse Products, Inc. from June 2001 to February
2005. Mr. Marhofer earned his Bachelor of Science in Accounting and Marketing
fromMiamiUniversityinOhioin 1984, and his Masters in Business
Administration in Finance fromAkronUniversityinOhioin 1997, where he was named to the
National Honor Society of the Financial Management
Association.




30





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.








Common Stockholders





As of December 31, 2008, 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, 2008.




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 2008 and 2007. On March 16, 2009,
the last reported sale price of our common stock was $1.40 per
share.




2008
              
              High
              
              
              LowFirst
      Quarter
              
              $
              8.79
              
              
              $
              2.03Second
      Quarter
              
              $
              6.40
              
              
              $
              3.82Third
      Quarter
              
              $
              5.65
              
              
              $
              3.70Fourth
      Quarter
              
              $
              4.59
              
              
              $
              1.51
 2007
                
                High
                
                
                LowFirst
      Quarter
                
                $
                13.99
                
                
                $
                4.49Second
      Quarter
                
                $
                11.98
                
                
                $
                8.00Third
      Quarter
                
                $
                13.89
                
                
                $
                9.10Fourth
      Quarter
                
                $
                13.07
                
                
                $
                6.64




31





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)2008
              
              
              2007
              
              
              2006
              
              
              2005
              
              
              2004Total
      Operating Revenue
              
              $
              4,706
              
              
              $
              2,019
              
              
              $
              1,708
              
              
              $
              1,139
              
              
              $
              636Government
      contract or grant
              
              
              4,586
              
              
              
              1,729
              
              
              
              1,503
              
              
              
              1,000
              
              
              
              531Commercial
              
              
              120
              
              
              
              290
              
              
              
              205
              
              
              
              139
              
              
              
              105Net
      loss
              
              $
              (14,026
              )
      (1)
              
              $
              (26,997
              )
      (1)
              
              $
              (7,223
              )
      (1)
              
              $
              (2,678
              )
      (1)
              
              $
              (2,523
              )Net
      loss per share, basic and diluted
              
              $
              (1.13
              )
              
              $
              (2.34
              )
              
              $
              (0.84
              )
              
              $
              (0.43
              )
              
              $
              (0.55
              )Total
      assets
              
              $
              4,706
              
              
              $
              17,422
              
              
              $
              6,417
              
              
              $
              4,253
              
              
              $
              382Long-term
      debt
              
              
              -
              
              
              
              -
              
              
              
              50
              
              
              
              303
              
              
              
              334Stockholder's
      equity (deficit)
              
              
              538
              
              
              
              14,194
              
              
              
              5,593
              
              
              
              3,557
              
              
              
              (374
              )





We have not paid any dividends on common
stock.


All per share amounts reflect the
596-to-1 stock split that was effected in 2004.





(1)
              Net loss in 2008, 2007, 2006 and
      2005 included employee stock-based compensation costs of $1.5 million,
      $7.8 million, $0.5 million and $0.3 million, net of tax, respectively, due
      to our adoption of Statement of Financial Accounting Standards No.
      123(R),“Share-Based
      Payment,”on a
      modified prospective basis on January 1, 2005. No employee stock-based
      compensation expense was recognized in reported amounts in any period
      prior to January 1,
2005.




32





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 and the Company’s
other SEC filings under the heading “Risk Factors.” 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.




Overview





We incorporated inDelawareand commenced business operations in
June 2003. We secured a $6,000,000 investment via a private placement of Series
A Preferred Stock in March 2005. On July 20,2006, we sold 1,700,000 shares of common
stock in our initial public offering at $6.00 per share. The net proceeds from
this offering were approximately $8,300,000. Beginning July 21, 2006, our common
stock was listed on the NASDAQ Capital Market and on the Boston Stock Exchange
under the symbols “CBLI” and “CFB” respectively. On August 28, 2007, trading of
our stock moved from the NASDAQ Capital Market to the NASDAQ Global Market. In
September 2007, we ceased our listing on the Boston Stock Exchange. On November
28, 2008, trading of our common stock transferred from the NASDAQ Global Market
to the NASDAQ Capital Market.





On September 21, 2006, the SEC declared
effective a registration statement of the Company registering up to 4,453,601
shares of common stock for resale from time to time by the selling stockholders
named in the prospectus contained in the registration statement. We will not
receive any proceeds from the sale of the underlying shares of common stock,
although to the extent the selling stockholders exercise warrants for the
underlying shares of common stock, we will receive the exercise price of those
warrants. The registration statement was filed to satisfy registration rights
that we had previously granted in connection with our Series A Preferred
transaction.





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
aggregate purchase price paid by the investors for the Series B Preferred and
Series B Warrants was approximately $30,000,000. Afterrelated fees and expenses, we received
net proceeds of approximately $29,000,000. We intend to use the proceeds for
general corporate and working capital purposes.





The Series B Preferred have an initial
conversion price of $7.00 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. Based on the closing price of our stock on March 16, 2007 of
$10.19, the Series B Preferred sold to investors and issued to certain of the
Agents had a market value of $46,660,112. The Series B Warrants have 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 is reduced as a result
of certain anti-dilution protections, the number of shares of common stock into
which the Series B Preferred are convertible and for which the Series B Warrants
are exercisable may increase.





We also issued to the placement agents
in the private placement, as compensation for their services, Series B
Preferred, Series B Warrants, and Series C Warrants. The agents collectively
received Series B Preferred that are convertible into an aggregate of 290,298
shares of common stock, Series B Warrants that are exercisable for an aggregate
of 221,172 shares of our common stock, and Series C Warrants that are
exercisable for 267,074 shares of our common stock. The Series C Warrants have
an exercise price of $11.00 per share, and are also subject to antidilution
protections that could increase the number of shares of common stock for which
they are exercisable.





In total, the securities issued in the
private placement were convertible into, or exercisable for, up to approximately
7,211,612 shares of common stock (subject to adjustments for stock splits,
anti-dilution, etc.). As of March 16, 2009 the securities issued in the
transaction, in the aggregate, were convertible into or exercisable forapproximately6,249,469 sharesof common stock that remain outstanding
(subject to adjustments for stock splits, anti-dilution,
etc.).




33





Proceeds from these transactions,
together with grants we have received, have supported our R&D activities
through December 31, 2008. We are actively seeking new grants and co-development
contacts with premier pharmaceutical partners to support further development of
other promising leads resulting from our R&D program.




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 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 are issuable upon conversion of Series B Preferred and
1,797,484 shares are issuable upon exercise of the Series B Warrants. We will
not receive any proceeds from the sale of the underlying shares of common stock,
although to the extent the selling stockholders exercise warrants for the
underlying shares of common stock, we will receive the exercise price of those
warrants. The registration statement was filed to satisfy registration rights
that we had previously granted.  Subsequent to the effectiveness of
the registration statement, 1,418,036 Series B Preferred were converted and
$321,293 in dividends earned have been accrued as of December 31,
2008.




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 theU.S., or GAAP. The preparation of these
financial statements requires us to make estimates and judgments that affect the
reported amounts of our assets, liabilities, revenues, expenses and other
reported disclosures. We base our estimates on historical experience and on
various other assumptions that we believe are reasonable under the
circumstances.





Note 2 to our financial statements
include disclosure of our significant accounting policies. 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 income taxes could be considered
critical.




Revenue Recognition





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





Government contract and grant revenue is
recognized using two different methods depending on the type of contract or
grant. Cost reimbursement contracts and 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, revenue is recognized during the period that the
costs were incurred.





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





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





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




34





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, 2008, $50,000 has been
paid to CCF for milestone payments relating to the filing of an IND with the FDA
for Curaxin CBLC102, $250,000 has been paid to CCF as a result of commencing
Phase II clinical trials for Curaxin CBLC102 and $50,000 has been paid to CCF
relating to the filing of an IND with the FDA for Protectan CBLB502. Once a drug
receives regulatory approval, we will record any subsequent milestone payments
in identifiable intangible assets, less accumulated amortization, and amortize
them evenly over the remaining agreement term or the expected drug life cycle,
whichever is shorter.




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 general and administrative expenses at that
time.





Through December 31, 2007, we had
capitalized $459,102 in expenditures associated with the preparation, filing and
maintenance of certain of our patents. For the year ending December 31, 2008, we
capitalized an additional $333,995.  In addition, the company
abandoned two patent applications and expensed $60,046 to selling, general and
administrative expenses.  This resulted in a balance of $733,051 in
expenditures associated with the filing and maintenance of certain patents as a
December 31, 2008 capitalized balance for intellectual
property.




Stock-based
Compensation





The Financial Accounting Standards Board
(FASB) issued SFAS No. 123(R) requiring all share-based payments to employees,
including grants of employee stock options, be recognized in the statement of
operations based at their fair values. Accordingly, effective January 1, 2005,
we value employee stock based compensation under the provisions of SFAS 123(R)
and related interpretations.





The fair value of each stock option
granted is estimated on the grant date using the Black-Scholes option valuation
model or the Monte Carlo Simulation depending on the terms and conditions
present within the specific option being valued.The Black-Scholes option valuation model
was developed for use in estimating the fair value of traded options that have
no vesting restrictions and are fully transferable. In addition, the
Black-Scholes valuations model requires the input of highly subjective
assumptions including the expected stock price volatility. Because our employee
stock options have characteristics significantly different from those of traded
options, and because changes in subjective input assumptions can materially
affect the fair value estimate, in management’s opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of our
options. For those stock options where market conditions are present within the
stock options, we utilizeMonte Carlosimulation to value the stock options.
There was one issuance in the fiscal year ended December 31, 2007, for a total
of 90,000 options to an outside consultant whereMonte Carlosimulation was used to value the
issuance.





On March 1, 2006, we granted 116,750
options pursuant to stock award agreements to certain employees and key
consultants. On July 20, 2006, we granted a total of 45,000 fully-vested, stock
options to our new independent board members (Messrs. Antal, Kasten, and Perez)
pursuant to stock award agreements.





In the fiscal year ended December 31,
2007, we granted 520,000 options pursuant to stock award agreements to certain
employees and key consultants. On June 12, 2007 we granted 140,000 fully- vested
stock options to the independent board members (Messrs. Antal, DiCorleto,
Kasten, and Perez) pursuant to stock award agreements.





In the fiscal year ended December 31,
2008, we granted 857,721 options pursuant to stock award agreements to certain
employees and key consultants.   On April 29, 2008 we granted
140,000 fully-vested stock options to the independent board members (Messrs.
Antal, DiCorleto, Kasten, and Perez) pursuant to stock award
agreements.  In addition, during the fiscal year ended December 31,
2008, we issued 130,000 restricted shares to certain key employees and key
consultants and granted an additional 15,000 restricted shares to a key employee
that vest over a three year period.




35





We recognized a total of $828,377,
$3,401,499, and $506,078 in expense for options for the years ended December 31,
2008, 2007 and 2006 respectively. For the year ended December 31, 2008, we
recognized a total of $626,500 in expense for shares issued and a total of
$72,722 in expense related to the amortization of restricted
shares.  For the year ended December 31, 2007 and 2006, the Company
recognized a total of $1,700,450 and $0, respectively, in expense for shares
issued to various consultants.





The weighted average, estimated grant
date fair values of stock options granted during the years ended December 31,
2008, 2007 and 2006 were $3.16, $6.08 and $3.14,
respectively.




Income Taxes





The Company accounts for income taxes in
accordance with Statement of Financial Accounting Standards No. 109 “Accounting
for Income Taxes,” which requires an asset and liability approach to financial
accounting and reporting for income taxes.  Deferred tax assets and
liabilities are recognized for the estimated future tax consequences
attributable to operating loss and tax credit carryforwards, and temporary
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases.  Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those operating loss carryforwards and
temporary differences are expected to be recovered or settled.  The
effect on deferred income tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment
date.  A valuation allowance is established, if necessary, to reduce
the deferred tax asset to the amount that will, more likely than not, be
realized.  The Company accounts for interest and penalties related to
uncertain tax positions as part of its provision for income
taxes.




Impact of Recently Issued Accounting
Pronouncements





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





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





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





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




36





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





In December 2007, the FASB issued
Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements
— An Amendment of ARB No. 51, or SFAS 160. SFAS 160 establishes new accounting
and reporting standards for the noncontrolling interest in a subsidiary and for
the deconsolidation of a subsidiary. Specifically, SFAS 160 requires the
recognition of a noncontrolling interest (minority interest) as equity in the
consolidated financial statements and separate from the parent's equity. The
amount of net income attributable to the noncontrolling interest will be
included in consolidated net income on the face of the income statement. In
addition, SFAS 160 requires that a parent recognize a gain or loss in net income
when a subsidiary is deconsolidated. Such gain or loss will be measured using
the fair value of the noncontrolling equity investment on the deconsolidation
date. SFAS 160 also includes expanded disclosure requirements regarding the
interests of the parent and its noncontrolling interest. SFAS 160 is effective
for fiscal years, and interim periods within those fiscal years, beginning on or
after December 15, 2008. We do not expect a material impact from the adoption of
SFAS 160.





In December 2007, the FASB issued
Statement No. 141 (revised 2007),Business
Combinations("SFAS
141(R)"), which replaces SFAS 141. SFAS 141(R) requires an acquiring entity to
recognize all the assets acquired and liabilities assumed in a transaction at
the acquisition-date fair value with limited exceptions. In addition, SFAS
141(R) will require acquisition costs to be expensed as incurred, acquired
contingent liabilities will be recorded at fair value at the acquisition date
and subsequently measured at either the higher of such amount or the amount
determined under existing guidance for non-acquired contingencies, in-process
research and development will be recorded at fair value as an indefinite-lived
intangible asset at the acquisition date, restructuring costs associated with a
business combination will be generally expensed subsequent to the acquisition
date and changes in deferred tax asset valuation allowances and income tax
uncertainties after the acquisition date generally will affect income tax
expense. SFAS 141(R) also includes a substantial number of new disclosure
requirements. SFAS 141(R) is effective prospectively to business combinations
for which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008. We anticipate that the
prospective application of the provisions of SFAS 141(R) could have a material
impact on the fair values assigned to assets and liabilities of any future
acquisitions.





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





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




37





Results of
Operations





Our operating results for the past three
fiscal years have been nominal. The following table sets forth our statement of
operations data for the years ended December 31, 2008, 2007 and 2006 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
              
              Year
      Ended
              
              Year
      EndedDecember
      31,
              
              December
      31,
              
              December
      31,2008
              
              2007
              
              2006Revenues
              
              $
              4,705,597
              
              
              $
              2,018,558
              
              
              $
              1,708,214Operating
      expenses
              
              
              19,050,965
              
              
              
              27,960,590
              
              
              
              9,126,315Other
      expense (income)
              
              
              (59,597
              )
              
              
              2,058,236
              
              
              
              -Net
      interest expense (income)
              
              
              (259,844
              )
              
              
              (1,003,766
              )
              
              
              (195,457
              )Net
      income (loss)
              
              $
              (14,025,927
              )
              
              $
              (26,996,502
              )
              
              $
              (7,222,644
              )




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





Revenue





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





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




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


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




38





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





Operating Expenses





Operating expenses have historically
consisted of costs relating to R&D and general and administrative expenses.
R&D expenses have consisted mainly of supporting our R&D teams, process
development, sponsored research at the Roswell Park Cancer Institute and the
Cleveland Clinic, clinical trials and consulting fees. We plan to incur only
those R&D costs that are properly funded, either through a government
contract or grant or other capital sources such as direct investment. General
and administrative expenses include all corporate and administrative functions
that serve to support our current and future operations while also providing an
infrastructure to support future growth. Major items in this category include
management and staff salaries, rent/leases, professional services and
travel-related expenses. Some of these costs will be funded through government
contracts and grants that provide indirect cost reimbursement for certain
indirect costs such as fringe benefits, overhead and general and administrative
expenses.





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





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





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




Year Ended
              
              
              Year Ended
              
              
              Year Ended
              
              
              TotalDecember
31,
              
              
              December
31,
              
              
              December
31,
              
              
              Since2008
              
              
              2007
              
              
              2006
              
              
              InceptionResearch
      and development
              
              $
              13,160,812
              
              
              $
              17,429,652
              
              
              $
              6,989,804
              
              
              $
              43,256,722General
              
              $
              931,441
              
              
              $
              892,456
              
              
              $
              378,113
              
              
              $
              5,106,630Protectan
      CBLB502 - non-medical applications
              
              $
              7,264,813
              
              
              $
              9,885,776
              
              
              $
              3,574,593
              
              
              $
              21,601,196Protectan
      CBLB502 - medical applications
              
              $
              756,227
              
              
              $
              815,399
              
              
              $
              144,369
              
              
              $
              1,776,929Protectan
      CBLB612
              
              $
              974,459
              
              
              $
              1,127,248
              
              
              $
              466,715
              
              
              $
              3,130,374Curaxin
      CBLC102
              
              $
              1,741,194
              
              
              $
              2,712,521
              
              
              $
              1,372,998
              
              
              $
              6,466,483Other
      Curaxins
              
              $
              1,492,678
              
              
              $
              1,996,252
              
              
              $
              1,053,016
              
              
              $
              5,175,110
  39


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





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




Year Ended December 31, 2007 Compared to
Year Ended December 31, 2006





Revenue





Revenue increased from $1,708,214 for
the year ended December 31, 2006 to $2,018,558 for the year ended December 31,
2007, representing an increase of $310,344 or 18.2%, resulting primarily from an
increase in revenue from various grants including the sponsored research
agreement with RPCI, the DTRA contract, and the NCI contract. As the term of the
BioShield grant ended, the proceeds from the BioShield grant were $0 for the
year ended December 31, 2007 as compared to $1,100,293 for the year ended
December 31, 2006.





Operating Expenses





Operating expenses increased from
$9,126,315 for the year ended December 31, 2006 to $27,960,590 for the year
ended December 31, 2007. This represents an increase of $18,834,275 or 206.4%.
We recognized a total of $7,789,305 of non-cash compensation for stock based
compensation for the year December 31, 2007 compared to $506,078 for the year
ended December 31, 2006. If these non-cash stock based compensation expenses
were excluded, operating expenses would have increased from $8,620,237 for the
year ended December 31, 2006 to $20,171,285 for the year ended December 31,
2007. This represents an increase in operating expenses of $11,551,048 or
134.0%.





This increase resulted primarily from an
increase in R&D expenses from $6,989,804 for the year ended December 31,
2006 to $17,429,652 for the year ended December 31, 2007, an increase of
$10,439,848 or 149.4%. The higher R&D expenses were incurred as a result of
increasing the number of research and development personnel, commencing clinical
trials for CBLC102 and completing the cGMP manufacturing of CBLB502. We
recognized a total of $250,682 of non-cash compensation for R&D stock based
compensation for the year ended December 31, 2006 compared to $1,836,787 for the
year ended December 31, 2007. Without the non-cash stock based compensation, the
R&D expenses increased from $6,739,122 for the year ended December 31, 2006
to $15,592,865 for the year ended December 31, 2007; an increase of $8,853,743
or 131.4%.





In addition, general and administrative
expenses increased from $2,136,511 for the year ended December 31, 2006 to
$10,530,938, for the year ended December 31, 2007. This represents an increase
of $8,394,427 or 392.9%. These higher general and administrative expenses were
incurred as a result of creating and improving the infrastructure of the company
and the costs associated with being a publicly traded company. We recognized a
total of $255,396 of non-cash stock-based compensation for general and
administrative compensation for the year ended December 31, 2006 compared to
$5,952,517 for the year ended December 31, 2007. Without the non-cash stock
based compensation, the general and administrative expenses increased from
$1,881,115 for the year ended December 31, 2006 to $4,578,421 for the year ended
December 31, 2007; an increase of $2,697,306 or 143.4%.





Liquidity and Capital
Resources





We have incurred annual operating losses
since our inception, and, as of December 31, 2008 we had an accumulated deficit
of $56,246,173.  Our principal sources of liquidity have been cash
provided by sales of our securities, and government grants, contracts and
agreements. Our principal uses of cash have been R&D and working capital. We
expect our future sources of liquidity to be primarily government 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.




40





Net cash used in operating activities
totaled $12,121,102 for the year ended December 31, 2008, compared to
$16,607,922 used in operating activities for the same period in 2007. This
decrease in cash used in operating activities resulted from a reduction in our
net loss due to increase contract and grant revenues.  Net cash used
in operating activities totaled $6,653,602 for the same period in
2006.





Net cash used in investing activities
was $558,407 for the year ended December 31, 2008 and $442,523 used for the same
period in 2007. The increase in cash used for investing activities resulted
primarily from an increase in the investment in intellectual property and the
reduction in proceeds from the maturity of short term investment as compared to
2007. Net cash used in investing activities was $14,281 for the same period in
2006.





Net cash used in financing activities
totaled $1,232,831 for the year ended December 31, 2008, compared to $28,200,591
provided by financing activities for the 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.
Net cash provided by financing activities totaled $8,523,414 for the same period
in 2006. The funds provided for the year ended December 31, 2006 were
attributable primarily to the net proceeds from our initial public offering in
July 2006.





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




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


As of December 31, 2008, we had accrued
and paid $50,000 for the milestone payment relating to the filing of the IND
application for Curaxin CBLC102, $50,000 for the milestone related to the filing
of the IND application for Protectan CBLB502 and $250,000 for the milestone
payment relating to starting a Phase II hormone-refractory prostate cancer
clinical trial for Curaxin CBLC102.





Our agreement with CCF also provides for
payment by us to the 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.





To more effectively match short-term
investment maturities with cash flow requirements, we have obtained a working
capital line of credit, which is fully secured by our short-term investments.
This line of credit has an interest rate of prime, a borrowing limit of
$1,000,000 and expires on September 25, 2009. At December 31, 2008, there were
no outstanding borrowings under this credit facility.





We believe that existing cash resources
will be sufficient to finance our currently planned operations for the near-term
(approximately 12-24 months), such 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.




41





The following factors, among others,
could cause actual results to differ from those indicated in the above
forward-looking statements: the results of our R&D efforts, the timing and
success of preclinical testing, the timing and success of any clinical trials we
may commence in the future, the timing of and responses to regulatory
submissions, the amount of cash generated by our operations, the amount of
competition we face, and how successful we are in obtaining any required
licenses and entering into collaboration arrangements.




Subsequent Event





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


The
aggregate purchase price paid by the Purchasers for the Shares and the Warrants
was approximately $5,428,307 (representing $10,000 for each Share together with
a Warrant).  After related fees and expenses, the Company received net
proceeds of approximately $4,460,000.  The Company intends to use the
proceeds for working capital purposes.
 
 In
consideration for its services as exclusive placement agent, Garden State
Securities, Inc. (“GSS”), received cash compensation and Warrants to purchase an
aggregate of approximately 387,736 shares of Common Stock.  In the
aggregate, Series D Preferred and Warrants issued in the transaction (including
those issued to GSS) are convertible into, and exercisable for, approximately
8,142,508 shares of Common Stock. Each share of Series D Preferred is
convertible into a number of shares of Common Stock equal to (1) the stated
value of the share ($10,000), divided by (2) $1.40, subject to adjustment as
discussed below (the “Conversion Price”).
 
 The
Series D Preferred ranks junior to the Company’s Series B Convertible Preferred
Stock (“Series B Preferred”) and senior to all shares of Common Stock and other
capital stock of the Company.
 
 If the
Company does not meet certain milestones, the Conversion Price will, unless the
closing price of the Common Stock is greater than $3.69 on the date the
Milestone is missed, be reduced to 80% of the Conversion Price in effect on that
date (the “Milestone Adjustment”).  In addition to the Milestone
Adjustment, (a) on August 13, 2009 (the “Initial Adjustment Date”), the
Conversion Price shall be reduced to 95% of the then Conversion Price, and (b)
on each three month anniversary of the Initial Adjustment Date (each, an
“Adjustment Date”), the then Conversion Price shall be reduced by $0.05 (subject
to adjustment) until maturity.  The Conversion Price is also subject
to proportional adjustment in the event of any stock split, stock dividend,
reclassification or similar event with respect to the Common Stock and to
anti-dilution adjustment in the event of any Dilutive Issuance (as defined in
the Certificate of Designation).
 
 If the
closing price for each of any 20 consecutive trading days after the effective
date of the initial registration statement filed pursuant to the Registration
Rights Agreement (as defined below) (the “Effective Date”) exceeds 300% of the
then effective Conversion Price and various other equity conditions are
satisfied, the Series D Preferred will automatically convert into shares of
Common Stock.
 
 At any
time after February 13, 2012, the Company may, if various equity conditions are
satisfied, elect either to redeem any outstanding Series D Preferred in cash or
to convert any outstanding Series D Preferred into shares of Common Stock at the
conversion rate then in effect.
 
 If the
Company receives any cash funds after February 13, 2009 from fees, royalties or
revenues as a result of the license of any of its intellectual property (such
net proceeds the “IP Proceeds”), cash funds from development grants from any
government agency for the development of anti-cancer applications of any of the
Company’s curaxin compounds or anti-cancer or biodefense applications for the
Company’s CBLB502 compound (the “Governmental Grant Proceeds”) or allocates cash
proceeds to its Escrow Account (as defined in the Purchase Agreement) (the
“Company Allocation”), then the Company must deposit 40% of the IP Proceeds, 20%
of the Governmental Grant Proceeds and the Company Allocation into an escrow
account (the “Sinking Fund”).  At any time after the later of the
Effective Date and the 6-month anniversary of the initial contribution by the
Company to the Sinking Fund, but no more than once in every six-month period,
the Company will be required to use the funds then in the Sinking Fund to redeem
outstanding shares of Series D Preferred, from the holders on a pro rata basis,
at a premium of 15% to the stated value through February 13, 2010, and 20%
thereafter.




42





Immediately
after the completion of the transactions contemplated by the Purchase Agreement,
the conversion price of the Company’s Series B Preferred was adjusted, pursuant
to weighted-average anti-dilution provisions, to $4.67, causing the conversion
rate of Series B Preferred into Common Stock to change to approximately
1-to-1.49893.  In addition, the exercise prices of the Company’s
Series B Warrants and Series C Warrants were adjusted, pursuant to
weighted-average anti-dilution provisions, to $6.79 and $7.20, respectively,
from the original exercise prices of $10.36 and $11.00. In addition to the
adjustment to the exercise prices of the Series B Warrants and the Series C
Warrants, the aggregate number of shares issuable upon exercise of the Series B
Warrants and the Series C Warrants increased to 3,609,261and 408,032,
respectively, from 2,365,528and 267,074. Certain
other warrants issued prior to the Company’s initial public offering were also
adjusted pursuant to anti-dilution provisions contained in those warrants such
that their per share exercise price reduced from $2.00 to $1.48 and the
aggregate number of shares of Common Stock issuable increased from approximately
281,042 to approximately 379,787.





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, 2008, we are obligated to make
payments under these agreements of 916,354 Euros and 39,100 Great British
Pounds. 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.




43





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 in 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% or the Federal Funds Effective Rate in effect plus 0.50%. As of
December 31, 2008, we had not drawn on this facility.





Foreign Currency
Risk.As of December 31,
2008, 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 and the British Pound.  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 theUnited Statesand 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 consolidated financial
position, results of operations or cash flows.




44





Item 8: Financial Statements and
Supplementary Data









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, 2008and 2007, 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, 2008. 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, 2008and 2007, and the results of its operations and
its cash flows for each of the years in the three-year period ended December 31,
2008in conformity with accounting
principles generally accepted in the United States of
America.





MEADEN & MOORE,
LTD.


Certified Public
Accountants





Cleveland,Ohio


March27, 2009




45




CLEVELAND
      BIOLABS, INC.BALANCE
      SHEETSDecember
      31, 2008 and December 31, 2007December
      31
              
              
              December
      312008
              
              
              2007ASSETSCURRENT
      ASSETSCash
      and equivalents
              
              $
              299,849
              
              
              $
              14,212,189Short-term
      investments
              
              
              1,000,000
              
              
              
              1,000,000Accounts
      receivable:Trade
              
              
              1,043,821
              
              
              
              163,402Interest
              
              
              9,488
              
              
              
              50,042Other
      prepaid expenses
              
              
              510,707
              
              
              
              325,626Total
      current assets
              
              
              2,863,865
              
              
              
              15,751,259EQUIPMENTComputer
      equipment
              
              
              309,323
              
              
              
              258,089Lab
      equipment
              
              
              1,102,465
              
              
              
              966,517Furniture
              
              
              312,134
              
              
              
              274,9031,723,922
              
              
              
              1,499,509Less
      accumulated depreciation
              
              
              637,840
              
              
              
              313,4891,086,082
              
              
              
              1,186,020OTHER
      ASSETSIntellectual
      property
              
              
              733,051
              
              
              
              459,102Deposits
              
              
              23,482
              
              
              
              25,445756,533
              
              
              
              484,547TOTAL
      ASSETS
              
              $
              4,706,480
              
              
              $
              17,421,826


46




CLEVELAND
      BIOLABS, INC.BALANCE
      SHEETSDecember
      31, 2008 and December 31, 2007December
      31
              
              
              December
      312008
              
              
              2007LIABILITIES AND
      STOCKHOLDERS' EQUITYCURRENT
      LIABILITIESAccounts
      payable
              
              $
              1,101,961
              
              
              $
              710,729Deferred
      revenue
              
              
              2,365,312
              
              
              
              1,670,610Dividends
      payable
              
              
              321,293
              
              
              
              396,469Accrued
      expenses
              
              
              379,653
              
              
              
              449,774Total
      current liabilities
              
              
              4,168,219
              
              
              
              3,227,582STOCKHOLDERS'
      EQUITYSeries
      B convertible preferred stock, $.005 par valueAuthorized
      - 10,000,000 shares at December 31, 2008and
      December 31, 2007Issued
      and outstanding 3,160,974 and 3,870,267shares
      at December 31, 2008 and December 31, 2007, respectively
              
              
              15,805
              
              
              
              19,351Additional
      paid-in capital
              
              
              19,918,696
              
              
              
              24,383,695Common
      stock, $.005 par valueAuthorized
      - 40,000,000 shares at December 31, 2008and
      December 31, 2007Issued
      and outstanding 13,775,805 and 12,899,241shares
      at December 31, 2008 and December 31, 2007, respectively
              
              
              68,879
              
              
              
              64,496Additional
      paid-in capital
              
              
              36,781,054
              
              
              
              30,764,914Accumulated
      deficit
              
              
              (56,246,173
              )
              
              
              (41,038,212
              )Total
      stockholders' equity
              
              
              538,261
              
              
              
              14,194,244TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY
              
              $
              4,706,480
              
              
              $
              17,421,826


47




CLEVELAND
      BIOLABS, INC.STATEMENTS
      OF OPERATIONSYears
      Ended December 31, 2008, 2007, and 2006December
      31
              
              
              December
      31
              
              
              December
      312008
              
              
              2007
              
              
              2006REVENUESContract
      and Grant
              
              $
              4,585,597
              
              
              $
              1,728,558
              
              
              $
              1,503,214Service
              
              
              120,000
              
              
              
              290,000
              
              
              
              205,0004,705,597
              
              
              
              2,018,558
              
              
              
              1,708,214OPERATING
      EXPENSESResearch
      and development
              
              
              13,160,812
              
              
              
              17,429,652
              
              
              
              6,989,804Selling,
      general and administrative
              
              
              5,890,153
              
              
              
              10,530,938
              
              
              
              2,136,511Total
      operating expenses
              
              
              19,050,965
              
              
              
              27,960,590
              
              
              
              9,126,315LOSS
      FROM OPERATIONS
              
              
              (14,345,368
              )
              
              
              (25,942,032
              )
              
              
              (7,418,101
              )OTHER
      INCOMEInterest
      income
              
              
              259,844
              
              
              
              1,004,853
              
              
              
              206,655Buffalo
      relocation reimbursement
              
              
              220,000
              
              
              
              -
              
              
              
              -Sublease
      revenue
              
              
              12,475
              
              
              
              4,427
              
              
              
              -Gain
      on disposal of fixed assets
              
              
              1,394
              
              
              
              -
              
              
              
              -Gain
      on investment
              
              
              3,292
              
              
              
              -
              
              
              
              -Total
      other income
              
              
              497,005
              
              
              
              1,009,280
              
              
              
              206,655OTHER
      EXPENSEInterest
      expense
              
              
              -
              
              
              
              1,087
              
              
              
              11,198Corporate
      relocation
              
              
              177,564
              
              
              
              1,741,609
              
              
              
              -Loss
      on disposal of fixed assets
              
              
              -
              
              
              
              15,575
              
              
              
              -Loss
      on investment
              
              
              -
              
              
              
              305,479
              
              
              
              -177,564
              
              
              
              2,063,750
              
              
              
              11,198NET
      LOSS
              
              
              (14,025,927
              )
              
              
              (26,996,502
              )
              
              
              (7,222,644
              )DIVIDENDS
      ON CONVERTIBLE PREFERRED STOCK
              
              
              (1,182,033
              )
              
              
              (1,265,800
              )
              
              
              (214,928
              )NET
      LOSS AVAILABLE TO COMMON STOCKHOLDERS
              
              $
              (15,207,960
              )
              
              $
              (28,262,302
              )
              
              $
              (7,437,572
              )NET
      LOSS AVAILABLE TO COMMON STOCKHOLDERSPER
      SHARE OF COMMON STOCK - BASIC ANDDILUTED
              
              $
              (1.13
              )
              
              $
              (2.34
              )
              
              $
              (0.84
              )WEIGHTED
      AVERAGE NUMBER OF SHARES USEDIN
      CALCULATING NET LOSS PER SHARE, BASIC ANDDILUTED
              
              
              13,492,391
              
              
              
              12,090,430
              
              
              
              8,906,266


48
 
  CLEVELAND BIOLABS,
INC.
 STATEMENTS OF STOCKHOLDERS' EQUITY AND
COMPREHENSIVE LOSS
 Period From January 1, 2006 to December
31, 2008
  Common
StockAdditionalPaid-in
                  
                  
                  PenaltyShares
                  
                  
                  Amount
                  
                  
                  Capital
                  
                  
                  SharesBalance at January 1,
      2006
                  
                  
                  6,396,801
                  
                  
                  
                  31,984
                  
                  
                  
                  3,338,020
                  
                  
                  
                  81,125Issuance of shares - previously
      accrued penalty shares
                  
                  
                  54,060
                  
                  
                  
                  270
                  
                  
                  
                  80,855
                  
                  
                  
                  (81,125
                  )Issuance of shares - stock
      dividend
                  
                  
                  184,183
                  
                  
                  
                  922
                  
                  
                  
                  367,445
                  
                  
                  
                  -Issuance of penalty
      shares
                  
                  
                  15,295
                  
                  
                  
                  76
                  
                  
                  
                  (76
                  )
                  
                  
                  -Issuance of shares - initial
      public offering
                  
                  
                  1,700,000
                  
                  
                  
                  8,500
                  
                  
                  
                  10,191,500
                  
                  
                  
                  -Fees associated with initital
      public offering
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (1,890,444
                  )
                  
                  
                  -Conversion of preferred stock to
      common stock
                  
                  
                  3,351,219
                  
                  
                  
                  16,756
                  
                  
                  
                  5,291,385
                  
                  
                  
                  -Conversion of notes payable to
      common stock
                  
                  
                  124,206
                  
                  
                  
                  621
                  
                  
                  
                  312,382
                  
                  
                  
                  -Issuance of
      options
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  506,078
                  
                  
                  
                  -Exercise of
      options
                  
                  
                  625
                  
                  
                  
                  3
                  
                  
                  
                  2,810
                  
                  
                  
                  -Issuance of
      warrants
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  114,032
                  
                  
                  
                  -Proceeds from sales of
      warrants
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  110
                  
                  
                  
                  -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,
      2006
                  
                  
                  11,826,389
                  
                  
                  $
                  59,132
                  
                  
                  $
                  18,314,097
                  
                  
                  $
                  -Issuance of
      options
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  3,401,499
                  
                  
                  
                  -Options to be issued in
      2008
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  2,687,355
                  
                  
                  
                  -Issuance of shares - Series B
      financing
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Fees associated with Series B
      Preferred offering
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Issuance of restricted
      shares
                  
                  
                  190,000
                  
                  
                  
                  950
                  
                  
                  
                  1,699,500
                  
                  
                  
                  -Exercise of
      options
                  
                  
                  126,046
                  
                  
                  
                  630
                  
                  
                  
                  110,650
                  
                  
                  
                  -Exercise of
      warrants
                  
                  
                  48,063
                  
                  
                  
                  240
                  
                  
                  
                  90,275
                  
                  
                  
                  -Conversion of Series B Preferred
      Shares to Common
                  
                  
                  708,743
                  
                  
                  
                  3,544
                  
                  
                  
                  4,461,537
                  
                  
                  
                  -Dividends 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
                  
                  
                  $
                  64,496
                  
                  
                  $
                  30,764,914
                  
                  
                  $
                  -Issuance of
      options
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  2,287,803
                  
                  
                  
                  -Partial recapture of expense for
      options expensed in 2007
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (1,459,425
                  )
                  
                  
                  -but issued in
      2008Issuance of restricted
      shares
                  
                  
                  130,000
                  
                  
                  
                  650
                  
                  
                  
                  625,850
                  
                  
                  
                  -Restricted stock
      awards
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  72,722
                  
                  
                  
                  -Exercise of
      options
                  
                  
                  37,271
                  
                  
                  
                  186
                  
                  
                  
                  24,191
                  
                  
                  
                  -Conversion of Series B Preferred
      Shares to Common
                  
                  
                  709,293
                  
                  
                  
                  3,547
                  
                  
                  
                  4,464,999
                  
                  
                  
                  -Dividends 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,
      2008
                  
                  
                  13,775,805
                  
                  
                  $
                  68,879
                  
                  
                  $
                  36,781,054
                  
                  
                  $
                  -


49
 
  CLEVELAND BIOLABS,
INC.
 STATEMENTS OF STOCKHOLDERS' EQUITY AND
COMPREHENSIVE LOSS
 Period From January 1, 2006 to December
31, 2008
  Preferred
    StockAdditionalPaid-in
                  
                  
                  PenaltyShares
                  
                  
                  Amount
                  
                  
                  Capital
                  
                  
                  SharesBalance at January 1,
      2006
                  
                  
                  3,051,219
                  
                  
                  
                  15,256
                  
                  
                  
                  4,932,885
                  
                  
                  
                  360,000Issuance of shares - previously
      accrued penalty shares
                  
                  
                  240,000
                  
                  
                  
                  1,200
                  
                  
                  
                  358,800
                  
                  
                  
                  (360,000
                  )Issuance of shares - stock
      dividend
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Issuance of penalty
      shares
                  
                  
                  60,000
                  
                  
                  
                  300
                  
                  
                  
                  (300
                  )
                  
                  
                  -Issuance of shares - initial
      public offering
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Fees associated with initital
      public offering
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Conversion of preferred stock to
      common stock
                  
                  
                  (3,351,219
                  )
                  
                  
                  (16,756
                  )
                  
                  
                  (5,291,385
                  )
                  
                  
                  -Conversion of notes payable to
      common stock
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Issuance of
      options
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Exercise of
      options
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Issuance of
      warrants
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Proceeds from sales of
      warrants
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -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,
      2006
                  
                  
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -Issuance of
      options
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Options to be issued in
      2008
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Issuance of shares - Series B
      financing
                  
                  
                  4,579,010
                  
                  
                  
                  22,895
                  
                  
                  
                  32,030,175
                  
                  
                  
                  -Fees associated with Series B
      Preferred offering
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (3,184,943
                  )
                  
                  
                  -Issuance of restricted
      shares
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Exercise of
      options
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Exercise of
      warrants
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Conversion of Series B Preferred
      Shares to Common
                  
                  
                  (708,743
                  )
                  
                  
                  (3,544
                  )
                  
                  
                  (4,461,537
                  )
                  
                  
                  -Dividends 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
                  
                  
                  3,870,267
                  
                  
                  $
                  19,351
                  
                  
                  $
                  24,383,695
                  
                  
                  $
                  -Issuance of
      options
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Partial recapture of expense for
      options expensed in 2007
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -but issued in
      2008Issuance of restricted
      shares
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Restricted stock
      awards
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Exercise of
      options
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Conversion of Series B Preferred
      Shares to Common
                  
                  
                  (709,293
                  )
                  
                  
                  (3,547
                  )
                  
                  
                  (4,464,999
                  )
                  
                  
                  -Dividends 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,
      2008
                  
                  
                  3,160,974
                  
                  
                  $
                  15,805
                  
                  
                  $
                  19,918,696
                  
                  
                  $
                  -


50
 
  CLEVELAND BIOLABS, INC.
 STATEMENTS
OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS
 Period
From January 1, 2006 to December 31, 2008
  Other
                
                
                
                
                
                
                
                
                ComprehensiveComprehensive
                
                
                Accumulated
                
                
                
                
                
                IncomeIncome/(Loss)
                
                
                Deficit
                
                
                Total
                
                
                (Loss)Balance
      at January 1, 2006
                
                
                (17,810
                )
                
                
                (5,184,856
                )
                
                
                3,556,604Issuance
      of shares - previously accrued penalty shares
                
                
                -
                
                
                
                -
                
                
                
                -Issuance
      of shares - stock dividend
                
                
                -
                
                
                
                (368,410
                )
                
                
                (43
                )Issuance
      of penalty shares
                
                
                -
                
                
                
                -
                
                
                
                -Issuance
      of shares - initial public offering
                
                
                -
                
                
                
                -
                
                
                
                10,200,000Fees
      associated with initital public offering
                
                
                -
                
                
                
                -
                
                
                
                (1,890,444
                )Conversion
      of preferred stock to common stock
                
                
                -
                
                
                
                -
                
                
                
                -Conversion
      of notes payable to common stock
                
                
                -
                
                
                
                -
                
                
                
                313,003Issuance
      of options
                
                
                -
                
                
                
                -
                
                
                
                506,078Exercise
      of options
                
                
                -
                
                
                
                -
                
                
                
                2,813Issuance
      of warrants
                
                
                -
                
                
                
                -
                
                
                
                114,032Proceeds
      from sales of warrants
                
                
                -
                
                
                
                -
                
                
                
                110Net
      loss
                
                
                -
                
                
                
                (7,222,644
                )
                
                
                (7,222,644
                )
                
                
                (7,222,644
                )Other
      comprehensive incomeUnrealized gains (losses) on short term investmentsChanges
      in unrealized holding gains (losses)arising
      during period
                
                
                6,678
                
                
                
                -
                
                
                
                6,678
                
                
                $
                6,678Less
      reclassification adjustment for (gains) lossesincluded
      in net loss
                
                
                6,967
                
                
                
                -
                
                
                
                6,967
                
                
                $
                6,967Comprehensive
      loss
                
                
                
                
                
                
                
                
                
                
                
                
                
                $
                (7,208,999
                )Balance
      at December 31, 2006
                
                $
                (4,165
                )
                
                $
                (12,775,910
                )
                
                $
                5,593,154Issuance
      of options
                
                
                -
                
                
                
                -
                
                
                
                3,401,499Options
      to be issued in 2008
                
                
                -
                
                
                
                -
                
                
                
                2,687,355Issuance
      of shares - Series B financing
                
                
                -
                
                
                
                -
                
                
                
                32,053,070Fees
      associated with Series B Preferred offering
                
                
                -
                
                
                
                -
                
                
                
                (3,184,943
                )Issuance
      of restricted shares
                
                
                -
                
                
                
                -
                
                
                
                1,700,450Exercise
      of options
                
                
                -
                
                
                
                -
                
                
                
                111,280Exercise
      of warrants
                
                
                -
                
                
                
                -
                
                
                
                90,515Conversion
      of Series B Preferred Shares to Common
                
                
                -
                
                
                
                -
                
                
                
                -Dividends
      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
                
                
                4,165
                
                
                
                -
                
                
                
                4,165
                
                
                $
                4,165Comprehensive
      loss
                
                
                
                
                
                
                
                
                
                
                
                
                
                $
                (26,992,337
                )Balance
      at December 31, 2007
                
                $
                -
                
                
                $
                (41,038,212
                )
                
                $
                14,194,244Issuance
      of options
                
                
                -
                
                
                
                -
                
                
                
                2,287,803Partial
      recapture of expense for options expensed in 2007
                
                
                -
                
                
                
                -
                
                
                
                (1,459,425
                )but
      issued in 2008Issuance
      of restricted shares
                
                
                -
                
                
                
                -
                
                
                
                626,500Restricted
      stock awards
                
                
                -
                
                
                
                -
                
                
                
                72,722Exercise
      of options
                
                
                -
                
                
                
                -
                
                
                
                24,378Conversion
      of Series B Preferred Shares to Common
                
                
                -
                
                
                
                -
                
                
                
                (0
                )Dividends
      on Series B Preferred shares
                
                
                -
                
                
                
                (1,182,033
                )
                
                
                (1,182,033
                )Net
      Loss
                
                
                -
                
                
                
                (14,025,927
                )
                
                
                (14,025,927
                )
                
                
                (14,025,927
                )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
                
                
                
                
                
                
                
                
                
                
                
                
                
                $
                (14,025,927
                )Balance
      at December 31, 2008
                
                $
                -
                
                
                $
                (56,246,172
                )
                
                $
                538,261


51




CLEVELAND BIOLABS, INC.STATEMENTS
      OF CASH FLOWSFor
      the Years Ended December 31, 2008, 2007 and 20062008
              
              
              2007
              
              
              2006CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      loss
              
              $
              (14,025,927
              )
              
              $
              (26,996,502
              )
              
              $
              (7,222,644
              )Adjustments
      to reconcile net loss to net cashused
      by operating activities:Depreciation
              
              
              324,351
              
              
              
              188,395
              
              
              
              94,931Noncash
      interest expense
              
              
              -
              
              
              
              -
              
              
              
              9,929Noncash
      salaries and consulting expense
              
              
              1,527,600
              
              
              
              7,789,305
              
              
              
              620,119Deferred
      compensation
              
              
              -
              
              
              
              -
              
              
              
              5,886Loss
      on disposal of fixed assets
              
              
              -
              
              
              
              15,575
              
              
              
              -Loss
      on investments
              
              
              -
              
              
              
              305,479
              
              
              
              -Loss
      on abandoned patents
              
              
              60,045
              
              
              
              -
              
              
              
              -Changes
      in operating assets and liabilities:Accounts
      receivable - trade
              
              
              (880,419
              )
              
              
              (3,652
              )
              
              
              (159,750
              )Accounts
      receivable - interest
              
              
              40,553
              
              
              
              (12,870
              )
              
              
              (5,616
              )Prepaid
      expenses
              
              
              (185,081
              )
              
              
              109,049
              
              
              
              (422,427
              )Deposits
              
              
              1,963
              
              
              
              (10,390
              )
              
              
              (3,750
              )Accounts
      payable
              
              
              391,232
              
              
              
              65,923
              
              
              
              380,023Deferred
      revenue
              
              
              694,702
              
              
              
              1,670,610
              
              
              
              (100,293
              )Accrued
      expenses
              
              
              (70,121
              )
              
              
              321,206
              
              
              
              99,990Milestone
      payments
              
              
              -
              
              
              
              (50,000
              )
              
              
              50,000Total
      adjustments
              
              
              1,904,825
              
              
              
              10,388,630
              
              
              
              569,042Net
      cash (used by) provided by operatingactivities
              
              
              (12,121,102
              )
              
              
              (16,607,872
              )
              
              
              (6,653,602
              )CASH
      FLOWS FROM INVESTING ACTIVITIESPurchase
      of short-term investments
              
              
              (2,000,000
              )
              
              
              (1,000,000
              )
              
              
              (4,800,000
              )Sale
      of short-term investments
              
              
              2,000,000
              
              
              
              2,000,000
              
              
              
              5,200,000Issuance
      of notes receivable
              
              
              -
              
              
              
              (250,000
              )
              
              
              (50,000
              )Purchase
      of equipment
              
              
              (224,413
              )
              
              
              (987,649
              )
              
              
              (187,660
              )Sale
      of equipment
              
              
              -
              
              
              
              1,250
              
              
              
              -Costs
      of patents pending
              
              
              (333,994
              )
              
              
              (206,124
              )
              
              
              (176,621
              )Net
      cash (used in) provided by investing activities
              
              
              (558,407
              )
              
              
              (442,523
              )
              
              
              (14,281
              )CASH
      FLOWS FROM FINANCING ACTIVITIESIssuance
      of preferred stock
              
              
              -
              
              
              
              30,020,984
              
              
              
              -Financing
      costs
              
              
              -
              
              
              
              (1,152,857
              )
              
              
              (1,679,456
              )Dividends
              
              
              (1,257,209
              )
              
              
              (869,331
              )
              
              
              (43
              )Issuance
      of common stock
              
              
              -
              
              
              
              -
              
              
              
              10,200,000Exercise
      of stock options
              
              
              24,378
              
              
              
              111,280
              
              
              
              2,813Exercise
      of warrants
              
              
              -
              
              
              
              90,515
              
              
              
              -Issuance
      of warrants
              
              
              -
              
              
              
              -
              
              
              
              100Net
      cash (used in) provided by financing activities
              
              
              (1,232,831
              )
              
              
              28,200,591
              
              
              
              8,523,414INCREASE
      (DECREASE) IN CASH AND EQUIVALENTS
              
              
              (13,912,340
              )
              
              
              11,150,196
              
              
              
              1,855,531CASH
      AND EQUIVALENTS AT BEGINNING OF
              
              
              14,212,189
              
              
              
              3,061,993
              
              
              
              1,206,462PERIODCASH
      AND EQUIVALENTS AT END OF PERIOD
              
              $
              299,849
              
              
              $
              14,212,189
              
              
              $
              3,061,993Supplemental
      disclosures of cash flow information:Cash
      paid during the period for interest
              
              $
              -
              
              
              $
              1,087
              
              
              $
              1,269Cash
      paid during the year for income taxes
              
              $
              -
              
              
              $
              -
              
              
              $
              -Supplemental
      schedule of noncash financing activities:Issuance
      of stock options to employees, consultants, and
              
              $
              2,287,803
              
              
              $
              3,401,499
              
              
              $
              506,078independent
      board membersExpense
      recapture for expense for options expensed in 2007 but issued in
      2008
              
              $
              (1,459,425
              )
              
              $
              -
              
              
              $
              -Stock
      options due to employees and a consultant
              
              $
              -
              
              
              $
              2,687,355
              
              
              $
              -Issuance
      of shares to consultants and employees
              
              $
              626,500
              
              
              $
              1,700,450
              
              
              $
              368,367Amortization
      of restricted shares to be issued to employees and
    consultants
              
              $
              72,722
              
              
              $
              -
              
              
              $
              -Issuance
      of non-cash financing fees
              
              $
              -
              
              
              $
              2,032,086
              
              
              $
              -Conversion
      of preferred stock to common stock
              
              $
              4,468,546
              
              
              $
              4,465,081
              
              
              $
              5,308,141Accrual
      of preferred stock dividends
              
              $
              321,293
              
              
              $
              396,469
              
              
              $
              -Issuance
      of warrants to consultant
              
              $
              -
              
              
              $
              -
              
              
              $
              114,042Conversion
      of notes payable and accrued interest to common stock
              
              $
              -
              
              
              $
              -
              
              
              $
              313,003
  52




CLEVELAND BIOLABS,
INC.





NOTES TO FINANCIAL
STATEMENTS




Note 1.
Organization





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





The Company’s financial statements have
been prepared on the accrual basis of accounting in accordance with accounting
principles generally accepted in theUnited States of Americaand ona 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 and it has a working capital deficit which raises a question
about its ability to continue as a going concern. The Company sustained a net
loss of $14,025,927 for the fiscal year ended December 31, 2008 and it had
a working capital deficit of $1,304,354 at December 31, 2008.





The
Company plans to secure additional financing to sustain operations by issuing
additional preferred shares and exploring individual investment or licensing
arrangements.  Subsequent to year-end, the Company has raised
approximately $4,300,000 from the issuance of additional preferred shares (see
Note 8 for details). The
Companyalsoplansto submit proposals for government
contracts and grants over the next two years totaling over $30 million. Many of the proposals will be
submitted to government agencies that have awarded contracts and grantsto the Companyin the recent
past.Finally,
the Companyplansto incurcostsonlyonR&Dprojectsthat are properly funded, either
through a government contract or grant or other capital sources such as direct
investment.


.


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, 2008 and December 31,
2007.





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 $324,351, $188,395, and $94,931
      for the years ended December 31, 2008, 2007 and 2006,
      respectively





E.
            Impairment of Long-Lived Assets -
      In accordance with Statements of Financial Accounting Standards, or SFAS,
      No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets,
      long-lived assets to be held and used, including equipment and intangible
      assets subject to depreciation and amortization, are reviewed for
      impairment at least annually and whenever events or changes in
      circumstances indicate that the carrying amounts of the assets or related
      asset group may not be recoverable. Determination of recoverability is
      based on an estimate of discounted future cash flows resulting from the
      use of the asset and its eventual disposition. In the event that such cash
      flows are not expected to be sufficient to recover the carrying amount of
      the asset or asset group, the carrying amount of the asset is written down
      to its estimated net realizable
value.




53




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.





A portion of this intellectual property
is owned by the Cleveland Clinic Foundation, or CCF, and granted to the Company
through an exclusive licensing agreement. As part of the licensing agreement,
CBLI agrees to bear the costs associated with the preparation, filing and
maintenance of patent applications relating to this intellectual property. Gross
capitalized patents pending costs were $629,363 and $407,425 for thirteen patent
applications as of December 31, 2008 and December 31, 2007, respectively. All of
the CCF patent applications are still pending approval. 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 also has submitted five
patent applications as a result of intellectual property exclusively developed
and owned by the Company. Gross capitalized patents pending costs were $103,688
and $51,677 for five patent applications as of December 31, 2008 and December
31, 2007, 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.




G.
            Line of Credit - The Company has a
      working capital line of credit that is fully secured by short-term
      investments. This fully-secured, working capital line of credit carries an
      interest rate of prime minus 1%, a borrowing limit of $1,000,000, and
      expires on September 25, 2009. At December 31, 2008 and 2007, 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.





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





SFAS No. 157 establishes a valuation
hierarchy for disclosure of the inputs to valuation used to measure fair
value.  This hierarchy prioritizes the inputs into three broad levels
as follows: Level 1 inputs are quoted prices (unadjusted) in active markets for
identical assets or liabilities; Level 2 inputs are quoted prices for similar
assets and liabilities in active markets or inputs that are observable for the
asset or liability, either directly or indirectly; and Level 3 inputs are
unobservable inputs in which little or no market data exists, therefore
requiring a company to develop its own assumptions.  The Company does
not have any significant assets or liabilities measured at fair value using
Level 1 or Level 3 inputs as of December 31, 2008.





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.




54




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




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





Government contract revenue is
recognized as allowable research and development expenses are incurred during
the period and according to the terms of the government contract. The Company
has recognized grant revenue from the following agencies: the Department of
Defense (DoD), the Defense Threat Reduction Agency (DTRA), the Defense Advanced
Research Projects Agency (DARPA), National Aeronautics and Space Administration
(NASA), the National Institutes of Health (NIH) and the Department of Health and
Human Services (HHS).





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





Commercial development revenues are
recognized when the service or development is delivered.





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 ofNew
Yorkthrough the Roswell
Park Cancer Institute (“RPCI”) during the second quarter of 2007.  The
Company received an additional $1,000,000 in funds from the State ofNew Yorkthrough the RPCI during the second
quarter of 2008.  The Company is recognizing this revenue over the
terms and conditions of the sponsored research agreement. The Company recognizes
revenue on research laboratory services and the purchase and subsequent use of
related equipment. The amount paid as a payment toward future services related
to the equipment is recognized as a prepaid asset and will be recognized as
revenue as the services are performed.




55





The following table summarizes the
deferred revenue activity for the years ended December 31, 2008 and December 31,
2007, 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
              
              $
              2,365,312ActivityBeginning Balance, December
      31, 2006
              
              $
              -Funds Recived From State of
      NY
              
              $
              2,000,000Funds Recognized as
      Revenue
              
              $
              (329,390
              )Ending Balance, December 31,
      2007
              
              $
              1,670,610


..


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 collaboration efforts. Expenditures relating
      to research and development are expensed as
    incurred.





M.
            2006 Equity Incentive Plan - On
      May 26, 2006, the Company's Board of Directors adopted the 2006 Equity
      Incentive Plan (“Plan”) to attract and retain persons eligible to
      participate in the Plan, motivate participants to achieve long-term
      Company goals, and further align participants' interests with those of the
      Company's other stockholders. The Plan expires on May 26, 2016 and the
      aggregate number of shares of stock which may be delivered under the Plan
      shall not exceed 2,000,000 shares. On February 14, 2007, these 2,000,000
      shares were registered with the SEC by filing a Form S-8 registration
      statement. On April 29, 2008, the stockholders of the Company approved an
      amendment and restatement of the Plan (the “Amended Plan”). The Amended
      Plan increases the number of shares available for issuance by an
      additional 2,000,000 shares, clarifies other aspects of the 2006 Plan, and
      contains updates that reflect changes and developments in federal tax
      laws.  As of December 31, 2008 there were 1,702,721 stock
      options and 235,000 shares granted under the Amended Plan and 18,053
      forfeited leaving 2,080,332 shares of stock to be awarded under the
      Amended Plan.





N.
            Executive Compensation Plan - On
      May 11, 2007, the Compensation Committee (the “Compensation Committee”) of
      the Board of Directors 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 (the
      “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.





Under the terms of this program, after
each fiscal year beginning with the fiscal year ended December 31, 2007, each
component of our 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 and (4) financial milestones, each of which will be weighted
equally. 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 300,000 for high performance.





For the year ended December 31, 2008 the
Compensation Committee awarded no cash bonuses or stock option awards under the
Executive Compensation Plan.  For 2007, the Compensation Committee
awarded $185,288 in cash bonuses and expensed $2,687,355 in non-cash,
stock-based compensation for the stock options to be awarded by the Compensation
Committee and issued in the subsequent year. In 2008, $1,459,425 of this
non-cash, stock-based compensation was recaptured as discussed in note O
below.




56





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





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





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




2008
              
              
              2007
              
              
              2006Risk-free
      interest rate
              
              
              2.43-3.58
              %
              
              
              3.38-5.11
              %
              
              
              4.66-5.04
              %Expected
      dividend yield
              
              
              0
              %
              
              
              0
              %
              
              
              0
              %Expected
      life
              
              5-6
      years
              
              
              2.74-6
      years
              
              
              5
      yearsExpected
      volatility
              
              
              64.25-82.47
              %
              
              
              71.86-76.29
              %
              
              
              71.43-75.11
              %


During the year ended December 31, 2008,
the Company granted 997,721 stock options pursuant to stock award agreements.
The Company recognized a total of $2,287,803 in expense related to stock options
granted for the year ended December 31, 2008.  The Company also
recaptured $1,459,425 of previously recognized expense relating to the stock
options awarded under the 2007 Executive Compensation Plan.  These
options were originally expensed based on the December 31, 2007 variables, but
were not issued until February 4, 2008.  The change in dates resulted
in a difference in valuation assumptions used in the Black-Scholes model causing
a reduction in the grant date fair value.  This reduction in the grant
date fair value from $5.34 to $2.58 per share resulted in the recapture of
$1,459,425 in expense and a net expense for options granted for the year ended
December 31, 2008 of $828,377.





The Company issued 997,721, 660,000 and
161,750 stock options during the years ended December 31, 2008, 2007, and 2006,
respectively, pursuant to various stock award agreements. The Company recognized
a total of $828,377, $3,401,499, and $506,078 in expense related to options for
the years ended December 31, 2008, 2007, and 2006, respectively. The weighted
average, estimated grant date fair values of stock options granted was $3.16,
$6.08, and $3.14 during the years ended December 31, 2008, 2007, and 2006,
respectively.




57





The following tables summarize the stock
option activity for the years ended December 31, 2008 and December 31, 2007,
respectively.





Weighted
              
              
              WeightedAverage
              
              
              AverageExercise
              
              
              RemainingPrice
      per
              
              
              ContractualShares
              
              
              Share
              
              
              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


Weighted
              
              
              WeightedAverage
              
              
              AverageExercise
              
              
              RemainingPrice
      per
              
              
              ContractualShares
              
              
              Share
              
              
              Term
      (in Years)Outstanding,
      December 31, 2006
              
              
              483,490
              
              
              $
              2.17Granted
              
              
              660,000
              
              
              $
              9.85Exercised
              
              
              131,750
              
              
              $
              1.34Forfeited,
      Canceled
              
              
              0
              
              
              
              n/aOutstanding,
      December 31, 2007
              
              
              1,011,740
              
              
              $
              7.29
              
              
              
              8.80Exercisable,
      December 31, 2007
              
              
              646,930
              
              
              $
              6.89
              
              
              
              8.75


The table summarizing the stock option
activity for the year ended December 31, 2008 indicates 42,534 shares exercised.
This figure includes 5,263 shares used to compensate the Company for a cashless
stock option exercise and therefore, were surrendered instead of
issued.





For the year ended December 31, 2008,
the Company recognized a total of $626,500 in expense for shares issued under
the Amended Plan and a total of $72,722 in expense related to the amortization
of restricted shares.  For the year ended December 31, 2007 the
Company recognized a total of $1,700,450 in expense for shares issued under the
Plan to various consultants. During the year ended December 31, 2006, there was
no compensation expense related to share issuance because there were no shares
issued for compensation.




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.




58




The following table presents the
calculation of basic and diluted net loss per share for the years ended December
31, 2008, 2007 and 2006:




2008
              
              
              2007
              
              
              2006Net loss available to common
      stockholders
              
              $
              (15,207,960
              )
              
              $
              (28,262,302
              )
              
              $
              (7,437,572
              )Net loss per share, basic and
      diluted
              
              $
              (1.13
              )
              
              $
              (2.34
              )
              
              $
              (0.84
              )Weighted-average shares used in
      computing net loss per share, basic and diluted
              
              
              13,492,391
              
              
              
              12,090,430
              
              
              
              8,906,266




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





The total number of shares excluded from
the calculations of diluted net loss per share, prior to application of the
treasury stock method forwarrants, was 3,453,268, 3,453,268, and 814,424
for the years ended December 31, 2008, 2007 and 2006, respectively. Such
securities, had they been dilutive, would have been included in the computation
of diluted earnings per share.





The total number of shares excluded from
the calculations of diluted net loss per share, prior to the application of the
treasury stock method foroptions, was 1,948,874, 1,011,740, and 483,490
for the years ended December 31, 2008, 2007 and 2006, respectively. 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 97.4%, 85.6% and 88.0% for the year ended December
      31 2008, 2007 and 2006, 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 and into an agreement for assay development and
      validation with foreign third parties and is required to make payments in
      the foreign currency. As a result, the Company's financial results could
      be affected by changes in foreign currency exchange rates. Currently, the
      Company's exposure primarily exists with the Euro and the British Pound,
      or GBP. As of December 31, 2008, the Company is obligated to make payments
      under the agreements of 916,354 Euros and 39,100 GBP. As of December 31,
      2008, the Company has not purchased any forward contracts for Euros or GBP
      and, therefore, at December 31, 2008, had foreign currency commitments of
      $1,275,473 for Euros and $46,635 for GBP given prevailing currency
      exchange spot rates..





S.
            Comprehensive Income/(Loss) - The
      Company applies Statement of Financial Accounting Standards (SFAS) No.
      130, “Reporting Comprehensive Income.” SFAS No. 130 requires disclosure of
      all components of comprehensive income on an annual and interim basis.
      Comprehensive income is defined as the change in equity of a business
      enterprise during a period from transactions and other events and
      circumstances from non-owner
sources.





T.
            Segment Reporting – As of December
      31, 2008, 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 June 2008, the Financial Accounting Standards Board
      ("FASB") issued EITF Issue No. 07-5 ("EITF 07-5"), Determining whether an
      Instrument (or Embedded Feature) is indexed to an Entity's Own Stock. EITF
      No. 07-5 is effective for financial statements issued for fiscal years
      beginning after December 15, 2008, and interim periods within those fiscal
      years. Early application is not permitted. Paragraph 11(a) of SFAS No. 133
      - specifies that a contract that would otherwise meet the definition of a
      derivative but is both (a) indexed to the Company's own stock and (b)
      classified in stockholders' equity in the statement of financial position
      would not be considered a derivative financial instrument. EITF 07-5
      provides a new two-step model to be applied in determining whether a
      financial instrument or an embedded feature is indexed to an issuer's own
      stock and thus able to qualify for the SFAS No. 133 paragraph 11(a) scope
      exception. The adoption of EITF 07-5 is not anticipated to materially
      impact the Company's financial
  statements.




59




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





In May 2008, the FASB issued SFAS No.
162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS 162”).
SFAS No. 162 identifies the sources of accounting principles and the framework
for selecting the principles to be used in the preparation of financial
statements of nongovernmental entities that are presented in conformity with
GAAP. Effective December 31, 2008, the Company adheres to SFAS No. 162, which
did not have any impact on the Company’s financial
statements.





In March 2008,  the FASB
issued SFAS No. 161,"Disclosures about
Derivative Instruments and Hedging Activities, an amendment of FASB Statement
No. 133,"which requires
additional disclosures about the objectives of using derivative instruments, the
method by which the derivative instruments and related hedged items are
accounted for under FASB Statement No.133 and its related interpretations, and
the effect of derivative instruments and related hedged items on financial
position, financial performance and cash flows. SFAS No. 161 also requires
disclosure of the fair values of derivative instruments and their gains and
losses in a tabular format. SFAS No. 161 will be effective for the Company on
January 1, 2009. The Company does not expect that the adoption of SFAS No. 161
will have a material impact on its consolidated financial statement
disclosures.





In
December 2007,the FASB
issued SFAS No. 141 (revised 2007), or SFAS No. 141R, "Business
Combinations" and SFAS No.
160, "Noncontrolling
Interests in Consolidated Financial Statements, an amendment of Accounting
Research Bulletin No. 51."
SFAS 141R will change how business acquisitions are accounted for and will
impact financial statements both on the acquisition date and in subsequent
periods. SFAS No. 160 will change the accounting and reporting for minority
interests, which will be recharacterized as noncontrolling interests and
classified as a component of equity. SFAS No. 141R and SFAS No. 160 are
effective for the Company on January 1, 2009. Early adoption is not permitted.
The Company does not expect that the adoption of SFAS No. 141R and SFAS No. 160
will have will have a material impact on its consolidated financial statements.





InDecember 2007, the FASB
ratified the consensuses reached in Emerging Issue Task Force, or EITF, Issue
No. 07-1,"Collaborative
Arrangements". EITF Issue
No. 07-1 defines collaborative arrangements and establishes reporting
requirements for transactions between participants in a collaborative
arrangement and between participants in the arrangements and third parties.
Under EITF Issue No. 07-1, payments between participants pursuant to a
collaborative arrangement that are within the scope of other authoritative
accounting literature on income statement classification should be accounted for
using the relevant provisions of that literature. If the payments are not within
the scope of other authoritative accounting literature, the income statement
classification for the payments should be based on an analogy to authoritative
accounting literature or if there is no appropriate analogy, a reasonable,
rational, and consistently applied accounting policy election. EITF Issue No.
07-1 also provides disclosure requirements and is effective for the Company on
January 1, 2009. The effect of applying EITF Issue No. 07-1 will be reported as
a change in accounting principle through retrospective applications to all prior
periods presented for all collaborative arrangements existing as of the
effective date, unless it is impracticable. The Company does not expect the
adoption of EITF Issue No. 07-1 will have a material impact on its financial
statements.




60





Note 3. Significant Alliances and
Related Parties





TheClevelandClinic 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 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 $50,000, $300,000,
and $0 for the years ended December 31, 2008, 2007, and 2006,
respectively.





The Company also incurred $518,904,
$927,347, and $1,142,290 in subcontract expense to CCF related to research
grants and other agreements for the years ended December 31, 2008, 2007 and
2006, respectively. The balance remaining in accrued payables is $15,209,
$70,539 and $7,309 at December 31, 2008, 2007 and 2006, respectively. Finally,
the Company recognized a balance of $0, $10,227 and $0 in accounts receivable at
December 31, 2008, 2007 and 2006, 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 ofNew Yorkas part of an incentive package for the
Company to relocate and establish a major research/clinical facility inBuffalo,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 also incurred $1,120,571
$414,389, and $0 in subcontract expense to RPCI related to research grants and
agreements for the years ended December 31, 2008, 2007 and 2006, respectively.
The balance remaining in accrued payables is $174,693 and $16,190 at December
31, 2008 and 2007, respectively





ChemBridge
Corporation





In April 2004, ChemBridge Corporation
acquired 357,600 shares of the Company’s common stock valued at $6,081 (subject
to antidilution provisions for future equity issues) and holds warrants to
purchase an additional 264,624 shares of the Company’s common stock for $1.13
per share. The warrants expire in April 2010. Under the agreement, ChemBridge
has agreed to provide chemical technology and expertise for the benefit of the
Company for research and drug development.





In April 2004, the Company entered into
a chemical libraries license agreement with ChemBridge. Under the terms of the
agreement, 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, 2008.




61





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, 2008.





In addition, the Company paid ChemBridge
$916, $41,780, and $29,910 for the purchase of chemical compounds in the normal
course of business in 2008, 2007 and 2006, respectively.





Cooperative Research and Development
Agreement





In August 2004, the Company entered into
a five-year cooperative research and development agreement (CRADA) with the
Uniformed Service University of the Health Sciences, which includes the Armed
Forces Radiobiology Research Institute, the Henry M. Jackson Foundation for the
Advancement of Military Medicine, Inc., and 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. The
agreement may be unilaterally terminated by any party upon 30 days prior written
notice.





In August 2007, the Company entered into
an additional one-year CRADA with theUniformedServiceUniversityof the Health Sciences to evaluate the
Company’s radioprotective drug candidate Protectan CBLB502 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.





Sunrise Securities
Corp.





The Company engaged Sunrise Securities
Corporation, or SSC, to act as the investment banker for the private placement
that took place in March 2005, as a lead underwriter for the initial public
offering in 2006, and as placement agent for its private placement of Series B
Convertible Preferred Stock, or Series B Preferred. SSC and its related parties
are owners of both common stock and warrants of the Company as a result of the
private placement and the initial public offering. The Company paid SSC $75,000
as an initial retainer for underwriting work associated with the initial public
offering and SSC received $945,000 in underwriting commissions from the initial
public offering. In addition, the Company paid SSC $95,000 related to legal fees
incurred in the March 2007 Series B Preferred offering.





Consultants





In addition, 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
$114,215, $120,580, and $104,168 for the years ended December 31, 2008, 2007 and
2006, respectively. The Company recaptured $378,810 in non-cash, stock-based
compensation expense in 2008 previously expensed as discussed in Note 2O to this
consultant.  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 Executive Compensation
Plan.





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 $78,380, $95,520, and
$84,330 for the years ended December 31, 2008, 2007, and 2006,
respectfully.




62





Note 4. Equity
Transactions





On February 1, 2006, the Company paid a
common stock dividend of 91,776 shares to holders of the Series A preferred
stock to satisfy the dividend requirement of the preferred stock
issuance.





On March 1, 2006, the Company issued
116,750 stock options to various employees and consultants of the Company under
non-qualified stock option agreements. These options allow for the purchase of
116,750 shares of common stock at a price of $4.50. These options have a
three-year vesting schedule and expire on February 29, 2016.





On June 21, 2006, after the expiration
of the 115-day extension and an additional 30-day period, the Company incurred
one additional penalty period in which 60,000 shares of Series A preferred stock
were earned at $120,000 and 15,295 shares of common stock were earned at
$30,590. The Company has not incurred any further obligation to issue penalty
shares since these issuances.





On July 20, 2006, the Company sold
1,700,000 shares of common stock in its initial public offering at $6.00 per
share. The net proceeds to the Company from this offering were approximately
$8,300,000. Beginning July 21, 2006, the Company’s shares were quoted on the
NASDAQ Capital Market and listed on the Boston Stock Exchange under the symbols
“CBLI” and “CFB” respectively. On August 28, 2007, trading of the Company’s
common stock moved from the NASDAQ Capital Market to the NASDAQ Global Market.
In September 2007, we ceased our listing on the Boston Stock Exchange. In
connection with its initial public offering, the Company sold warrants to
purchase 170,000 shares of common stock to the underwriters and their designees
at a cost of $100.00. The warrants have an exercise price of $8.70 per
share.





On July 20, 2006, the effective date of
the Company’s initial public offering, the Company issued 92,407 shares of
common stock as accumulated dividends to the Series A preferred stockholders. On
the same date, all of the Company’s Series A Preferred shares automatically
converted on a one-for-one basis into 3,351,219 shares of common stock and notes
of the Company in the principal amount of $283,500 plus accrued interest of
$29,503 automatically converted into 124,206 shares of common stock. In
connection with their appointment to the Board, the Company issued to each of
the Company’s three new independent directors, options to purchase 15,000 shares
of common stock with an exercise price of $6.00 per share.





On September 21, 2006, the SEC declared
effective a registration statement of the Company registering up to 4,453,601
shares of common stock for resale from time to time by the selling stockholders
named in the prospectus contained in the registration statement. The Company
will not receive any proceeds from the sale of the underlying shares of common
stock, although to the extent the selling stockholders exercise warrants for the
underlying shares of common stock, the Company will receive the exercise price
of those warrants. The registration statement was filed to satisfy registration
rights that the Company had previously granted.




On November 16, 2006 the Company issued
50,000 warrants to an outside consultant. These warrants are immediately
exercisable into common shares of the Company and have an exercise price of
$6.00 per share and an expiration date of November 16, 2011.





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 are exercisable
for an aggregate of 2,144,356 shares of common stock. The Series B Preferred
have an initial conversion price of $7.00 per share, pay 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 have 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 is reduced as a result of certain anti-dilution protections,
the number of shares of common stock into which the Series B Preferred are
convertible and for which the Series B Warrants are exercisable may
increase.




63




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 are convertible into an
aggregate of 290,298 shares of common stock, Series B Warrants that are
exercisable for an aggregate of 221,172 shares of the Company’s common stock,
and Series C Warrants that are exercisable for 267,074 shares of the Company’s
common stock. The Series C Warrants have an exercise price of $11.00 per share,
and are also subject to anti-dilution protections that could increase the number
of shares of common stock for which they are exercisable.




In total, the securities issued in the
private placement will be convertible into, or exercisable for, up to
approximately 7,211,612 shares of common stock, which amount is 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 are immediately
exercisable and allow 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 are immediately exercisable and allow 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 are immediately exercisable and allow 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 have various
vesting schedules including immediate vesting, up to three year vesting, and
vesting upon the company stock price obtaining certain levels.  These
options allow 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 vest over a six month period and allow 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 are immediately exercisable and allow 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 have up to three
year vesting.  These options allow 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 are issuable upon conversion of Series B
Preferred and 1,797,484 shares are issuable upon exercise of the Series B
Warrants. The Company will not receive any proceeds from the sale of the
underlying shares of common stock, although to the extent the selling
stockholders exercise warrants for the underlying shares of common stock, the
Company will 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.




64





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





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





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




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




On March 14, 2008, the Company issued
100,000 unrestricted shares of common stock to a key consultant 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 vest immediately and allow for the purchase
of 40,000 shares of common stock at an exercise price of $4.18 per
share.  These options expire on April 7, 2018.  On April 8,
2008, the Company also issued 25,000 restricted shares of common
stock.  These shares vest over a three-month period with 40% vested on
issuance and 60% vesting three months from the date of the
agreement.




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




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




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




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




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




For the year ending December 31, 2008,
Series B Preferred Shares were converted into 709,293 shares of common stock. At
December 31, 2008, there were 3,160,974 outstanding Series B Preferred for which
$321,293 in dividends had been accrued.




65





Note 5. Income Taxes





The provisions for income taxes charged
to continuing operations is $0 for the years ended December 31, 2008, 2007, and
2006, respectively.





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




2008
              
              
              2007
              
              
              2006Deferred tax
      assets:Operating loss
      carryforwards
              
              $
              18,383,000
              
              
              $
              13,289,000
              
              
              $
              4,586,000Tax credit
      carryforwards
              
              
              1,772,000
              
              
              
              737,000
              
              
              
              -Deferred
      compensation
              
              
              3,102,000
              
              
              
              2,765,000
              
              
              
              345,000Other
              
              
              4,000
              
              
              
              -
              
              
              
              2,000Total deferred income tax
      assets
              
              
              23,261,000
              
              
              
              16,791,000
              
              
              
              4,933,000Deferred tax
      liabilitiesEquipment
              
              
              (83,000
              )
              
              
              (61,000
              )
              
              
              (35,000
              )Net deferred income tax
      asset
              
              
              23,178,000
              
              
              
              16,730,000
              
              
              
              4,898,000Valuation
      allowance
              
              
              (23,178,000
              )
              
              
              (16,730,000
              )
              
              
              (4,898,000
              )$
              -
              
              
              $
              -
              
              
              $
              -







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




2008
              
              
              2007
              
              
              2006Tax at the U.S. statutory
      rate
              
              $
              (4,769,000
              )
              
              $
              (9,474,000
              )
              
              $
              (2,456,000
              )Stock option
      exercises
              
              
              (20,000
              )
              
              
              (363,000
              )
              
              
              -Valuation
      allowance
              
              
              4,879,000
              
              
              
              9,831,000
              
              
              
              2,456,000Other
              
              
              (90,000
              )
              
              
              6,000
              
              
              
              -$
              -
              
              
              $
              -
              
              
              $
              -





At December 31, 2008, the Company has
federal net operating loss carryforwards of approximately $46,658,000, which
begin to expire if not utilized by 2023, and approximately $1,509,000 of tax
credit carryforwards that begin to expire if not utilized by
2024.  The utilization of approximately $329,000 of the net operating
loss carryforwards and approximately $203,000 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 $35,486,000, which begin
to expire if not utilized by 2027, and state tax credit carryforwards of
approximately $517,000, which begin to expire if not utilized by
2010.  The utilization of these federal and state net operating loss
and tax credit carryforwards is limited as a result of ownership
changes.





The Company files aUnited Statesfederal tax return, along with various
state and local income tax returns. The federal, state and local tax returns for
the years ended December 31, 2007, 2006 and 2005 are still open for
examination.




66


Effective January 1, 2007, the Company
adopted Financial Accounting Standards Board FIN 48, “Accounting for Uncertainty
in 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. There was no impact to the financial statements upon the adoption of
FIN 48.





The following presents a rollforward of
the unrecognized tax benefits under FIN 48, and the associated interest and
penalties:




Unrecognized
              
              
              InterestTax
Benefits
              
              
              and
    PenaltiesBalance at January 1, 2007
      (adoption)
              
              $
              -
              
              
              $
              -Prior year tax
      positions
              
              
              -
              
              
              
              -Current year tax
      positions
              
              
              -
              
              
              
              -Deferred tax
      positions
              
              
              230,000
              
              
              
              -Settlements with tax
      authorities
              
              
              -
              
              
              
              -Expiration of the statute of
      limitations
              
              
              -
              
              
              
              -Balance at December 31,
      2007
              
              
              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
              
              
              $
              -


The Company’s 2007 and 2008New Yorkstate tax returns include approximately
$724,000 of refundable state incentive tax credits, which are based upon
research and development activities, real estate tax payments, hiring employees
and equipment purchases.  At December 31, 2008, none of these refunds
have been received from the NY tax authorities, and accordingly, no benefit has
been recorded in the accompanying financial statements.





Note 6. Other Balance Sheet
Details





Available-For-Sale Cash Equivalents and
Marketable Securities





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




Gross
              
              
              GrossAccrued
              
              
              Unrealized
              
              
              Unrealized
              
              
              FairCost
              
              
              Interest
              
              
              Gains
              
              
              Losses
              
              
              ValueDecember 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 $4,165, and $13,645 for the years ending December 31, 2008,
2007, and 2006, respectively.




67




Equipment





Equipment consists of the
following:




2008
              
              
              2007Laboratory
      Equipment
              
              $
              309,323
              
              
              $
              966,517Computer
      Equipment
              
              
              1,102,465
              
              
              
              258,089Furniture
              
              
              312,134
              
              
              
              274,9031,723,922
              
              
              
              1,499,509Less accumulated
      depreciation
              
              
              (637,840
              )
              
              
              (313,489
              )$
              1,086,082
              
              
              $
              1,186,020




Note 7. 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, 2008, $350,000 in milestone payments have been made
under one of these agreements.





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





The Company currently has operating
lease commitments in place for facilities inBuffalo,New YorkandChicago,Illinoisas 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 $332,584,
$218,635 and $160,742 for the years ended December 31, 2008, 2007 and 2006,
respectively.




68





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




OperatingLeases2009
              
              $
              355,9002010
              
              
              343,6562011
              
              
              311,8032012
              
              
              144,3752013
              
              
              -$
              1,155,734





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.





The following tables summarize the stock
option activity for the year ended December 31, 2008 and
2007:




Number
      of
              
              
              Weighted
      AverageOptions
              
              
              Exercise PriceOutstanding
      at December 31, 2006
              
              
              483,490
              
              
              $
              2.17Granted
              
              
              660,000
              
              
              $
              9.85Exercised
              
              
              131,750
              
              
              $
              1.34Forfeited
              
              
              0
              
              
              
              n/aOutstanding
      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
              
              
              $
              6.17
 The number of options and weighted
average exercise price of options fully vested and exercisable for the years
ending December 31, 2008, 2007 and 2006 were 1,597,837, 646,930, and 243,183
options at $5.52, $6.89, and $2.27 respectively. A table showing the number of
options outstanding and exercisable (fully vested) at December 31, 2008 appears
below:








The Company has entered into warrant
agreements with strategic partners, consultants and investors with exercise
prices ranging from $1.13 to $11.00. These awards were approved by the Company’s
Board of Directors. The warrants expire between five and six years from the date
of grant, subject to the terms applicable in the agreement. A list of the total
warrants awarded and exercised appears below:




Number
      of
              
              
              Weighted
      AverageWarrants
              
              
              Exercise
      PriceOutstanding
      at December 31, 2006
              
              
              814,424
              
              
              $
              3.36Granted
              
              
              2,687,602
              
              
              $
              10.40Exercised
              
              
              48,758
              
              
              $
              2.00Outstanding
      at December  31, 2007
              
              
              3,453,268
              
              
              $
              8.86Granted
              
              
              -
              
              
              
              N/AExercised
              
              
              -
              
              
              
              N/AOutstanding
      at December  31, 2007
              
              
              3,453,268
              
              
              $
              8.86
  69
  WeightedAverageNumber
      of
                
                
                Years
      to
                
                
                Number
      ofExercise
      Price
                
                
                Options
                
                
                Expiration
                
                
                Options$
                0.66
                
                
                
                112,500
                
                
                
                6.50
                
                
                
                112,500$
                0.67
                
                
                
                45,981
                
                
                
                6.50
                
                
                
                45,981$
                3.10
                
                
                
                19,341
                
                
                
                9.87
                
                
                
                19,341$
                3.98
                
                
                
                28,456
                
                
                
                9.54
                
                
                
                28,456$
                4.00
                
                
                
                557,902
                
                
                
                9.09
                
                
                
                541,927$
                4.18
                
                
                
                40,000
                
                
                
                9.27
                
                
                
                40,000$
                4.50
                
                
                
                111,500
                
                
                
                7.17
                
                
                
                81,688$
                4.69
                
                
                
                35,000
                
                
                
                9.73
                
                
                
                8,750$
                4.81
                
                
                
                1,000
                
                
                
                9.20
                
                
                
                1,000$
                5.28
                
                
                
                14,694
                
                
                
                9.35
                
                
                
                14,694$
                5.33
                
                
                
                140,000
                
                
                
                9.33
                
                
                
                140,000$
                6.00
                
                
                
                45,000
                
                
                
                7.56
                
                
                
                45,000$
                8.00
                
                
                
                160,000
                
                
                
                9.01
                
                
                
                55,000$
                8.36
                
                
                
                152,500
                
                
                
                8.27
                
                
                
                152,500$
                8.82
                
                
                
                20,000
                
                
                
                8.22
                
                
                
                20,000$
                9.14
                
                
                
                77,000
                
                
                
                8.12
                
                
                
                39,000$
                9.40
                
                
                
                140,000
                
                
                
                8.45
                
                
                
                140,000$
                9.93
                
                
                
                30,000
                
                
                
                8.46
                
                
                
                20,000$
                10.00
                
                
                
                117,000
                
                
                
                8.93
                
                
                
                71,000$
                10.61
                
                
                
                18,000
                
                
                
                4.00
                
                
                
                18,000$
                10.84
                
                
                
                3,000
                
                
                
                8.48
                
                
                
                3,000$
                11.00
                
                
                
                25,000
                
                
                
                8.46
                
                
                
                -$
                14.00
                
                
                
                25,000
                
                
                
                8.46
                
                
                
                -$
                17.00
                
                
                
                30,000
                
                
                
                8.46
                
                
                
                -Total
                
                
                
                1,948,874
                
                
                
                8.53
                
                
                
                1,597,837
 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 and received
$220,000 in the year ended December 31, 2008. 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.





Note 8. Subsequent
Events





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


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




70





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


The
Series D Preferred ranks junior to the Company’s Series B Convertible Preferred
Stock (“Series B Preferred”) and senior to all shares of Common Stock and other
capital stock of the Company.
 
 If the
Company does not meet certain milestones, the Conversion Price will, unless the
closing price of the Common Stock is greater than $3.69 on the date the
Milestone is missed, be reduced to 80% of the Conversion Price in effect on that
date (the “Milestone Adjustment”).  In addition to the Milestone
Adjustment, (a) on August 13, 2009 (the “Initial Adjustment Date”), the
Conversion Price shall be reduced to 95% of the then Conversion Price, and (b)
on each three month anniversary of the Initial Adjustment Date (each, an
“Adjustment Date”), the then Conversion Price shall be reduced by $0.05 (subject
to adjustment) until maturity.  The Conversion Price is also subject
to proportional adjustment in the event of any stock split, stock dividend,
reclassification or similar event with respect to the Common Stock and to
anti-dilution adjustment in the event of any Dilutive Issuance (as defined in
the Certificate of Designation).
 
 If the
closing price for each of any 20 consecutive trading days after the effective
date of the initial registration statement filed pursuant to the Registration
Rights Agreement (as defined below) (the “Effective Date”) exceeds 300% of the
then effective Conversion Price and various other equity conditions are
satisfied, the Series D Preferred will automatically convert into shares of
Common Stock.
 
 At any
time after February 13, 2012, the Company may, if various equity conditions are
satisfied, elect either to redeem any outstanding Series D Preferred in cash or
to convert any outstanding Series D Preferred into shares of Common Stock at the
conversion rate then in effect.
 
 If the
Company receives any cash funds after February 13, 2009 from fees, royalties or
revenues as a result of the license of any of its intellectual property (such
net proceeds the “IP Proceeds”), cash funds from development grants from any
government agency for the development of anti-cancer applications of any of the
Company’s curaxin compounds or anti-cancer or biodefense applications for the
Company’s CBLB502 compound (the “Governmental Grant Proceeds”) or allocates cash
proceeds to its Escrow Account (as defined in the Purchase Agreement) (the
“Company Allocation”), then the Company must deposit 40% of the IP Proceeds, 20%
of the Governmental Grant Proceeds and the Company Allocation into an escrow
account (the “Sinking Fund”).  At any time after the later of the
Effective Date and the six-month anniversary of the initial contribution by the
Company to the Sinking Fund, but no more than once in every 6-month period, the
Company will be required to use the funds then in the Sinking Fund to redeem
outstanding shares of Series D Preferred, from the holders on a pro rata basis,
at a premium of 15% to the stated value through February 13, 2010, and 20%
thereafter.
 
 Immediately
after the completion of the transactions contemplated by the Purchase Agreement,
the conversion price of the Company’s Series B Preferred was adjusted, pursuant
to weighted-average anti-dilution provisions, to $4.67, causing the conversion
rate of Series B Preferred into Common Stock to change to approximately
1-to-1.49893.  In addition, the exercise prices of the Company’s
Series B Warrants and Series C Warrants were adjusted, pursuant to
weighted-average anti-dilution provisions, to $6.79 and $7.20, respectively,
from the original exercise prices of $10.36 and $11.00. In addition to the
adjustment to the exercise prices of the Series B Warrants and the Series C
Warrants, the aggregate number of shares issuable upon exercise of the Series B
Warrants and the Series C Warrants increased to 3,609,261and 408,032,
respectively, from 2,365,528and 267,074. 
Certain other warrants issued prior to the Company’s initial public offering
were also adjusted pursuant to anti-dilution provisions contained in those
warrants such that their per share exercise price reduced from $2.00 to $1.48
and the aggregate number of shares of Common Stock issuable increased from
approximately 281,042 to approximately 379,787.


71





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 ourChief Executive
Officer and Chief Financial Officer, evaluated the effectiveness of our
disclosure controls and procedures as of December 31,2008 as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended,orthe 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 ofDecember 31, 2008, our Chief Executive
Officer and Chief Financial Officerconcluded 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 ourChief 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 Frameworkissued
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, 2008.





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 nochange in our internal control over
financial reportingduring
our fourthfiscal quarter
endedDecember
31,2008 that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.





Item 9B:Other Information





Not applicable.




72





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, 2008 and
2007


Statements of Operations for years ended
December 31, 2008, 2007, and 2006


Statements of Stockholders’ Equity for
period from January 1, 2006 to December 31, 2008


Statements of Cash Flows for years ended
December 31, 2008, 2007, and 2006


Notes to Financial
Statements





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




Exhibit
              No.
            
            Description3.1
            
            Certificate of Incorporation filed
      with the Secretary of State of Delaware on June 5,
      2003***3.2
            
            Certificate of Amendment of
      Certificate of Incorporation filed with the Secretary of State of Delaware
      on February 25, 2005***3.3
            
            Certificate of Designation of
      Series A Participating Convertible Preferred Stock filed with the
      Secretary of State of Delaware on March 8,
  2005***3.4
            
            Second Certificate of Amendment of
      Certificate of Incorporation filed with Secretary of State of Delaware on
      June 30, 2006***3.5
            
            Certificate of Designations,
      Preferences and Rights of Series B Convertible Preferred Stock, dated
      March 16, 2007******3.6
            
            Certificate of Designation of
      Preferences, Rights and Limitations of Series D Convertible Preferred
      Stock, dated February 13, 2009.†3.7
            
            SecondAmended and Restated
      By-Laws*******4.1
            
            Form of Specimen Common Stock
      Certificate*4.2
            
            Form of Warrants issues to
      designees of Sunrise Securities Corp., dated March
      2005*




73




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.†10.1
            
            Restricted Stock Agreement between
      Cleveland BioLabs, Inc. andMichael Fonstein, dated as of July 5,
      2003*10.2
            
            Restricted Stock Agreement between
      Cleveland BioLabs, Inc. andYakov Kogan, dated as of July 5,
      2003*10.3
            
            Restricted Stock Agreement between
      Cleveland BioLabs, Inc. andAndreiGudkov, 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.AndreiGudkov, 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**




74




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.AndreiGudkov, dated as of January 23,
      2006*10.15
            
            Amendment to Restricted Stock
      Agreement between Cleveland BioLabs, Inc. andMichael Fonstein, dated as of January 23,
      2006*10.16
            
            Amendment to Restricted Stock
      Agreement between Cleveland BioLabs, Inc. andYakov Kogan, dated as of January 23,
      2006*10.17
            
            Amendment to Restricted Stock
      Agreement between Cleveland BioLabs, Inc. andAndreiGudkov, 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
            
            Process Development and
      Manufacturing Agreement between Cleveland BioLabs, Inc. and SynCo Bio
      Partners B.V., effective as of August 31,
  2006****10.21
            
            Sponsored Research Agreement
      between Cleveland BioLabs, Inc. and Roswell Park Cancer Institute
      Corporation, effective as of January 12,
  2007*****10.22
            
            Securities Purchase Agreement,
      dated March 16, 2007******10.23
            
            Registration Rights Agreement,
      dated March 16, 2007******10.24
            
            Amendment to Employment Agreement
      by and between Cleveland BioLabs, Inc. and Dr.Michael Fonstein, dated as of December 31,
      2008.10.25
            
            Amendment to Employment Agreement
      by and between Cleveland BioLabs, Inc. and Dr.Yakov Kogan, dated as of December 31,
      2008.10.26
            
            Form of Securities Purchase
      Agreement. †10.27
            
            Form of Registration Rights
      Agreement.†




75




10.28
            
            Form of Voting
      Agreement.†10.29
            
            Amendment and Waiver Agreement,
      dated March 20, 2009.†10.30
            
            Form of Amendment and
      Reaffirmation Agreement.†23.1
            
            Consent of Meaden & Moore,
      Ltd.31.1
            
            Rule 13a-14(a)/15d-14(a)
      Certification ofMichael
      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 onDecember 5, 2007.†
            Incorporated by reference to Form
      8-K as filed on March 30,
2009.





(c) Not applicable.




76


SIGNATURES




Pursuant
to the requirementsof 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 30,
      2009
              By:
              /s/ MICHAEL
      FONSTEINMichael
      FonsteinChief
      Executive Officer(Principal
      Executive Officer)






CLEVELAND BIOLABS,
      INC.Dated: March 30,
      2009
                By:
                /s/ JOHN
      A. MARHOFER, JR.John
      A. Marhofer, Jr.Chief
      Financial Officer(Principal Financial and
      Accounting 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 30,
      2009Michael
      Fonstein/ S
      /    John A. Marhofer, Jr.
              
              Chief Financial Officer (Principal
      Financial and Accounting Officer)
              
              March 30,
      2009John A. Marhofer,
      Jr./ S
      /    James Antal
              
              Director
              
              March 30,
      2009James
      Antal/
      S /    Paul DiCorleto
              
              Director
              
              March 30,
    2009Paul
    DiCorleto/
      S /    Andrei Gudkov
              
              Chief Scientific Officer, and
      Director
              
              March 30,
    2009Andrei
      Gudkov/
      S /    Bernard L. Kasten
              
              Director
              
              March 30,
    2009Bernard L.
      Kasten/
      S /    Yakov Kogan
              
              Chief Operating Officer,
      Secretary, and Director
              
              March 30,
    2009Yakov Kogan/
      S /    H. Daniel Perez
              
              Director
              
              March 30,
    2009H. Daniel
    Perez




77




EXHIBIT INDEX





Exhibit
              No.
            
            Description3.1
            
            Certificate of Incorporation filed
      with the Secretary of State of Delaware on June 5,
      2003***3.2
            
            Certificate of Amendment of
      Certificate of Incorporation filed with the Secretary of State of Delaware
      on February 25, 2005***3.3
            
            Certificate of Designation of
      Series A Participating Convertible Preferred Stock filed with the
      Secretary of State of Delaware on March 8,
  2005***3.4
            
            Second Certificate of Amendment of
      Certificate of Incorporation filed with Secretary of State of Delaware on
      June 30, 2006***3.5
            
            Certificate of Designations,
      Preferences and Rights of Series B Convertible Preferred Stock, dated
      March 16, 2007******3.6
            
            Certificate of Designation of
      Preferences, Rights and Limitations of Series D Convertible Preferred
      Stock Preferred Stock, dated February 13, 2009.†3.7
            
            SecondAmended and Restated
      By-Laws*******4.1
            
            Form of Specimen Common Stock
      Certificate*4.2
            
            Form of Warrants issues 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.†10.1
            
            Restricted Stock Agreement between
      Cleveland BioLabs, Inc. andMichael Fonstein, dated as of July 5,
      2003*10.2
            
            Restricted Stock Agreement between
      Cleveland BioLabs, Inc. andYakov Kogan, dated as of July 5,
      2003*









10.3
            
            Restricted Stock Agreement between
      Cleveland BioLabs, Inc. andAndreiGudkov, 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.AndreiGudkov, 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.AndreiGudkov, dated as of January 23,
      2006*10.15
            
            Amendment to Restricted Stock
      Agreement between Cleveland BioLabs, Inc. andMichael Fonstein, dated as of January 23,
      2006*10.16
            
            Amendment to Restricted Stock
      Agreement between Cleveland BioLabs, Inc. andYakov Kogan, dated as of January 23,
      2006*









10.17
            
            Amendment to Restricted Stock
      Agreement between Cleveland BioLabs, Inc. andAndreiGudkov, 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
            
            Process Development and
      Manufacturing Agreement between Cleveland BioLabs, Inc. and SynCo Bio
      Partners B.V., effective as of August 31,
  2006****10.21
            
            Sponsored Research Agreement
      between Cleveland BioLabs, Inc. and Roswell Park Cancer Institute
      Corporation, effective as of January 12,
  2007*****10.22
            
            Securities Purchase Agreement,
      dated March 16, 2007******10.23
            
            Registration Rights Agreement,
      dated March 16, 2007******10.24
            
            Amendment to Employment Agreement
      by and between Cleveland BioLabs, Inc. and Dr.Michael Fonstein, dated as of December 31,
      2008.10.25
            
            Amendment to Employment Agreement
      by and between Cleveland BioLabs, Inc. and Dr.Yakov Kogan, dated as of December 31,
      2008.10.26
            
            Form of Securities Purchase
      Agreement.†10.27
            
            Form of Registration Rights
      Agreement.†10.28
            
            Form of Voting
      Agreement.†10.29
            
            Amendment and Waiver Agreement,
      dated March 20, 2009.†10.30
            
            Form of Amendment and
      Reaffirmation Agreement.†23.1
            
            Consent of Meaden & Moore,
      Ltd.31.1
            
            Rule 13a-14(a)/15d-14(a)
      Certification ofMichael
      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 onDecember 5, 2007.†
            Incorporated by reference to Form
      8-K as filed on March 30,
2009.