If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

 

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

 

If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. o

 

 

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The information contained in this prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and we are not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

PROSPECTUS

SUBJECT TO COMPLETION, DATED AUGUST 10, 2007

 

9,375,095 Shares

 

 

CLEVELAND BIOLABS, INC.

Common Stock, $0.005 Par Value

 

This prospectus relates to up to 9,375,095 shares of our common stock that may be offered for sale from time to time by the selling stockholders named in this prospectus. This number represents approximately 130% of the 7,211,612 shares of common stock issuable upon the conversion or exercise of the securities issued in our private placement at the current conversion and exercise prices. Of these 7,211,612 shares of common stock:

 

·	4,579,010 shares are issuable upon conversion of Series B Convertible Preferred Stock, par value $0.005 per share (the “Series B Preferred”);

 

·	2,365,528 shares are issuable upon exercise of the Series B Warrants; and

 

·	267,074 shares of common stock are issuable upon exercise of the Series C Warrants (together with the Series B Warrants, the “Warrants”).

 

All of these shares of common stock may be sold by the selling stockholders named in this prospectus, or their respective transferees, pledgees, donees or successors-in-interest. The selling stockholders will receive all proceeds from the sale of the shares of our common stock being offered in this prospectus. We will receive the exercise price of the Warrants upon the exercise in cash of the Warrants by the selling stockholders. We are registering the offer and sale of the shares of common stock to satisfy registration rights that we have granted.

 

The shares of common stock to which this prospectus relates may be offered and sold from time to time directly by the selling stockholders or alternatively through ordinary brokerage transactions directly to market makers of our shares or through any other means described in “Plan of Distribution” beginning on page 81. The shares of common stock may be sold in one or more transactions, at fixed prices, at prevailing market prices at the time of sale or at negotiated prices.

 

Our common stock is quoted on the Nasdaq Capital Market and the Boston Stock Exchange under the symbol “CBLI.” The last reported sales price of our common stock on the Nasdaq Capital Market on August 7, 2007 was $10.23 per share.

 

Investing in our common stock involves a high degree of risk. See “Risk Factors” beginning on page 8.

 

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Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

The date of this prospectus is ____________, 2007.

 

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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, entered Phase IIa clinical trials earlier this year.

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Our Markets

 

Protectan CBLB502 is being developed in part to address the unmet need of protection against exposure to nuclear radiation. Recent acts and threats of terrorism and the proliferation of nuclear weapons programs in rogue states have magnified the need for radiation-protecting agents, or radioprotectants, in non-medical applications. The Project BioShield Act, which President Bush 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 importance and urgency of developing tissue-protecting agents for these kinds of emergency applications are so great that the FDA approval process is scaled down to preclinical and Phase I trials. Under new FDA rules, costly and time-consuming Phase II and III studies are not required for these non-medical applications. Because Phase II and Phase III testing, which each involve testing a drug candidate on large numbers of participants who suffer from the targeted disease and condition, can last for a total of anywhere from three to six or more years, being permitted to bypass those phases represents a significant time and cost savings towards obtaining FDA approval. Without Phase II and Phase III testing, the FDA approval process is based on efficacy testing in primates and safety testing in humans conducted during preclinical and Phase I trials.

 

The Department of Defense, or DoD, through the U.S. Army Space and Missile Defense Command, recently issued a Request for Proposal, or RFP, for the Advanced Development of Medical Radiation Countermeasures, or MRC. According to the RFP, the objective of the MRC project is to develop a post-exposure MRC through a Phase I clinical trial and, pending successful completion of the Phase I clinical trial, develop the MRC product through approval/licensure with the FDA and procure quantities of the MRC sufficient to achieve Initial Operational Capability, or IOC. A range of 50,000 to 500,000 doses has been specified to achieve IOC. The RFP stated that MRC must be safe, efficacious, quick acting, free from performance-decrementing side effects, relatively non-invasive, approved by the FDA, compatible with current military countermeasures, and usable on the battle field. The MRC should not require refrigeration, nor have other significant logistical burdens, and should have a relatively long shelf life.

The solicitation specifically seeks a drug/biologic intended for use after exposure to ionized radiation, or IR, has occurred. It is anticipated that the countermeasure, when administered following exposure to IR, will prolong survival by treating the gastrointestinal syndrome of Acute Radiation Syndrome. Specifically, when administered following exposure to IR, the countermeasure should either prevent or reduce the extent of incipient radiation injury or promote repair of manifest radiation injury to allow the preservation or restoration of the anatomic integrity and normal physiologic functioning of the gastrointestinal tract. Our response to this RFP was submitted in April 2007. Information regarding an anticipated contract award is expected later in the year.

We believe Protectan CBLB502's unique ability to protect against and mitigate the damaging effects of gamma irradiation on the gastrointestinal system, combined with its safety, stability and method of administration, will make it a very strong candidate for this contract. Moreover, we are actively engaged in the process of completing current cGMP-compliant manufacturing, and we plan to submit an IND application for human safety testing in late 2007.

The protection of healthy tissues against side effects of radiation treatment and anticancer drugs provides another application, and, therefore, another market opportunity for Protectan CBLB502. Approximately 50 to 60% of cancer patients are treated with radiation sometime during the progression of the disease. To obtain optimal results, physicians attempt to strike a judicious balance between the total dose of radiotherapy and the adverse effect on surrounding healthy tissues. If there were a means by which these tissues could be protected from radiotherapy, more aggressive treatment regimens could be possible. In contrast to non-medical applications, use of Protectan CBLB502 to ameliorate the side effects of radiation treatment and anticancer drugs is subject to the full FDA approval process.

CBL’s primary targets for curaxins are three treatment-resistant forms of cancer — hormone refractory prostate cancer, RCC, and soft-tissue sarcoma.

 

Other than skin cancer, prostate cancer is the most common cancer in men in the United States. According to the American Cancer Society, an estimated 234,460 cases were projected to be diagnosed with prostate cancer in 2006. RCC is a niche cancer that accounts for 3% of all cancer cases in the United States, but it is the most common type of kidney cancer in adults. In the United States, approximately 35,000 to 40,000 patients are diagnosed with RCC annually. Soft-tissue sarcomas are rare, representing only about 1% of all cancer cases. According to the American Cancer Society, approximately 9,400 new cases of soft-tissue sarcoma were projected to be diagnosed in the United States in 2006, which were projected to be responsible for approximately 3,500 deaths.

 

Our Industry

 

CBL is a biotechnology, or biotech, company focused on developing bio-defense and cancer treatment products. 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 $300 billion industry (based on total market capitalization) and includes large companies such as Amgen and Genentech.

 

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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 revenues, (2) gain access to additional expertise, and (3) establish relations with major players 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.

 

With the Project BioShield Act, biotech companies now have greater access to grants and contracts with the U.S. government. Several biotech companies have secured grants and contracts from the U.S. government to develop drugs and vaccines as a medical counter-measure against potential terrorist attacks. For biotech companies focused on these types of drugs and vaccines, this type of funding together with the scaled down FDA approval process are major departures from the traditional biotech business model.

 

CBL is focusing its R&D efforts in the following areas:

 

·	protecting against the effects of radiation;

 

·	reducing cancer treatment side effects; and

 

·	developing anticancer drugs against several specific forms of cancer.

 

While there are a number of biotech companies and Pharma companies that attempt to develop new anti-radiation and anticancer drugs to treat these medical conditions, these areas are nevertheless considered unmet medical needs, which means that there are currently no existing methods to satisfactorily treat these medical conditions.

Private Placement

On March 16, 2007, pursuant to a Securities Purchase Agreement of the same date, we consummated a transaction with various accredited investors in which we agreed to sell to the investors, in a private placement, Series B Preferred convertible into an aggregate of approximately 4,288,712 shares of common stock, and Series B Warrants to purchase approximately 2,144,356 shares of our common stock at an exercise price of $10.36 per share. The aggregate purchase price paid by the investors for the Series B Preferred and Series B Warrants was approximately $30,000,000. After related 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.

Sunrise Securities Corp., or SSC, Reedland Capital Partners, an Institutional Division of Financial West Group, and Basic Investors, Inc., served as placement agents for the transaction. In consideration for their services, each agent (or its designees) received compensation as follows: SSC received Series B Preferred convertible into an aggregate of 290,298 shares of common stock, Series B Warrants to purchase an aggregate of 145,149 shares of common stock, and Series C Warrants, bearing an exercise price of $11.00 per share, to purchase 267,074 shares of common stock; Reedland received Series B Warrants to purchase an aggregate of 63,543 shares of common stock and cash compensation (in lieu of Series B Preferred and additional Series B Warrants) of $444,800; Basic Investors received Series B Warrants to purchase an aggregate of 12,480 shares of Common Stock and cash compensation (in lieu of Series B Preferred and additional Series B Warrants) of $87,360.

In the aggregate, the Series B Preferred and the Series B Warrants issued in the transaction are convertible for and exercisable into, as of the date hereof, approximately 6,944,538 shares of common stock (subject to adjustments 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 the exercise price of the Warrants, as the case may be). Based on the closing price of our common stock on March 16, 2007 of $10.19, the Series B Preferred sold to investors and issued to SSC had a market value of approximately $46,660,112.  Nasdaq Marketplace Rule 4350(i)(1)(D)(ii) requires that, for the sale, issuance or potential issuance by us of common stock (or securities convertible into or exercisable for common stock) equal to 20% or more of the common stock outstanding before the issuance, for less than the greater of book or market value of the common stock, we must obtain stockholder approval for the issuance. Accordingly, the conversion of the Series B Preferred and the exercise of the Warrants into common stock by their respective holders was submitted for approval and was approved by our stockholders at our 2007 annual stockholders meeting.

Notwithstanding the conversion rights of the Series B Preferred holders and us, and the exercise rights of the holders of Series B Warrants and us, we may not issue any shares of common stock in conversion of the Series B Preferred or in exercise of any Series B Warrant if the conversion or exercise would either (1) cause the applicable holder to beneficially own a number of shares of common stock that exceeds 9.99% of the number of shares of common stock outstanding after giving effect to the conversion or exercise, or (2) cause us to issue a number of shares of common stock that would exceed the number of shares of common stock that we can issue under the rules and regulations of the exchange on which those shares are traded. The holders of Series C Warrants may exercise at any time after September 16, 2007 until expiration.

In connection with obtaining stockholder approval of the foregoing issuances, on March 16, 2007 we entered into a Voting Agreement with Michael Fonstein, Andrei Gudkov, Yakov Kogan, the Cleveland Clinic, ChemBridge, Sunrise Equity Partners L.P., or SEP, and SSC, each of whom agreed to vote in favor of authorizing the issuance of the shares of common stock underlying all of the Series B Preferred and the Warrants. In the aggregate, these parties to the Voting Agreement, together with holders of the Series B Preferred that were eligible to vote at the 2007 annual stockholders meeting, held approximately 63% of all votes entitled to be cast as of the record date.

In connection with the Securities Purchase Agreement, we also entered into a Registration Rights Agreement with the Buyers, dated as of March 16, 2007. Under the Registration Rights Agreement, we granted the Buyers certain registration rights with respect to common stock issuable upon conversion of the Series B Preferred or exercise of the Warrants. This registration statement is being filed to satisfy the registration rights granted under that Registration Rights Agreement.

 

SEP, one of the investors, together with its affiliates is a holder of more than 10% of our outstanding common stock. In the transaction, SEP purchased Series B Preferred convertible into 600,000 shares of common stock and received Series B Warrants to purchase 300,000 shares of common stock. As mentioned above, we also issued Series B Preferred convertible into 290,298 shares of common stock, Series B Warrants to purchase an aggregate of 145,149 shares of Common Stock, and Series C Warrants to purchase 267,074 shares of common stock to SSC, an affiliate of SEP, in consideration for its services as lead placement agent. We also engaged SSC as our exclusive management agent regarding all exercises of the Warrants, for which we will pay SSC a fee equal to 3.5% of the aggregate exercise price of each Warrant, payable in cash if the exercise is in cash or in shares of common stock if the exercise is cashless.

Risk Factors

 

Our business is subject to numerous risks as discussed more fully in the section entitled “Risk Factors” immediately following this prospectus summary. Principal risks of our business include:

 

·	We have a history of operating losses. We expect to continue to incur losses and may exhaust our financial resources before we are able to complete the development of our drug candidates.

 

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·	Development of our drug candidates will be an expensive and time-consuming process. We may therefore require substantial additional financing to meet our business objectives.

 

·	Our success depends in large part on the results as well as the cost of our R&D. Failures in our R&D efforts or substantial increases in our R&D costs would adversely affect our results of operations.

 

·	We are subject to significant and complex government regulations, which may delay or prevent the commercialization of any drug candidates.

 

·	Our intellectual property is based primarily upon licensed patents and license agreements with our collaborators. If we lose any of the rights under these agreements, our ability to commercialize our drug candidates would be materially harmed.

 

·

Before obtaining required regulatory approvals for the commercial sale of any of our drug candidates, we must demonstrate through pre-clinical testing and clinical trials that our drug candidates are safe and effective for use in humans. We are subject to numerous risks inherent in conducting clinical trials, any of which could delay or prevent us from developing or commercializing our drug candidates.

Statement of Operations Data

		Three Months Ended March 31, 2007			Three Months Ended March 31, 2006			Fiscal year Ended December 31, 2006			Fiscal year Ended December 31, 2005			Fiscal year Ended December 31, 2004
Total Revenues		$	321,445		$	578,424		$	1,708,214		$	1,138,831		$	636,341
Operating Expenses
Research and Development		$	3,528,600		$	1,502,364		$	6,989,804		$	2,640,240		$	2,892,967
General and Administrative		$	994,319		$	352,898		$	2,136,511		$	986,424		$	262,817
Income (Loss) from Operations		$	(4,201,474	)	$	(1,276,838	)	$	(7,418,101	)	$	(2,487,833	)	$	(2,519,443	)
Net Income (Loss)		$	(4,106,133	)	$	(1,252,145	)	$	(7,222,644	)	$	(2,386,455	)	$	(2,523,142	)

 

Balance Sheet Data

		March 31, 2007			December 31, 2006			December 31, 2005			December 31, 2004
Cash and Cash Equivalents		$	11,968,017		$	3,061,993		$	1,206,462		$	94,741
Total Assets		$	32,497,045		$	6,416,529		$	4,253,333		$	382,219
Total Liabilities		$	1,639,271		$	823,375		$	696,729		$	756,433
Total Stockholders’ Equity		$	30,857,774		$	5,593,154		$	3,556,604		$	(374,214	)

 

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Our executive officers and directors control our business and may make decisions that are not in our stockholders’ best interests.

 

As of August 7, 2007, our officers and directors, in the aggregate, beneficially owned (calculated in accordance with Rule 13d-3 under the Exchange Act) approximately 31.43% of the outstanding shares of our voting stock. As a result, such persons, acting together, have the ability to substantially influence all matters submitted to our stockholders for approval, including the election and removal of directors and any merger, consolidation or sale of all or substantially all of our assets, and to control our management and affairs. Accordingly, such concentration of ownership may have the effect of delaying, deferring or preventing a change in discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of our business, even if such a transaction would be beneficial to other stockholders. Our founders and executive officers together with two of our stockholders, the Cleveland Clinic Foundation and ChemBridge Corporation, have agreed that in the event of a liquidation, dissolution, bankruptcy or receivership of the Company during the 24 months after July 20, 2006, the effective date of our initial public offering, or upon our common stock becoming a “Covered Security” under the National Securities Markets Improvement Act of 1996, they will subordinate their right to receive any proceeds until each other holder of our common stock has received an amount equal to the number of shares held multiplied by the public offering price. Such founders, officers and stockholders have also agreed during the same 24-month period not to sell, transfer or otherwise dispose of their shares in a tender offer, merger or other sale transaction unless such transaction is approved by a majority of the other stockholders.

 

Sales of additional equity securities may adversely affect the market price of our common stock and your rights in us may be reduced.

 

We expect to continue to incur drug development and selling, general and administrative costs, and in order to satisfy our funding requirements, we may need to sell additional equity securities, which may be subject to certain registration rights. 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. Our stockholders may experience substantial dilution and a reduction in the price that they are able to obtain upon sale of their shares. Also, any new securities issued may have greater rights, preferences or privileges than our existing common stock.

 

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

 

We are authorized to issue 40,000,000 shares of our common stock and 10,000,000 shares of our preferred stock. As of August 7, 2007, we had 12,139,943 shares of our common stock issued and outstanding, excluding shares issuable upon the exercise of our outstanding warrants and options, and 4,579,010 shares of our common stock issuable upon conversion of our Series B Preferred. As of August 7, 2007, we had outstanding 957,490 options to purchase shares of our common stock with exercise prices ranging from $0.66 to $10.48 per share of which 656,430 options have vested or will vest within 60 days of August 7, 2007, and outstanding warrants to purchase 3,456,768 shares of our common stock with exercise prices ranging from $1.13 to $11.00 per share, all of which are exercisable within 60 days of August 7, 2007. 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.

 

Shares eligible for future sale may adversely affect the market.

 

From time to time, certain of our stockholders may be eligible to sell all or some of their shares of common stock by means of ordinary brokerage transactions in the open market pursuant to Rule 144 promulgated under the Securities Act of 1933, as amended, or Securities Act, subject to certain limitations. In general, pursuant to Rule 144, a stockholder (or stockholders whose shares are aggregated) who has satisfied a one-year holding period may, under certain circumstances, sell within any three-month period a number of securities which does not exceed the greater of 1% of the then outstanding shares of common stock or the average weekly trading volume of the class during the four calendar weeks prior to such sale. Rule 144 also permits, under certain circumstances, the sale of securities, without any limitations, by a non-affiliate of our company who has satisfied a two-year holding period. Any substantial sale of our common stock pursuant to Rule 144 or pursuant to any resale prospectus may have an adverse effect on the market price of our securities.

 

An aggregate of 6,153,601 shares of common stock have been registered with the SEC. A total of up to an additional 9,375,095 shares of common stock are being registered pursuant to the registration statement of which this prospectus forms a part. All of these shares would otherwise be eligible for future sale under Rule 144 after passage of the minimum one-year holding period for holders who are not officers, directors or affiliates of the company.

 

Because we will not pay cash dividends on our common stock, stockholders may have to sell shares in order to realize their investment.

 

We have not paid any cash dividends on our common stock and do not intend to pay cash dividends on our common stock in the foreseeable future. We will pay dividends on our Series B Preferred at the annual rate of 5% in two semi-annual installments. We intend to retain future earnings, if any, for reinvestment in the development and expansion of our business. Any credit agreements, which we may enter into with institutional lenders, may restrict our ability to pay dividends. Whether we pay cash dividends in the future will be at the discretion of our board of directors and will be dependent upon our financial condition, results of operations, capital requirements and any other factors that the board of directors decides is relevant.

 

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We are able to issue shares of preferred stock with rights superior to those of holders of our common stock. Such issuances can dilute the tangible net book value of shares of our common stock.

 

Our Certificate of Incorporation provides for the authorization of 10,000,000 shares of “blank check” preferred stock. Of such authorized shares, 3,750,000 of these shares were previously designated as Series A Participating Convertible Preferred Stock, or Series A Preferred Stock, and 4,579,010 of these shares have been designated as Series B Preferred. All of the outstanding Series A Preferred Stock converted into common stock in connection with our initial public offering. Pursuant to our Certificate of Incorporation, our board of directors is authorized to issue such “blank check” preferred stock with rights that are superior to the rights of stockholders of our common stock, at a purchase price then approved by our board of directors, which purchase price may be substantially lower than the market price of shares of our common stock, without stockholder approval.

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Agency		Title		Amount			Project		Status
NASA		New class of biological radioprotectors		$	70,000		Protectans		Completed
NIH		N-myc targeted therepeutics for childhood neuroblastoma		$	100,000		Curaxins		Completed
NIH		Radioprotectors targeting p53		$	100,000		Protectans		Completed
NIH		Development of new inhibitors of androgen receptors		$	100,000		Curaxins		Completed
DARPA		Tissue protecting antidotes from anti-apoptotic factors of Mycoplasma		$	475,000		Protectans		Completed
NIH		Bacterial proteins as cancer drugs and radioprotectors		$	100,000		Protectans		Completed
NIH		Protecting immune system by modulators of p53 and NF-kB		$	1,500,000		Protectans		Funded
NIH		New approach to improve abdominopelvic radiotherapy by protecting small intestine		$	100,000		Protectans		Completed
NIH		Effective Radioprotectants Targeting Toll-like Receptor 5		$	100,000		Protectans		Completed
NASA		Use of CBLB502 against biologically harmful effects of ionizing radiation during space flight		$	100,000		Protectans		Funded
NIH		Radioprotectors targeting p53		$	750,000		Protectans		Funded
NIH		N-myc targeted therapeutics for childhood neuroblastoma		$	750,000		Curaxins		Funded

Besides being a source of non-dilutive cash, grants play two very important roles:

·	validating our science by passing a rigorous review process; and

 

·	creating awareness by exposure to a professional bio-medical community.

 

·	License of Early-Stage Leads — In addition to Protectan CBLC502 and Curaxin CBLC102, we possess certain compound prototypes which we are developing with a view to offering them to a pharmaceutical or biotechnology company for strategic alliance or licensing transactions.

 

We cannot be certain that we will be successful in attracting additional capital from any of the foregoing sources to fund our development of drugs. In the event that we do not successfully attract additional capital, our business, prospects, financial condition and results of operations could be adversely affected.

 

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Research and Development

 

Over nearly two years of operations, we have been able to build an R&D team headed by our founder and Chief Scientific Officer, Dr. Andrei Gudkov, a distinguished scientist with numerous publications and patents. Our Vice President of Drug Development, Dr. Farrel Fort, who spent 20 years at Abbott Laboratories and TAP Pharmaceutical where he was the Director of Drug Safety, supervises our drug development efforts. Over the last 10 years, the labs of Drs. Gudkov and George Stark of the Cleveland Clinic have received more than $20 million of grant funding for the development of the basic science forming our technological foundation. Our fully equipped 20,000 square foot research facilities include a modern high-throughput screening, or HTS, core and versatile molecular biology and cell culture capabilities.

Besides academic grants already received by the labs of our scientific founders, we are also eligible for government support. We have historically received approximately 30% of our grant revenues through the SBIR and Small Business Technology Transfer grant programs. As a result of our growth, however, we have ceased to be eligible for SBIR grant programs, and therefore no longer qualify to receive these grants.

 

We have submitted 14 grant applications to NIH, DOD and NASA. As of December 31, 2006, 12 of the 14 grant applications have been awarded to us bringing $4,245,000 in grant commitments to our R&D programs.

 

Licensing Revenues

 

Licensing and other payments from large pharmaceutical companies (and other institutions, including the U.S. government) are a major revenue source for biotech companies in the process of developing drugs. Licensing and acquisition transactions with large pharmaceutical companies are struck at all stages of drug development, from early discovery to Phase III clinical trials. For example, large pharmaceutical companies, such as Bristol-Myers Squibb Co., Johnson & Johnson, Amgen Inc., AstraZeneca and Novartis AG, that dominate the anticancer drug market, distribute major anticancer drugs that were initially developed by biotech companies. Over the last decade, there has been a substantial increase in the number of collaborative deals between large pharmaceutical companies and biotech companies with the average deal amount increasing to $30 million in 2003. Such licensing deals can be an attractive way to realize the value of a potential product of a biotech company early in the R&D process — an approach we intend to strategically employ. Historically, some of the larger biopharmaceutical licensing deals have been in the field of cancer research. In addition to bringing in early revenues, such discussions can also serve as an invaluable opportunity to gauge the true market value of specific drug candidates. However, as of the date of this prospectus, we have not realized any revenue from licensing arrangements.

 

Strategic Partnerships

 

CBL’s development is supported by its strategic partners and founders, the Cleveland Clinic and ChemBridge. Besides being a source of critical intellectual property, the Cleveland Clinic provides access on favorable economic terms to its multiple research cores and animal care facilities, which allows us to avoid building this type of infrastructure and focus instead on mission-critical research and drug development. Even more importantly, leading physicians of the Cleveland Clinic are involved in the design of our clinical trials, which will take place at the Cleveland Clinic among other locations, providing invaluable expertise in various cancer types and radiological treatment. Additionally, we may license certain future intellectual property developed in a laboratory at the Cleveland Clinic headed by one of our founders through our existing exclusive license for cancer applications and tissue protection with the Cleveland Clinic, which we believe will provide a good supply of new concepts and leads for future development.

 

ChemBridge provided us with access to 180,000 compounds of its compound library in exchange for 357,600 shares of our common stock and warrants to purchase 264,624 shares of our common stock. ChemBridge also expects to play a key role in hit-to-lead optimization providing necessary chemical expertise and synthetic capabilities. Our agreement with ChemBridge allows us to utilize these capabilities for a 50% share in the ownership of two lead compounds selected by ChemBridge and all derivative compounds thereof in lieu of cash reducing our development exposure.

In January 2007, we entered into a strategic research partnership with RPCI to develop our cancer and radioprotectant drug candidates. RPCI, founded in 1898, is a world-renowned cancer research hospital and the nation's first cancer research, treatment and education center. RPCI is a member of the prestigious National Comprehensive Cancer Network, an alliance of the nation's leading cancer centers, and is one of only ten free-standing cancer centers in the nation.

 

RPCI and various agencies of the state of New York will provide us with up to $5 million of grant and other funding. We will establish a major research/clinical facility at the RPCI campus in Buffalo, New York, which will become the foundation for several of our advanced research and clinical trials. Andrei Gudkov, our Chief Scientific Officer, has agreed to become Senior Vice President of Research Programming and Development for RPCI effective April 2007.

 

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.

 

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We are seeking new strategic partnerships to support the development of our drug candidates. We have engaged in discussions with several leading pharmaceutical and biotech entities as well as various government institutions. In August 2004, we entered into five-year cooperative research and development agreement, or CRADA, with the Uniformed Services University of the Health Sciences which includes the Armed Forces Radiobiology Research Institute (AFRRI), the Henry M. Jackson Foundation for the Advancement of Military Medicine, Inc. (Henry Foundation) and the Cleveland Clinic to:

·	evaluate radioprotectant candidates originating from the Cleveland Clinic;

·	obtain information on the effects of the radioprotectant candidates originating from AFRRI on intracellular and extracellular signaling pathways; and

·	if promising candidates emerge from the radioprotectant candidates supplied by the Cleveland Clinic, develop a plan and initiate studies of these compounds to the FDA to obtain IND status.

The agreement may be unilaterally terminated by any party upon 30 days prior written notice with or without cause. Under the terms of the agreement, all parties are financially responsible for their own expenses related to the agreement. We also discuss from time to time other collaborations with other potential partners. However, there can be no assurance that any of these discussions will result in collaborations on favorable terms or at all.

 

Our Intellectual Property

 

Our intellectual property platform is based primarily on 13 patent applications exclusively licensed to us by the Cleveland Clinic and three patent applications, which we have filed and own, all in the field of regulating cell death that cover new cancer treatment concepts, methods of drug discovery and drug candidates isolated in the laboratory of Dr. Andrei Gudkov. Our license with the Cleveland Clinic is for an indefinite term and we may license additional intellectual property in the same licensed field from the Cleveland Clinic in the future. 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 within 90 days of receipt of such termination notice we cure the breach. As consideration for this license, we issued the Cleveland Clinic 1,341,000 shares of common stock and agreed to make certain milestone, royalty and sublicense royalty payments. We have paid $50,000 in connection with milestone payments relating to the filing of an IND for Curaxin CBLC102 and accrued an additional $250,000 in milestone payments that are payable before August 31, 2007.

 

The aforementioned 13 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 Aminoacridenes;

·	Activation of p 53 and Inhibition of NF-kB for Cancer Treatment;

 

·	Modulation of Immune Responses;

 

·	Methods of Protecting Against Apoptosis Using Lipopeptides;

 

·	Modulation of Cell Growth; and

 

·	Mitochondrial Cytochrome B

 

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The aforementioned three patent applications, which we filed and own, are as follows:

 

·	Quinacrine Isomers;

 

·	Modulation of Androgen Receptor for Treatment of Prostate Cancer; and

·	Method of Increasing Hematopoietic Stem Cells (filed in January 2007).

 

Non-Medical Applications of Protectans

 

Recent acts of terrorism and the proliferation of nuclear weapons programs in rogue states have magnified the importance of radioprotectants in military applications. The potential threat of a terrorist attack using a conventional explosive embedded with radioactive material, or “dirty bomb”, or a nuclear device has caused the U.S. government to appropriate significant dollars in the area of Homeland Security and Emergency Preparedness. In a recent legislative act, the Project BioShield Act of 2004, the U.S. government allocated an extra $5.6 billion over ten years for countermeasures against these threats. As of March 26, 2006, under the Project BioShield Act of 2004, there have only been three contracts awarded for the treatment of radiation, which accounted for approximately $38 million of the over approximately $1 billion awarded.

 

Should either threat become a reality, emergency responders would have to enter the impact area to rescue survivors, assess damage, make repairs and perform containment, thereby potentially exposing themselves to lethal doses of radiation. An emergency of any magnitude, combined with the limited window after radiation exposure in which a drug is effective, would require a stockpile of any drug used to treat the effects of radiation.

 

The core meltdown, and resulting explosions, at the Chernobyl nuclear power plant in the Ukraine in April 1986 illustrates the impact such events could have on a surrounding population and the need for stockpiling radioprotectants. Officials estimate that at least 600,000 people were involved in some aspect of cleanup and more than 15 million people were exposed to heightened radiation, resulting in medical costs of more than $60 billion.

 

High-risk areas include military installations and theater of operations, any urban or metropolitan areas at risk of radiation attack, and a 10-50 mile radius around nuclear power plants or spent fuel facilities. In the New York City metropolitan area, for example, approximately 20 million people live within 50 miles of the Indian Point nuclear power plant located just 35 miles north of New York City thereby creating a large market for stockpiling radioprotectants. In addition, similar market opportunities may exist in both Europe and Asia to the extent permitted by U.S. and foreign government authorities. Other products in the bio-defense area have been granted licenses to export into specific countries by the U.S. State Department in accordance with export regulations, including International Traffic in Arms Regulations.

 

Currently, the only drug that is considered appropriate for stockpiling for protection against radiation injury is potassium iodide (KI). While KI is useful in protecting the thyroid from the long-term risk of thyroid cancer, it is not useful in protecting against the acute effects of radiation injury and ensuing infections. In Europe, KI has been stockpiled for years in sufficient quantities to treat all civilians living within a number of miles of any of the 300 nuclear power plants in the event of a nuclear accident. Stockpiling of KI has also recently begun for civilians living within 10-50 miles of the 103 active nuclear power plants in the U.S. For example, California recently announced plans to buy 880,000 doses of KI to protect people living close to either of the state’s two nuclear plants.

 

Medical Applications of Protectans

 

Radiotherapy is the most common modality for treating human cancers. Approximately 50%-60% of cancer patients need radiotherapy at some stage of treatment, either for curative or palliative purposes. To obtain optimal results, a judicious balance between the total dose of radiotherapy delivered and the threshold of the surrounding normal critical tissues is required. In order to obtain better control with a higher dose, normal tissue must be protected against radiation injury. Thus, the role of radioprotective compounds is very important in clinical radiotherapy.

 

Currently, the only available radioprotectant for cancer patients on the market is Ethyol® (aminofostine), which is produced by MedImmune Inc. Aminofostine is considered an inadequate radioprotectant because of its severe side effects and sub-optimal efficacy. Consequently, its sales have been limited.

 

The U.S. market for anticancer therapeutics is large and growing. The American Cancer Society estimates overall annual cancer costs in the United States at $189.8 billion: $69.4 billion for direct medical costs, $16.9 billion for morbidity costs, and $103.5 billion for mortality costs. Treatment of breast, lung and prostate cancer accounts for over half of the direct medical costs. The market for anticancer drugs, valued at more than $15 billion in 1998, was projected to nearly double by 2003, and, ultimately, exceeded this projection.

 

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Excessive loss of normal, non-cancerous cells through the mechanism of apoptosis occurs during both drug and radiation cancer treatments. The adverse effects of these therapies include injuries to the hematopoietic and immune systems, the epithelium of the digestive tract and hair follicles. Despite significant efforts in the anticancer drug market, some cancer patients die from complications from the drugs, and a significant number of patients cannot tolerate chemotherapy drug regimens due to their toxic side effects. Some of the side effects are dose limiting in that they do not allow the patient to take higher doses or longer treatment, ultimately reducing the potency of the therapy. Two of the most common side effects, chemo-nausea and fatigue, are likely to be reduced by drugs protecting the hematopoietic and gastrointestinal systems similar to Protectan CBLB502.  This creates an opportunity for us to offer our drug candidate to a substantial number of patients in a multibillion dollar anti-cancer drug market .

 

New therapies aimed at cancer (Curaxins)

 

We have prioritized our primary disease targets for Curaxin CBLC102 as hormone refractory prostate cancer, RCC and soft-tissue sarcoma based on several factors, including the results of our preliminary research, readily identifiable partnering opportunities, potential or orphan drug status and alternative treatments in other cancer areas.

 

Prostate cancer is the most common cancer in men in the United States other than skin cancer. According to the American Cancer Society, an estimated 234,460 cases were projected to be diagnosed with prostate cancer in 2006. The majority of patients who are diagnosed with localized prostate cancer are treated and cured with either radiation or surgery. Patients in whom treatment with curative intent is unsuccessful and those who present with metastasis are candidates for androgen suppression. The majority of men who are deprived of androgens, however, ultimately progress to an androgen-independent phase where the initial androgen suppression regimen no longer controls the tumor. As a result, treatment for the androgen-independent phase of prostate cancer is a clear unmet medical need.

RCC is a niche cancer that accounts for 3% of all cancer cases in the United States, but is the most common type of kidney cancer in adults. In the United States, approximately 35,000 — 40,000 patients are diagnosed with RCC annually. For early-stage cancer, the five-year survival rate is 60% to 70%. If the cancer has spread to the lymph nodes, the five-year survival rate is 5% to 15%. If it has spread to other organs, the five-year survival rate is less than 5%. Although the market for RCC treatment is relatively small and large pharmaceutical companies generally are unlikely to enter into the market with their own products that compete directly with us, we may see competition in the RCC market from Wyeth Research and Aeterna Laboratories which are in the late stage development of second-line therapies to combat RCC. These products are aimed at achieving better toxicity profiles and greater survival benefits than conventional treatments for stage IV RCC. Nevertheless, the high mortality rate and small market size may cause other large pharmaceutical companies to license products from a company such as us instead of developing their own products.

 

Soft-tissue sarcomas are rare, representing only about 1% of all cancer cases. According to the American Cancer Society, approximately 9,400 new cases of soft-tissue sarcoma were projected to be diagnosed in the United States in 2006, which were projected to be responsible for approximately 3,500 deaths per year. If detected early, before it has had a chance to spread, the five-year survival rate is approximately 90%. Treatment requires surgery and radiation therapy with chemotherapy used as an additional means to deal with distant reoccurrences and metastases.

Competition

 

 Non-Medical Applications

In the area of radiation-protective antidotes, the most visible market participant is Hollis-Eden Pharmaceuticals, Inc., a biopharmaceutical company that is working on the development of a new class of investigational drugs known as Immune Regulating Hormones (IRH). Hollis-Eden’s major developmental focus is on HE2100 (also known as NEUMUNE™ and 5-Adrostenediol), which is licensed from Virginia Commonwealth University.

Medical Applications

The arsenal of medical radiation-protectors is limited to ETHYOL™ (amifostine), sold by MedImmune. 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 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.

 

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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 (filgrastim, Amgen) 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. Use of G-CSF 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.

 

Sargramostim (Berlex, Richmond, CA) 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, now commonly used among cancer patients undergoing chemotherapy to maintain hemoglobin in the near normal range, also has some ability to mobilize CD34+ cells.

Other Sources of Competition

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

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

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

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

 

Governmental Regulation

 

The Drug Regulation Process

 

The R&D, manufacturing and marketing of drug candidates are subject to regulation, primarily by the FDA in the U.S. and by comparable authorities in other countries. These national agencies and other federal, state, local and foreign entities regulate, among other things, R&D activities (including testing in primates and in humans) and the testing, manufacturing, handling, labeling, storage, record keeping, approval, advertising and promotion of the products that we are developing. Noncompliance with applicable requirements can result in various adverse consequences, including approval delays or refusals to approve drug licenses or other applications, suspension or termination of clinical investigations, revocation of regulatory 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.

 

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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.

Clinical testing, also known as clinical trials or clinical studies, is either conducted internally by pharmaceutical or biotech companies or is conducted on behalf of these companies by contract research organizations. The process of conducting clinical studies is highly regulated by the FDA, as well as by other government and professional bodies. Below, we describe the principal framework in which clinical studies are conducted, as well as describe a number of the parties involved in these studies.

 

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.

Protocols. Before commencing human clinical studies, the sponsor of a new drug must submit an investigational new drug application, or IND, to the FDA. IND status allows initiation of clinical investigation within 30 days of filing of the NDA if the FDA does not respond with questions during the 30-day period. The IND application contains what is known in the industry as a protocol. A protocol is the blueprint for each drug study. The protocol sets forth, among other things, the following:

 

·	who must be recruited as qualified participants;

 

·	how often to administer the drug;

 

·	what tests to perform on the participants; and

 

·	what dosage of the drug to give to the participants.

 

Institutional Review Board. An institutional review board is an independent committee of professionals and lay persons that reviews clinical research studies involving human beings and is required to adhere to guidelines issued by the FDA. The institutional review board does not report to the FDA, but its records are audited by the FDA. Its members are not appointed by the FDA. An institutional review board must approve all clinical studies. The institutional review board’s role is to protect the rights of the participants in the clinical studies. It approves the protocols to be used, the advertisements that the company or contract research organization conducting the study proposes to use to recruit participants, and the form of consent that the participants will be required to sign prior to their participation in the clinical studies.

 

Clinical Trials. Human clinical studies or testing of a potential product are generally done in three stages known as Phase I through Phase III testing. The names of the phases are derived from the regulations of the FDA. Generally, there are multiple studies conducted in each phase.

 

Phase I. Phase I studies involve testing a drug or product on a limited number of healthy participants, typically 24 to 100 people at a time. Phase I studies determine a drug’s basic safety and how the drug is absorbed by, and eliminated from, the body. This phase lasts an average of nine months to a year.

 

Phase II. Phase II trials involve testing up to 200 participants at a time who may suffer from the targeted disease or condition. Phase II testing typically lasts an average of one to two years. In Phase II, the drug is tested to determine its safety and effectiveness for treating a specific illness or condition. Phase II testing also involves determining acceptable dosage levels of the drug. If Phase II studies show that a new drug has an acceptable range of safety risks and probable effectiveness, a company will continue to study the substance in Phase III studies.

 

Phase II trials are sometimes combined with Phase III trials. These Phase II/III trials differ from Phase II trials 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. Phase III studies involve testing large numbers of participants who suffer from the targeted disease or condition, typically several hundred to several thousand people. The purpose is to verify the effectiveness and long-term safety on a large scale. These studies generally last two to three years and are conducted at multiple locations or sites. Like the other phases, Phase III requires the site to keep detailed records of data collected and procedures performed.

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.

 

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New Drug Approval. The results of the clinical trials are submitted to the FDA as part of a new drug application, or NDA. Following the completion of Phase III studies, assuming the sponsor of a potential product in the United States believes it has sufficient information to support the safety and effectiveness of its product, it submits an NDA to the FDA requesting that the product be approved for marketing. The application is a comprehensive, multi-volume filing that includes the results of all clinical studies, information about the drug’s composition, and the sponsor’s plans for producing, packaging and labeling the product. The FDA’s review of an application can take a few months to several years, with the average review lasting 18 months. Once approved, drugs and other products may be marketed in the United States, subject to any conditions imposed by the FDA.

 

Phase IV. The FDA may require that the sponsor conduct additional clinical trials following new drug approval. The purpose of these trials, known as Phase IV studies, is to monitor long-term risks and benefits, study different dosage levels or evaluate safety and effectiveness. In recent years, the FDA has increased its reliance on these trials. Phase IV studies usually involve thousands of participants. Phase IV studies also may be initiated by the company sponsoring the new drug to gain broader market value for an approved drug. For example, large-scale trials may also be used to prove the effectiveness and safety of new forms of drug delivery for approved drugs. Examples may be using an inhalation spray versus taking tablets or a sustained-release form of medication versus capsules taken multiple times per day.

 

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. 

Fact Track Approval. On November 21, 1997, former President Clinton signed into law the Food and Drug Administration Modernization Act. That law codified the FDA’s policy of granting “Fast Track” approval for cancer therapies and other therapies intended to treat serious or life threatening diseases and that demonstrate the potential to address unmet medical needs. The Fast Track program emphasizes close, early communications between the FDA and the applicant to improve the efficiency of preclinical and clinical development, and to reach agreement on the design of the major clinical efficacy studies that will be needed to support approval. Under the Fast Track program, a sponsor also has the option to submit and receive review of parts of the NDA or BLA on a rolling schedule approved by the FDA, which expedites the review process.

 

The FDA’s Guidelines for Industry Fast Track Development Programs require that a clinical development program must continue to meet the criteria for Fast Track designation for an application to be reviewed under the Fast Track Program. Previously, the FDA approved cancer therapies primarily based on patient survival rates or data on improved quality of life. While the FDA could consider evidence of partial tumor shrinkage, which is often part of the data relied on for approval, such information alone was usually insufficient to warrant approval of a cancer therapy, except in limited situations. Under these Guidelines, 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 broadened authority to consider evidence of partial tumor shrinkage or other surrogate endpoints of clinical benefit for approval. This new policy is intended to facilitate the study of cancer therapies and shorten the total time for marketing approvals. Under accelerated approval, the manufacturer must continue with the clinical testing of the product after marketing approval to validate that the surrogate endpoint did predict meaningful clinical benefit. To the extent applicable, we intend to take advantage of the Fast Track programs to obtain accelerated approval on our future drugs, however, it is too early to tell what effect, if any, these provisions may have on the approval of our drug candidates.

 

Orphan Drug Act. The Orphan Drug Act provides incentives to develop and market drugs for rare disease conditions in the United States. A drug that receives orphan drug designation and is the first product to receive FDA marketing approval for its product claim is entitled to a seven-year exclusive marketing period in the United States for that product claim. Although we may not obtain it, we plan to seek orphan drug status for marketing protection from the FDA for the use of Curaxin CBLC102 in the treatment of RCC, soft-tissue sarcoma and hormone refractory prostate cancer. However, it should be noted that a drug that is considered by the FDA to be different than such FDA-approved orphan drug, is not barred from sale in the United States during this exclusive marketing period, even if it receives approval for the same claim.

 

The FDA requires that any drug or formulation to be tested in humans be manufactured in accordance with its current GMP regulations. The current GMP regulations set certain minimum requirements for procedures, record-keeping and the physical characteristics of the laboratories used in the production of these drugs.

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.

 

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

We also are subject to the following risks and obligations, 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.

·

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

The manufacturing and marketing of our proposed products and our R&D activities are and will continue to be subject to regulation by federal, state and local governmental authorities in the U.S. and other countries. In the U.S., pharmaceuticals are subject to rigorous regulation by the FDA, which reviews and approves the marketing of drugs. The Federal Food, Drug and Cosmetic Act, the regulations promulgated thereunder, and other federal and state statutes and regulations govern, among other things, the testing, manufacturing, labeling, storage, record keeping, advertising and promotion of our potential products.

 

Other Regulations

 

Various federal and state laws, regulations, and recommendations relating to safe working conditions, laboratory practices, the experimental use of primates, and the purchase, storage, movements, import, export, use and disposal of hazardous or potentially hazardous substances, including radioactive compounds and infectious disease agents, are applicable to our activities. They include, among others, the United States Atomic Energy Act, the Clean Air Act, the Clean Water Act, the Occupational Safety and Health Act, the National Environmental Policy Act, the Toxic Substances Control Act, the Resources Conservation and Recovery Act, national restrictions on technology transfer, import, export, and customs regulations and other present and possible future local, state, or federal regulation. The extent of government regulation that might result from future legislation or administrative action cannot be accurately predicted.

 

Hazardous Materials 

 

Our R&D processes involve the controlled use of hazardous materials, chemicals and radioactive materials and produce waste products. We are subject to federal, state and local laws and regulations governing the use, manufacture, storage, handling and disposal of hazardous materials and waste products. We do not expect the cost of complying with these laws and regulations to be material. We have no manufacturing capabilities. We plan to rely on third parties to manufacture bulk compounds and finished investigational medicines for clinical trials. Commercial quantities of any drugs that we may seek to develop will have to be manufactured in facilities and by processes that comply with FDA and other regulations. We plan to rely on third parties to manufacture commercial quantities of any products that we successfully develop.

 

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Manufacturing

 

We do not intend to establish or operate facilities to manufacture our drug candidates, and therefore will be dependent upon third parties to do so. As we develop new products or increase sales of any existing product, we must establish and maintain relationships with manufacturers to produce and package sufficient supplies of our finished pharmaceutical products. We have established a relationship with SynCo Bio Partners B.V., a leading biopharmaceutical manufacturer, to produce Protectan CBLB502 under cGMP specifications, and have signed an agreement to produce sufficient amounts for clinical trials and the commercial market. For CBLC102, we have contracted Regis Technologies, Inc. and Aptuit, LLC to manufacture sufficient amounts for clinical trials.

 

Reliance on third party manufacturing presents several risks, 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 commercial 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 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.

Executive Officers and Directors

 

The following are our executive officers and directors and their respective ages as of August 7, 2007.

 

Name		Age		Position
Bernard L. Kasten		61		Director, Chairman of the Board
James Antal		56		Director
Paul DiCorleto		56		Director
Michael Fonstein		47		Director, President and Chief Executive Officer
Andrei Gudkov		50		Director, Chief Scientific Officer
Yakov Kogan		34		Director, Executive Vice President of Business Development, Secretary
H. Daniel Perez		58		Director
John A. Marhofer Jr.		45		Chief Financial Officer

 

Bernard L. Kasten, M.D. Dr. Kasten became a member of our board on July 20, 2006 and was appointed Chairman of the Board on August 30, 2006. From 1995 to 2004, Dr. Kasten served at Quest Diagnostics Incorporated where he was Chief Laboratory Officer and most recently Vice President of Medical Affairs of the MedPlus Inc. Subsidiary. Dr. Kasten served as a director of SIGA Technologies from May 2003 to December 2006, and as SIGA’s Chief Executive Officer from July 2004 through April 2006. Dr. Kasten currently serves as a director of GeneLink Inc. and SeraCare Life Sciences Inc. Dr. Kasten is also a director of several privately held companies. Dr. Kasten is a graduate of the Ohio State University College of Medicine. His residency was served at the University of Miami, Florida and he was awarded fellowships at the National Institutes of Health Clinical Center and NCI, Bethesda, Maryland. He is a diplomat of the American Board of Pathology with certification in anatomic and clinical pathology with sub-specialty certification in Medical Microbiology.

  James J. Antal Mr. Antal became a member of our board on July 20, 2006. Mr. Antal served as Chief Financial Officer of Experian from 1996 to 2001 and as Chief Investment Officer of Experian from 2001 to 2002. Experian is a leading global provider of consumer and business credit information, direct marketing information services, and integrated customer relationship management processes. He also served on the Board of Directors of First American Real Estate Solutions; an Experian joint venture with First American Financial Corp. Mr. Antal earned a Bachelor of Science degree in Business Administration with an Accounting major from The Ohio State University in 1973. He became a Certified Public Accountant (Ohio) in 1975. Starting in 2002, Mr. Antal served as an advisor to the board of directors for Plexus Vaccine, Inc., a biotech company, until it was acquired by SIGA Technologies in 2004. In December 2004, he joined the SIGA board of directors, and also currently serves on its audit and corporate governance committees. From May 2004 to August 2005, he was engaged as the Chief Financial Advisor to the Black Mountain Gold Coffee Co. In July 2005, he joined Pathway Data Inc, a privately held company engaged in consumer credit notification and identity theft assistance services, as its part-time Chief Financial Officer.

  Paul E. DiCorleto, Ph.D.   Dr. DiCorleto has served as one of our directors since 2004. He is the Chairman of the Lerner Research Institute of the Cleveland Clinic and Chairman of the Department of Molecular Medicine at the Case School of Medicine. Dr. DiCorleto received his undergraduate training in chemistry at Rensselaer Polytechnic Institute and his doctorate in biochemistry from Cornell University. Dr. DiCorleto’s research focuses on the molecular and cellular basis of atherosclerosis. He has been with the Cleveland Clinic since 1981, having served previously as Chairman of the Department of Cell Biology, as an Associate Chief of Staff, and as a member of the Clinic’s Board of Governors and Board of Trustees. Dr. DiCorleto is currently serving, as the most recent past president, on the Executive Committee of the North American Vascular Biology Organization, as chair of the Vascular Biology study section of the national American Heart Association, and as a member of the Association of American Medical Colleges’ Advisory Panel on Research.

 

  Michael Fonstein, Ph.D. Dr. Fonstein has served as our Chief Executive Officer and President since our inception in June 2003. He served as Director of the DNA Sequencing Center at the University of Chicago from its creation in 1994 to 1998, when he left to found Integrated Genomics, Inc. located in Chicago, 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 in Moscow, where he led a broad research program focused on virology and cancer drug resistance. In 1990, he reestablished his lab at the University of Illinois at Chicago where 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 at Case Western Reserve University. Dr. Gudkov has agreed to become Senior Vice President of Research Programming and Development for Roswell Park Cancer Institute effective April 2007. He will continue in his capacity as a consultant with CBL. 

 

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  Yakov Kogan, Ph.D. Dr. Kogan has served as one of our directors and as our Executive Vice President of Business Development since our inception in June 2003 and as Secretary since March 2006. From 2001 to 2004, 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 the University of Chicago. Dr. Kogan holds a Ph.D. degree in Molecular Biology from VNII Genetica, as well as an M.S. degree in Biology from Moscow State University.

  H. Daniel Perez, M.D. Dr. Perez became a member of our board on July 20, 2006. Dr. Perez is currently a Venture Partner at Bay City Capital, LLC, a venture firm located in San Francisco. From 2001 until 2006, Dr. Perez was the President and CEO of Berlex Biosciences. He joined Berlex Biosciences in 1993. Berlex Biosciences combined biotechnology and pharmaceutical discovery and development technologies to deliver innovative treatments for cardiovascular, cancer and immuno-based disorders. He earned his undergraduate degree at Mariano Moreno School, Argentina and graduated from Buenos Aires University Medical School. After completing an internship and residency in internal medicine at Beth Israel Medical Center in New York, Dr. Perez was a Fellow in Rheumatology at New York University-Bellevue Medical Center. He served on the NYU faculty until he was recruited by the University of California at San Francisco (UCSF) Medical School to start the Rosalind Russell Arthritis Center at San Francisco General Hospital under the direction of Dr. Ira Goldstein. Dr. Perez is currently a Professor of Medicine at UCSF.

 

  John (Jack) A. Marhofer, Jr., CMA, CFM   Mr. 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 from Miami University in Ohio in 1984, and his Masters in Business Administration in Finance from Akron University in Ohio in 1997, where he was named to the National Honor Society of the Financial Management Association.

 

Director Independence

In accordance with Nasdaq Marketplace Rule 4350(c), and the standard of independence defined in Nasdaq Marketplace Rule 4200(a)(15), a majority of CBL’s Board of Directors are "independent directors.” CBL’s independent directors are James J. Antal, Paul E. DiCorleto, Bernard L. Kasten, and H. Daniel Perez. In making the determination of independence with respect to Dr. DiCorleto, the Nominating and Corporate Governance Committee of the Board of Directors, which at the time consisted of Messrs. Antal, Kasten, and Perez, considered Dr. DiCorleto’s affiliation with the Cleveland Clinic and satisfied itself that this affiliation does not detract or interfere with Dr. DiCorleto’s ability to exercise independent judgment in carrying out his responsibilities as director and serving the best interests of our stockholders. Messrs. Antal, Kasten and Perez make up our Compensation Committee and Audit Committee. Messrs. DiCorleto, Kasten and Perez make up our Nominating and Corporate Governance Committee. As members of CBL’s Audit Committee, Messrs. Antal, Kasten, and Perez meet the additional independence requirements for audit committee members under Nasdaq Marketplace Rule 4350(d). Specifically, Messrs. Antal, Kasten, and Perez satisfy the criteria for independence set forth in Rule 10a-3(b)(1) under the Securities Exchange Act of 1934, as amended, or Exchange Act, and have not participated in the preparation of the financial statements of the company or any current subsidiary of the company at any time during the past three years.

Audit Committee

 

The audit committee consists of three directors elected by a majority of the board. The members of our audit committee comply with the independence requirements of the Nasdaq Capital Market and the rules of the SEC under the Exchange Act and include at least one audit committee financial expert. The current members of this committee are Messrs. Antal, Kasten and Perez, with Mr. Antal serving as chairperson and as the audit committee financial expert.

 

The audit committee is responsible for the following:

 

·	reviewing the results of the audit engagement with the independent registered public accounting firm;

 

·	identifying irregularities in the management of our business in consultation with our independent accountants, and suggesting an appropriate course of action;
·	reviewing the adequacy, scope, and results of the internal accounting controls and procedures;

 

·	reviewing the degree of independence of the auditors, as well as the nature and scope of our relationship with our independent registered public accounting firm; and

 

·	reviewing the auditors’ fees.

 

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Compensation Committee

 

The compensation committee consists of three directors elected by a majority of the board. The members of our compensation committee comply with the independence requirements of the Nasdaq Capital Market and the rules of the SEC under the Exchange Act. The current members of this committee are Messrs. Kasten, Antal and Perez, with Mr. Kasten serving as chairperson.

 

The compensation committee determines the salaries and incentive compensation of our officers and will provide recommendations for the incentive compensation of our other employees and consultants. When determining the long-term incentive component of executive compensation, the compensation committee considers our performance and relative shareholder return, the value of similar incentive awards to executive officers in comparable positions at comparable companies, and awards given to our executive officers in past years.

 

From time to time, the compensation committee may utilize the services of independent consultants to perform analyses and to make recommendations to the committee relative to executive compensation matters. No compensation consultant has so far been retained by us.

 

Nominating and Corporate Governance Committee

 

The nominating and corporate governance committee consists of three directors elected by a majority of the board. The members of our nominating and corporate governance committee comply with the independence requirements of the Nasdaq Capital Market and the rules of the SEC under the Exchange Act. The current members of this committee are Messrs. Kasten, DiCorleto and Perez, with Mr. Kasten serving as chairperson.

 

The functions of the nominating and corporate governance include the following:

 

·	identifying and recommending to the board of directors individuals qualified to serve as directors of the company and on the committees of the board;

 

·	advising the board with respect to matters of board composition, procedures and committees;

 

·	developing and recommending to the board a set of corporate governance principles applicable to us and overseeing corporate governance matters generally; and

 

·	overseeing the annual evaluation of the board and our management.

 

Codes of Conduct and Ethics

 

We have adopted a code of conduct that applies to our officers, employees and directors, including our principal executive officers, principal financial officers and principal accounting officers and a code of ethics applicable to our senior executives. Copies of each of these codes are available on our website. Among their provisions, these codes set forth written standards that are designated to deter wrongdoing and to promote:

 

·	honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships;
·	full, fair, accurate, timely and understandable disclosure in reports and documents that we file with, or submit to, the SEC and in other public communications made by us; and
·	compliance with applicable governmental laws, rules and regulations.

 

We have also adopted a whistleblower policy setting forth procedures for the prompt internal reporting of violations of company policies or law to an appropriate person or persons identified therein.

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Summary Compensation Table

 

Name and Principal Position		Year			Salary ($)			Bonus ($) (1)			Stock Awards ($)			Option Awards ($) (2)			Non-Equity Incentive Plan Compens- ation ($)			Non- Qualified Deferred Compens -ation Earnings ($)			All Other Compensation ($)			Total
Michael Fonstein Chief Executive Officer			2006 2005			191,667 155,000			35,375 -			- -			- -			- -			- -			- -			227,042 155,000	(3)
Yakov N. Kogan Executive Vice President			2006 2005			166,667 143,725			34,500 -			- -			- -			- -			- -			48,855 -	(4)		250,022 143,725
John A. Marhofer, Jr. Chief Financial Officer			2006 2005			90,000 64,460			17,750 558			- -			49,559 18,552			- -			- -			- -			157,309 83,571

 

(1)	Bonuses earned in a given year are paid during the current and the next year. For example, the bonuses indicated as earned in respect of 2006 were paid in September of 2006 and January of 2007.

 

(2)	Option award amounts are calculated using the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123R, Share-Based Payment. Further details can be found in Item 6 under “Critical Accounting Policies - Stock Based Compensation .”

 

(3)	Total compensation figure does not include amounts for commuting from primary residence in Chicago, Illinois of $9,083 for 2006 and $9,922 for 2005.

(4)	Represents tuition reimbursement for masters in business administration program.

CBL entered into employment agreements dated as of August 1, 2004 with each of Michael Fonstein, CBL’s Chief Executive Officer, and Yakov N. Kogan, CBL’s Executive Vice President. For the year ended December 31, 2006, Dr. Fonstein’s annual base salary was $191,667 and Dr. Kogan’s annual base salary was $166,667. These agreements have three-year initial terms and are renewed pursuant to their terms for successive one-year periods, unless earlier terminated in accordance with their terms. If either executive is terminated by CBL without cause as described in the agreements, he would be entitled to severance pay equal to nine months of his annual salary. The agreements also contain standard confidentiality, assignment of inventions, non-competition and non-solicitation provisions to help protect the value of CBL’s intellectual property. Mr. Marhofer does not have an employment agreement.

On April 6, 2007, the Compensation Committee of the Board of Directors of CBL approved the payment of cash bonuses and the issuance of stock options to Messrs. Fonstein, Gudkov, Kogan, and Marhofer. The cash bonuses, consisting of $40,000 to each individual, were paid in April 2007. The stock options vested immediately and provide the right to purchase the Company’s common stock, $0.005 par value per share, at an exercise price of $8.36 per share. Messrs. Fonstein, Gudkov, and Kogan each received 37,500 options, and Mr. Marhofer received 25,000 options.

 

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Outstanding Equity Awards at Fiscal Year-End

Below is information relating to unexercised options held by John A. Marhofer, Jr., our Chief Financial Officer, as of December 31, 2006. No other named executive officer held any unexercised options or unvested stock as of such date.

 

Option Awards

Name

Number of Securities Underlying Unexercised Options (#) Exercisable

Number of Securities Underlying Unexercised Options (#) Unexercisable

Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#)

Option Exercise Price ($)

Option Expiration Date

John A. Marhofer, Jr.

5,000 11,592

15,000 11,592

- -

4.50 0.67

2/28/2016 6/30/2015

 

The vesting dates for the option awards in the table above are as follows:

 

Options to acquire 20,000 shares of common stock expiring on 2/28/2016:

 

Options to acquire 5,000 shares of common stock immediately vested on grant date of 3/1/2006

Options to acquire 5,000 shares of common stock vest on 3/1/2007

Options to acquire 5,000 shares of common stock vest on 3/1/2008

Options to acquire 5,000 shares of common stock vest on 3/1/2009

Options to acquire 23,184 shares of common stock expiring on 6/30/2015:

Options to acquire 5,796 shares of common stock immediately vested on grant date of 7/1/2005

Options to acquire 5,796 shares of common stock vest on 7/1/2006

Options to acquire 5,796 shares of common stock vest on 7/1/2007

Options to acquire 5,796 shares of common stock vest on 7/1/2008

Director Compensation

 

Each of our directors is elected annually at our annual meeting. For the period from July 20, 2006 (the effective date of our initial public offering) through December 31, 2006, we paid each of our independent directors, other than Dr. DiCorleto, a fee of $12,500 for their services as director. In addition, we also granted to each of these three independent directors options to purchase 15,000 shares of Common Stock at our initial public offering price of $6.00 per share. All of those options vested immediately upon grant and are exercisable for ten years. Each of our independent directors is also reimbursed for reasonable out-of-pocket expenses incurred in attending Board of Directors or Board committee meetings. The total compensation of our non-employee directors for the year ended December 31, 2006 in their capacity as directors is shown in the table below.

 

Name		Fees Earned or Paid in Cash ($)			Stock Awards ($)			Option Awards ($)  (1)			Non-Equity Incentive Plan Compensation ($)			Change in Pension Value and Nonqualified Deferred Compensation Earnings ($)			All Other Compensation ($)			Total ($)
Bernard L. Kasten Jr.			12,500			-			56,449			-			-			-			68,949
Daniel Perez			12,500			-			56,449			-			-			-			68,949
James J. Antal			12,500			-			56,449			-			-			-			68,949
Paul E. DiCorleto			-			-			-			-			-			-			0
Andrei V. Gudkov			-			-			-			-			-			-			0

 

(1)

Messrs. Kasten, Perez, and Antal each held fully vested options to purchase 15,000 shares of common stock outstanding as of December 31, 2006. Award amounts are calculated using the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123R, Share-Based Payment. Further details can be found in Item 6 under “Critical Accounting Policies - Stock Based Compensation .”

 

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Each of our directors is elected annually at our annual meeting. Beginning with the term starting after our 2007 annual meeting, each of our independent directors will receive an annual retainer of $50,000 and an award of 35,000 options to purchase shares of common stock that vest immediately. In addition, the chairperson of the Audit Committee will receive an annual fee of $15,000 and the other members of the Audit Committee will each receive an annual fee of $10,000. The chairperson of the Compensation Committee will receive an annual fee of $7,500 and the other members of the Compensation Committee will each receive $5,000. Each member of the Nominating and Corporate Governance Committee, including the chairperson, will receive an annual fee of $2,500.

  

2006 Equity Incentive Plan

 

Scientific Advisory Board

 

We have established a Scientific Advisory Board to advise us on our scientific and research path, with each member representing his respective areas of expertise. None of the members of our Scientific Advisory Board is involved in the management of CBL and, other than 208,600 restricted shares of common stock granted to Dr. George R. Stark on April 26, 2004, none of the members of our Scientific Advisory Board receives any compensation from us.

 

·	George R. Stark, Ph.D.	Cancer biology, chemistry, technology development
·	Inder Verma, Ph.D.	Cancer biology, technology development
·	Bruce Blazar, MD	Pre-clinical aspects of drug development
·	Ernest Borden, MD	Drug trials
·	Preet M. Chaudhary, M.D.	Pre-clinical aspects of drug development

  

Dr. George R. Stark, Ph.D. Dr. Stark, a member of the National Academy of Sciences, Distinguished Scientist of the Lerner Research Institute and Professor of Genetics at the Case Western Reserve University, is an expert in various fields of biochemistry, signal transduction and cancer biology and has pioneered many key technologies in the fields of molecular biology and genetics. He became a professor at Stanford in 1971. In 1983, he moved to the Imperial Cancer Research Fund in London. In 1992, he became the Chair of the Lerner Research Institute of the Cleveland Clinic, which he chaired until 2001.

 

Dr. Inder Verma, Ph.D. Dr. Verma is a member of the National Academy of Sciences, Professor of Salk Institute for Biology Research. He is a member of the board of directors of Cell Genesys and a member of the scientific advisory boards of Cenegen and Zenogen. Dr. Verma is an internationally recognized leader in cancer biology and inflammation.

 

Dr. Bruce R. Blazar Dr. Blazar has served in various academic positions at the University of Minnesota since 1978. Presently, he is a Professor in the Division of Pediatric Bone Marrow Transplantation, Director of the Cytokine Reference Laboratory, Associate Director of the Division of Pediatric Bone Marrow Transplantation and Andersen Chair in Transplantation Immunology. Dr. Blazar has received numerous professional honors and awards, including the American Cancer Society Clinical Fellowship Award, the NIH-NCI National Research Service Award and the MERIT Award. In addition to his past and present work on numerous editorial boards, he is a member of the FDA Advisory Committee on Biological Response Modifiers and the Leukemia and Lymphoma Society Translational Research Grant Committee. He has multiple active grants supporting a substantial research effort and has published over 230 manuscripts.

 

Dr. Ernest C. Borden Dr. Borden is a director of the Center for Drug Discovery and Development of Taussig Cancer Center at the Cleveland Clinic. Dr. Borden uses his expertise to bring new cancer-fighting drugs from laboratory to clinical evaluation. His special interests involve the treatment of melanoma and new cancer therapies including interferons, vaccines and antibodies.

Dr. Preet M. Chaudhary Dr. Chaudhary is Professor of Medicine at the University of Pittsburgh Medical School, Deputy Director of Translational Research of the University of Pittsburgh Cancer Institute, and Co-Director of the Hematological Malignancies Program of the University of Pittsburgh. Dr. Chaudhary is an internationally renowned physician-scientist with research interests in several areas of cancer, including cancer drug resistance, biology of normal and leukemic hematopoeitic stem cells, programmed cell death, cellular signaling, molecularly targeted and biological therapies for leukemias, lymphomas, multiple myeloma and solid tumors, and novel strategies to improve the outcome of stem cell transplantation. Dr. Chaudhary has authored or co-authored numerous scientific publications and book chapters in some of the top scientific journals and holds five U.S. patents in the areas of hematopoietic stem cell purification, multi-drug resistance to cancer chemotherapy and NF-?B signaling. Dr. Chaudhary has been the recipient of numerous honors, fellowships and awards from national and international research organizations including the National Institutes of Health, Department of Defense, Cancer Research Fund of the Damon-Runyon Walter-Winchell Foundation, Howard Hughes Medical Institute, Leukemia Research Foundation, March of Dimes Foundation, Childhood Cancer Foundation and the Nearburg Family Foundation.

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SECURITY OWNERSHIP OF MANAGEMENT AND PRINCIPAL STOCKHOLDERS

 

The following tables set forth information with respect to the beneficial ownership of Common Stock and Series B Preferred, our two classes of voting stock, as of August 7, 2007, by (i) each person or entity known by CBL to own beneficially more than 5% of the outstanding shares of Common Stock or Series B Preferred, (ii) each CBL director, (iii) each CBL executive officer, and (iv) all Company executive officers and directors as a group. Beneficial ownership percentages are each as of August 7, 2007 and are based on

·

12,139,943 shares of Common Stock outstanding, and

·

4,579,010 shares of Common Stock issuable upon conversion of the Series B Preferred outstanding.

Beneficial ownership is determined in accordance with Rule 13d-3 under the Exchange Act. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares subject to options, warrants or conversion rights held by that person (excluding Series B Preferred, which is represented separately in the table below) that are currently exercisable or will become exercisable within 60 days after August 7, 2007 are deemed outstanding. These shares are not deemed outstanding for the purpose of computing the percentage ownership of any other person or entity. Unless otherwise indicated, to the Company’s knowledge, each person or entity has sole voting power and dispositive control over the shares shown as owned.

 

COMMON STOCK

Name and Address		Number of Shares of Registrant Common Stock Beneficially Owned			Percentage of Class Beneficially Owned
Directors and Executive Officers
Bernard L. Kasten Jr.			50,000	(1)		*
Director, Chairman of the Board
James J. Antal			50,000	(2)		*
Director
Paul E. DiCorleto			35,000	(3)		*
Director
Michael Fonstein			1,348,700	(4)		11.08	%
Director, CEO & President
Andrei V. Gudkov			1,587,100	(5)		13.03	%
Director, Chief Scientific Officer
Yakov N. Kogan			752,700	(6)		6.18	%
Director, Executive Vice President of Business Development, Secretary
H. Daniel Perez			50,000	(7)		*
Director
John A. Marhofer, Jr.			52,388	(8)		*
Chief Financial Officer
All directors and officers as a group (eight people)			3,925,888			31.43	%
5% Stockholders
The Cleveland Clinic Foundation(9)			1,341,000	(10)		11.05	%
ChemBridge Corporation(11)			622,224	(12)		5.02	%
Sunrise Equity Partners, LP(13)			1,416,962	(14)		11.58	%
Sunrise Securities Corp.(15)			1,416,962	(16)		11.58	%

 

* Less than 1%.

 

(1) Includes options to purchase 50,000 shares of common stock, which are currently exercisable.

(2) Includes options to purchase 50,000 shares of common stock, which are currently exercisable.

(3) Includes options to purchase 35,000 shares of common stock, which are currently exercisable.

 

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(4) Includes options to purchase 37,500 shares of common stock, which are currently exercisable.

 

(5) Includes options to purchase 37,500 shares of common stock, which are currently exercisable.

 

(6) Includes options to purchase 37,500 shares of common stock, which are currently exercisable.

 

(7) Includes options to purchase 50,000 shares of common stock, which are currently exercisable.

  

(8) Includes options to purchase 52,388 shares of common stock, which are currently exercisable.

 

(9) 9500 Euclid Avenue, Cleveland, Ohio 44195.

 

(10) The Cleveland Clinic Foundation is an Ohio non-profit corporation. The power to dispose of and vote these shares is controlled by corporate governance procedures pursuant to the Code of Regulations adopted by The Cleveland Clinic Foundation. Pursuant to these Regulations, the power to dispose of these shares is vested with the Board of Trustees and the power to vote these shares is vested in the (i) Chairman of the Board of Trustees, currently A. Malachi Mixon, II, (ii) President of the Board of Trustees, currently Delos M. Cosgrove, M.D., (iii) Vice President of the Board of Trustees, currently Stephen R. Hardis, and (iv) Vice Chairman of the Board of Trustees, which office is currently vacant. Any vote so exercised by these officers is deemed to have been exercised by and on behalf of The Cleveland Clinic Foundation.

 

(11) 16981 Via Tazon, Suite G, San Diego, California 92127.

 

(12) Includes 357,600 shares of common stock and 264,624 shares of common stock underlying a warrant, which is currently exercisable. Eugene Vaisberg, the Chairman and CEO of ChemBridge Corporation, is the majority owner of ChemBridge Corporation and has the power to vote and dispose of securities owned by ChemBridge Corporation. Accordingly, he may be deemed to beneficially own the securities owned by ChemBridge Corporation. Mr. Vaisberg disclaims any beneficial ownership of the securities owned by ChemBridge Corporation.

 

(13) 641 Lexington Ave., 25th Floor, New York, New York 10022.

 

(14) Includes 1,185,962 shares of common stock owned by Sunrise Equity Partners, LP, 131,000 shares of common stock owned by Sunrise Securities Corp., and 100,000 shares of common stock underlying a warrant, which is currently exercisable, owned by Sunrise Securities Corp. Level Counter LLC is the general partner of Sunrise Equity Partners, LP. The three managing members of Level Counter LLC are Nathan Low, the sole stockholder of Sunrise Securities Corp. and its president, Amnon Mandelbaum, one of the Managing Directors of Investment Banking at Sunrise Securities Corp., and Marilyn Adler, who is otherwise unaffiliated with Sunrise Securities Corp., and a unanimous vote of all three persons is required to dispose of the securities of Sunrise Equity Partners, LP. Accordingly, each of such persons may be deemed to have shared beneficial ownership of the securities owned by Sunrise Equity Partners, LP. Such persons disclaim such beneficial ownership. As a result of the relationship of Mr. Low to Sunrise Securities Corp., Sunrise Equity Partners, LP may be deemed to beneficially own the securities owned by Sunrise Securities Corp. and/or Sunrise Securities Corp. may be deemed to beneficially own the securities owned by Sunrise Equity Partners, LP. Sunrise Equity Partners, LP disclaims any beneficial ownership of the securities owned by Sunrise Securities Corp. and Sunrise Securities Corp. disclaims any beneficial ownership of the securities owned by Sunrise Equity Partners, LP.

 

(15) 641 Lexington Ave., 25th Floor, New York, New York 10022.

 

(16) Includes 1,185,962 shares of common stock owned by Sunrise Equity Partners, LP, 131,000 shares of common stock owned by Sunrise Securities Corp., and 100,000 shares of common stock underlying a warrant, which is currently exercisable, owned by Sunrise Securities Corp. Level Counter LLC is the general partner of Sunrise Equity Partners, LP. The three managing members of Level Counter LLC are Nathan Low, the sole stockholder of Sunrise Securities Corp. and its president, Amnon Mandelbaum, one of the Managing Directors of Investment Banking at Sunrise Securities Corp., and Marilyn Adler, who is otherwise unaffiliated with Sunrise Securities Corp., and a unanimous vote of all three persons is required to dispose of the securities of Sunrise Equity Partners, LP. Accordingly, each of such persons may be deemed to have shared beneficial ownership of the securities owned by Sunrise Equity Partners, LP. Such persons disclaim such beneficial ownership. As a result of the relationship of Mr. Low to Sunrise Securities Corp., Sunrise Equity Partners, LP may be deemed to beneficially own the securities owned by Sunrise Securities Corp. and/or Sunrise Securities Corp. may be deemed to beneficially own the securities owned by Sunrise Equity Partners, LP. Sunrise Equity Partners, LP disclaims any beneficial ownership of the securities owned by Sunrise Securities Corp. and Sunrise Securities Corp. disclaims any beneficial ownership of the securities owned by Sunrise Equity Partners, LP.

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SERIES B PREFERRED

 

Name and Address		Number of Shares of Registrant Series B Preferred Beneficially Owned			Percentage of Class Beneficially Owned
5% Stockholders
Iroquois Master Fund Ltd.(1)			250,000			5.46	%
JMG Capital Partners, LP(2)			280,000			6.11	%
Perceptive Life Sciences Master Fund, Ltd(3)			392,142			8.56	%
SF Capital Partners Ltd.(4)			354,000			7.73	%
Enable Growth Partners, L.P.(5)			425,000			9.28	%
Sunrise Equity Partners, LP(6)			600,000			13.10	%

 

(1) 641 Lexington Ave., 26th Floor, New York, New York 10022.

(2) 11601 Wilshire Blvd., Suite 2180, Los Angeles, California 90025.

(3) 499 Park Avenue, 25th Floor, New York, New York 10022.

(4) c/o Stark Offshore Management LLC, 3600 South Lake Drive, St. Francis, Wisconsin 53235.

(5) One Ferry Building, Suite 255, San Francisco, California 94111.

(6) 641 Lexington Ave., 25th Floor, New York, New York 10022.

 

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Transfer Agent and Registrar

 

The transfer agent and registrar for the common stock is Continental Stock Transfer & Trust Company.

 

Directors’ Limitation of Liability

 

Our certificate of incorporation and by-laws include provisions to indemnify the directors and officers to the fullest extent permitted by the Delaware General Corporation Law, including circumstances under which indemnification is otherwise discretionary. We believe that these provisions are necessary to attract and retain qualified persons as directors and officers.

 

We expect to enter into an indemnification agreement with each of our directors, which provides that we will indemnify our directors and advance expenses to our directors to the extent permitted by the laws of the State of Delaware. We have also obtained directors and officers liability insurance in amounts commensurate with those of similarly situated companies.

 

Insofar as indemnification for liability arising under the Securities Act may be permitted to our directors, officers and controlling persons as stated in the foregoing provisions or otherwise, we have been advised that, in the opinion of the SEC, this indemnification is against public policy as expressed in the Act and is, therefore, unenforceable.

NOTES TO FINANCIAL STATEMENTS

 

Note 1. Organization

 

Cleveland BioLabs, Inc. (“CBL” or the “Company”) is engaged in the discovery, development and commercialization of products for cancer treatment and protection of normal tissues from radiation and toxins. The Company was incorporated under the laws of the State of Delaware on June 5, 2003 and is headquartered in Cleveland, Ohio. The Company’s initial technological development efforts are intended to be used as powerful antidotes with a broad spectrum of applications including protection from cancer treatment side effects, radiation and hypoxia. A recent discovery found that one of its compounds increases the number of progenitor (originator) stem cells in mouse bone marrow. To date, the Company has not developed any commercial products, but in 2006 and 2005 the Company developed and produced biological compounds under a single commercial development contract.

 

Note 2. Summary of Significant Accounting Policies

 

A.

Cash and Equivalents - The Company considers highly liquid debt instruments with original maturities 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 maturity 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, 2006, and 2005.

 

D.

Notes Receivable - On December 7, 2006 the Company entered into an agreement with the Orbit Brands Corporation (Borrower) and its subsidiaries whereby the Company would lend up to $150,000 each on two promissory notes to the Borrower at a rate of 5% per annum with a maturity date of one year. The proceeds of the loans shall be used by the Borrower solely to cover expenses associated with converting the notes into common stock and preparing the lending motions for the bankruptcy case involving the Borrower. The loans are convertible into common stock of the Borrower and its subsidiaries. The Company is under no obligation to fund or loan any additional amount to the Borrower, although in the event the Company terminates, ceases or withholds its funding, any amounts funded prior thereto shall be forfeited, unless such termination is due to a breach by Borrower. As of December 31, 2006 the balance outstanding was $50,000 plus accrued interest of $171.

 

E.

Equipment - Equipment is stated at cost and depreciated over the estimated useful lives of the assets (generally five years) using the straight-line method. Leasehold improvements are depreciated on the straight-line method over the shorter of the lease term or the estimated useful lives of the assets. Expenditures for maintenance and repairs are charged to expense as incurred. Major expenditures for renewals and betterments are capitalized and depreciated. Depreciation expense was $94,931, $44,762, and $2,299 for the years ended December 31, 2006, 2005, and 2004 respectively.

 

F.

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

 

G.

Deferred Compensation - The Company realized deferred compensation upon the valuation of restricted stock granted to the founding stockholders. This deferred compensation was expensed over the three-year vesting period from the grant of the stock. Capitalized Deferred Compensation was $0 and $5,887 at December 31, 2006, and 2005, respectively. The Company expensed $5,887, $9,140, and $9,164 in compensation expense in 2006, 2005 and 2004, respectively.

 

H.	Intellectual Property - The Company capitalizes the costs associated with the preparation, filing, and maintenance of certain intellectual property rights. Capitalized intellectual property is reviewed annually for impairment.

 

F-11

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	A portion of this intellectual property is owned by the Cleveland Clinic Foundation (“CCF”) and granted to the Company through an exclusive licensing agreement as further discussed in Note 3. As part of the licensing agreement, CBL agrees to bear the costs associated with the preparation, filing and maintenance of patent applications relating to this intellectual property. If the patent application is approved, the costs paid by the Company are amortized on a straight-line basis over the shorter of seventeen years or the anticipated useful life of the patent. If the patent application is not approved, the costs associated with the preparation and filing of the patent application by the Company on behalf of CCF will be expensed as part of selling, general and administrative expenses. Gross capitalized patents pending costs are $222,789 and $67,991 on behalf of CCF for 13 patent applications as of December 31, 2006 and 2005, respectively. All of the 13 CCF patent applications are still pending approval.
	The Company also has submitted two patent applications as a result of intellectual property exclusively developed and owned by the Company. 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 seventeen years or the anticipated useful life of the patent. If the patent applications are not approved, the costs associated with the preparation and filing of the patent application will be expensed as part of selling, general and administrative expenses at that time. Gross capitalized patents pending costs were $30,189 and $8,366 for two patent applications as of December 31, 2006 and 2005, respectively. The patent applications are still pending approval.
I.	Lines 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 $500,000, and expires on July 1, 2007. At December 31, 2006, there were no outstanding borrowings under this credit facility
	The Company also has an additional line of credit for use as a margin account in forward exchange rate transactions as a hedge against foreign exchange rate risk. This line of credit is fully secured by short term investments, carries an interest rate of prime minus 1%, has a borrowing limit of $500,000, and expires on October 25, 2007. At December 31, 2006, there were no outstanding borrowings under this credit facility.

 

J.

Fair Value of Financial Instruments - Financial instruments, including cash and equivalents, accounts receivable, notes receivable, accounts payable and accrued liabilities, are carried at net realizable value. The carrying amounts of the convertible notes payable approximate their respective fair values as they bear terms that are comparable to those available under current market conditions.

N.

Deferred Revenue - Deferred Revenue results when payment is received in advance of revenue being earned. When cash is received, 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.

 

O.

Research and Development - Research and development expenses consist primarily of costs associated with the clinical trials of drug candidates, compensation and other expenses for research and development, personnel, supplies and development materials, costs for consultants and related contract research and facility costs. Expenditures relating to research and development are expensed as incurred.

 

P.

Employee Benefit Plan - The Company maintains a 401(k) retirement savings plan that is available to all full-time employees who have reached age 21. The plan is intended to qualify under Section 401(k) of the Internal Revenue Code of 1986, as amended. The plan provides that each participant may contribute up to a statutory limit of their pre-tax compensation, which was $15,000 for employees under age 50 and $20,000 for employees 50 and older in calendar year 2006. Employee contributions are held in the employees’ name and invested by the plan trustee. The plan currently provides for the Company to make matching contributions, subject to established limits. The Company made matching contributions of $48,858, $0, and $0 for 2006, 2005, and 2004, respectively.

 

Q.

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 allows up to 2,000,000 shares of stock to be awarded. For the year ended December 31, 2006, 45,000 options were granted to independent board members. On February 14, 2007, these 2,000,000 shares were registered with the SEC by filing a Form S-8 registration statement.

 

R.

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 using the Black-Scholes option valuation model. 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 based on published rates from 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 Company’s best judgment using facts and circumstances based on its limited experience, and computes an expected volatility based on similar high-growth, publicly-traded, biotechnology companies. The Company does not include the use of its own stock in the volatility calculation at this time because of the brief history of the stock as a publicly traded security on a listed exchange. Compensation expense is recognized using the straight-line amortization method for all stock-based awards.

 

	The fair value of warrants issued to a key consultant in exchange for services is estimated using the Black-Scholes option valuation model with the same assumptions.
	On March 1, 2006, the Company granted 116,750 options pursuant to stock award agreements to certain employees and key consultants. On July 20, 2006, the Company granted 45,000 fully-vested, stock options to independent board members pursuant to stock award agreements. On November 16, 2006, the Company granted 50,000 warrants to a key consultant. The assumptions used to value these option and warrant grants using the Black-Scholes option valuation model are as follows:

		March 1, 2006						July 20, 2006						November 16, 2006
Risk-free interest rate						4.66	%					5.04	%					4.80	%
Expected dividend yield						0	%					0	%					0	%
Expected life						5 years						5 years						2.5 Years
Expected volatility						75.11	%					71.43	%					68.26	%

 

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 the Company’s employee stock options and warrants have characteristics significantly different from those of traded derivative securities, 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 the Company’s options and warrants.

 

F-13

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The Company recognized a total of $506,078, $318,511, and $0 in expense for options and $114,032, $0 and $0 in expense for warrants for the year-ended December 31, 2006, 2005, and 2004, respectively.

The weighted average, estimated fair values of stock options granted during the year-ended December 31, 2006 and 2005 were $3.14 and $1.65, respectively.

The following tables summarize the stock option activity for the years ended December 31, 2006 and 2005. 

 

			Options			Weighted Average Exercise Price per Share			Weighted Average Remaining Contractual Term (in Years)
Outstanding, December 31, 2005			324,240		$	0.82
Granted, March 1, 2006			116,750			4.50
Granted, July 20, 2006			45,000			6.00
Exercised			625			4.50
Forfeited, Canceled			1,875			4.50
Outstanding, December 31, 2006			483,490		$	2.17			8.77
Exercisable, December 31, 2006			243,183		$	2.27			8.78

 

			Options			Weighted Average Exercise Price per Share			Weighted Average Remaining Contractual Term (in Years)
Outstanding, December 31, 2004			-		$	-
Granted, March 1, 2005			10,000			3.00
Granted, July 1, 2005			353,840			0.55
Granted, December 1, 2005			20,000			2.00
Exercised, September 30, 2005			59,600			-
Forfeited, Canceled			-			-
Outstanding, December 31, 2005			324,240		$	0.82			9.52
Exercisable, December 31, 2005			83,560		$	0.88			9.50

 

S.

Income Taxes - The Company utilizes 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. The difference between the financial statement and tax basis of assets and liabilities is determined annually. Deferred income tax assets and liabilities are computed for those temporary differences that have future tax consequences using the current enacted tax laws and rates that apply to the periods in which they are expected to affect taxable income. Valuation allowances are established, if necessary, to reduce the deferred tax asset to the amount that will, more likely than not, be realized. Income tax expense is the current tax payable or refundable for the year plus or minus the net change in the deferred tax assets and liabilities.

 

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

 

The following table presents the calculation of basic and diluted net loss per share:

 

		2006			2005			2004
Net loss available to common stockholders		$	(7,437,572	)	$	(2,678,369	)	$	(2,523,142	)
Net loss per share, basic and diluted		$	(0.84	)	$	(0.43	)	$	(0.55	)
Weighted-average shares used in computing net loss per share, basic and diluted			8,906,266			6,250,447			4,615,571

 

F-14

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	The Company has included $214,928 and $291,914 in the numerator to account for cumulative dividends for Series A preferred stock that were recognized for 2006 and 2005, respectively. As of December 31, 2006 all of these dividends have been paid.
	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 for warrants, was 814,424. 594,424 and 294,424 for the years ended December 31, 2006, 2005 and 2004, respectively. Such securities, had they been dilutive, would have been included in the computation of diluted earnings per share.
	The total number of shares excluded from the calculations of diluted net loss per share, prior to the application of the treasury stock method for options , was 483,490, 324,240 and 0 for the years ended December 31, 2006, 2005 and 2004, respectively. Such securities, had they been dilutive, would have been included in the computation of diluted earnings per share.
U.	Concentrations of Risk - Grant revenue was comprised wholly from grants issued by the federal government and accounted for 88.0%, 88.9% and 83.5% of total revenue for the years ended December 31, 2006, 2005 and 2004, respectively. Although the company anticipates ongoing federal 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.

 

V.

Foreign Currency Exchange Rate Risk - The Company has entered into a manufacturing agreement with a foreign third party to produce one of its drug compounds 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 Dollar. As of December 31, 2006, the Company is obligated to make payments under the agreement of 1,295,385 Euros. The Company has established means to purchase forward contracts to hedge against this risk. As of December 31, 2006, no hedging transactions have been consummated.

 

W.

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.

X.	Segment Reporting - As of December 31, 2006 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.

 

Y.	Effect of New Accounting Standards - In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Correction - a Replacement of APB Opinion No. 20 and FASB Statement No. 3” (“SFAS 154”). SFAS 154 changes the requirements for the accounting for and the reporting of a change in accounting principle. SFAS 154 requires that a voluntary change in accounting principle be applied retroactively with all prior period financial statements presented under the new accounting principle. SFAS 154 is effective for accounting changes and corrections of errors in fiscal years beginning after December 15, 2005. The Company has determined that the adoption of the requirements required under SFAS 154 will not have a material impact on the financial statements of the Company.
	On July 15, 2006 the FASB issued FIN48, Accounting for Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109 .   The Company does not expect that the adoption of the recognition and measurement requirements required under FIN48 will have a material impact on the financial statements of the Company.

 

Note 3. Significant Alliances and Related Parties

 

The Cleveland Clinic Foundation

 

Effective July 2004, the Company entered into a strategic alliance with CCF. Under the agreement, the Company received an exclusive license to use CCF licensed patents and CCF technology for the benefit of the Company for research and drug development. The Company has 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.

 

F-15

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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. No milestone payments, royalties or sublicense royalties have been paid through the year ended December 31, 2006, although the Company has accrued $50,000 in milestone payments as a long term liability.

 

The Company recognized $0, $0 and $105,000 in service revenues for the years ended December 31, 2006, 2005 and 2004, respectively, from CCF related to a high-throughput screening engagement. The Company also incurred $1,142,290, $475,934 and $51,129 in subcontract expense to CCF related to technology grants for the years ended December 31, 2006, 2005 and 2004, respectively. The balance remaining is $7,309 in accounts payable at December 31, 2006.

 

The Company also rented office and laboratory space from an entity related to CCF on a month to month basis through May of 2005. Rent to this entity related to CCF was $0, $11,121 and $32,400 in 2006, 2005 and 2004, 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 have been paid through the year ended December 31, 2006.

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, 2006.

 

In addition, the Company paid ChemBridge $29,910, $3,913, and $395 for the purchase of chemical compounds in the normal course of business in 2006, 2005 and 2004, respectively.

 

University of New South Wales

 

In June 2003, the Company entered into a three year collaborative research agreement with the University of New South Wales (UNSW) to utilize functional genomic technologies in an attempt to identify genes in childhood neuroblastoma as potential candidates for the future development of molecular-targeted gene therapy. Under this agreement, the Company will make monetary and in-kind contributions with the collaborative partner in connection with the project under terms of the agreement. In return, the Company co-owns resulting intellectual property and has a right to use this intellectual property royalty free for internal purposes. The collaborative parties agree to negotiate a license arrangement for commercial projects resulting from co-owned intellectual property. No collaborative intellectual property has been developed during the term of this agreement. The agreement expired in June 2006 and was not renewed.

 

UNWS and two related parties to UNSW advanced funds of $109,000 and $174,500 during the year ended December 31, 2004 to the Company in exchange for convertible promissory notes, which mature on October 18, 2007 and November 23, 2007, respectively. These balances remained on the balance sheet as of December 31, 2005 as long-term notes payable. On July 20, 2006, the effective date of the initial public offering, the outstanding notes payable and accrued interest were converted into 124,206 shares of common stock. During the year ended December 31, 2005 a party related to UNSW advanced $50,000 in exchange for a convertible promissory note, which was subsequently converted into Series A Preferred Stock and eventually converted into common stock at the effective date of the initial public offering. In addition, the Company paid UNSW $0, $25,011 and $30,303 for subcontracted research during the years ended December 31, 2006, 2005 and 2004, respectively.

 

F-16

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As of December 31, 2006 all of the restricted stock was fully vested. The founders, their positions and number of shares purchased appear below. The total initial value assigned to these shares was $25,000 because at the time, without the involvement of ChemBridge or CCF, the probability of becoming a going concern was deemed to be remote.

 

Name		Position		Number of Shares
Dr. Andrei Gudkov		Chief Scientific Officer		1,579,400
Dr. Michael Fonstein		Chief Executive Officer, President, Chairman of the Board		1,311,200
Dr. Yakov Kogan		Executive Vice President of Business Development, Secretary		715,200
Dr. Elena Feinstein		Executive Vice President of Research and Development		268,200
Dr. Veronika Vonstein		General Manager		119,200

 

In April 2004, Dr. George Stark entered into a restricted stock agreement for 208,600 shares of common stock, which fully vested at the time of issuance. As the transaction pre-dated ChemBridge’s investment, the Company believed that its value remained at $25,000, and the value assigned to these shares was $1,287. He continues to serve the Company as the Chairman of the Scientific Advisory Board.

 

In August 2004, after ChemBridge acquired its shares, the Company entered into restricted stock agreements with Dr. Vadim Krivokrysenko, Dr. Katerina Gurova and Dr. Michael Chernov for 50,660, 107,280, and 50,660 shares of common stock respectively. With ChemBridge’s investment, the Company deemed the probability of becoming a going concern to have increased slightly and the Company was valued at a total of $75,000. The value assigned to these shares was $3,387. These stockholders continue to provide the Company with molecular and cancer biology expertise and management of laboratory operations and drug discovery projects.

 

In August 2004, Dr. Veronika Vonstein sold all 119,200 of her shares back to the Company, effectively terminating her relationship with the Company, to pursue outside opportunities. In August 2004, Dr. Andrei Gudkov sold 29,800 shares back to the Company to maintain an appropriate percentage ownership, as determined by the founders as a group.

 

F-17

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In September 2004, the Company issued 29,800 warrants to Sunrise Securities Corp. and its designees at an exercise price of $2.00 per share, which expire in March 2010. The warrants were issued to retain Sunrise Securities Corp. as an investment banker.

 

In March 2005, the Company issued 3,000,000 shares of Series A Participating Convertible Preferred Stock (Series A) for $6 million in gross proceeds. These shares were convertible into common stock on a one-for-one basis and earn a dividend of 6% payable biannually on February 1 and August 1 in cash or common stock. In conjunction with the issuance of the Series A shares, $50,000 of convertible notes held at December 31, 2004 and a $50,000 note issued February 3, 2005, including accrued interest, were converted into 51,219 shares of Series A preferred stock. The Company also issued 308,000 shares of common stock and 300,000 warrants to purchase 300,000 shares of common stock with an exercise price of $2.00 per share to Sunrise Securities Corp., the private placement agent, and its designees as partial consideration for their services rendered. 295,850 of these warrants expire on March 15, 2010 and 4,150 expire on March 28, 2010 resulting from two closing dates.

 

In March 2005, the Company issued 10,000 stock options under a non-qualified stock option agreement to a consultant who works for the company on an ongoing basis. These options allow for the purchase of common stock at a price of $3.00 per share. These options have a thirteen month vesting schedule and expire on March 1, 2015. The value of the options is being recognized as consulting expense over the vesting period based on the Black-Scholes option pricing model.

 

In July 2005, the Company issued 294,240 stock options to various employees of the Company under non-qualified stock option agreements. These options allow for the purchase of 190,000 shares of common stock at a price of $.66 and 104,240 shares of common stock at a price of $0.67 per share, respectively. These options have a three-year vesting schedule and expire on June 30, 2015. The value of the options is being recognized as compensation expense over the vesting period based on the Black-Scholes option pricing model.

 

In July 2005, the company issued fully vested options to purchase 59,600 shares of common stock under a non-qualified stock option agreement to an outside consultant who works for the company on an ongoing basis. These stock options were exercised at a price of $2.00 per share and the company recorded $119,200 in consulting fees as a result of the issuance of these stock options.

 

On August 1, 2005, the Company paid a stock dividend of 69,201 shares of common stock to holders of record of the outstanding Series A preferred stock.

In December 2005, the Company issued 20,000 stock options under a non-qualified stock option agreement to a consultant who works for the company on an ongoing basis. These options allow for the purchase of common stock at a price of $2.00 per share with a two-year vesting schedule and expire on November 30, 2015.

 

As a condition of the issuance of the Series A preferred stock in March 2005, all holders of Series A preferred stock received an additional 2% of all preferred stock, common stock and warrants that each Series A preferred stockholder owns for each 30 day period that a delay occurs in a required transaction. These penalty shares are not subject to compounding or prorating based on the number of days of delay. They are earned at the end of each 30-day penalty period. For the first quarter of 2006, one penalty period occurred in which 60,000 shares of Series A preferred stock were earned at $120,000. In addition, 13,515 shares of common stock were earned at $27,030. The penalty shares were issued in January 2006.

 

Pursuant to an Amendment to the Series A Rights Agreement, dated as of February 17, 2006, the Company’s obligation to issue penalty shares was suspended for a period of 70 days, subject to a one-time 45-day extension, while the Company’s registration statement was being reviewed by the SEC.

 

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.

 

See Note 8 for further details on stock option agreements.

 

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. 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.

 

F-18

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Note 7. Other Balance Sheet Details

 

Available-For-Sale Cash Equivalents and Marketable Securities

 

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

 

		Cost			Accrued Interest			Gross Unrealized Gains			Gross Unrealized Losses			Fair Value
December 31, 2006 - Current Marketable Securities		$	2,000,000		$	42,479		$	-		$	4,165		$	2,038,314

 

Available-for sale marketable securities consist of certificates of deposits with various commercial banks throughout the country. The unrealized gains and losses on these securities were primarily caused by recent changes in market interest rates. Because the Company has the ability and intent to hold these securities until a recovery of fair value, which may be at maturity, the Company does not consider these securities to be other than temporarily impaired as of December 31, 2006.

 

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 $13,645, ($17,810), and $0 for the years ending December 31, 2006, 2005, and 2004, respectively. In 2006, the Company recaptured $6,967 of the previously recorded other comprehensive loss due to the maturity of the short term investments and recaptured $6,678 due to market value fluctuations of the outstanding short term investments. The Company purchased short-term investments and incurred unrealized losses of $17,810. These gains/(losses) were charged directly against Stockholders’ Equity as Other Comprehensive Income/(Loss) in the periods incurred. The Company intends on holding these securities to maturity and views these unrealized losses as temporary in nature.

 

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

 

The Company currently has operating lease commitments in place for facilities in Cleveland, Ohio and Chicago, Illinois as well as office equipment. The Company recognizes rent expense on a straight-line basis over the term of the related operating leases. The operating lease expenses recognized were $160,742, $112,967 and $18,900 in 2006, 2005 and 2004, respectively.

 

Annual future minimum lease payments under present lease commitments are as follows. These future minimum payments have not been adjusted to reflect an inflation adjustment included in the lease for the Cleveland facilities based on the Gross Domestic Product Price Deflator.

		Operating Leases
2007		$	63,460
2008			4,949
2009			1,935
		$	70,344

 

F-21

---

 

The number of options and weighted average exercise price of options fully vested and exercisable for the years ending December 31, 2006, 2005 and 2004 were 243,183, 83,560 and 0 options at $2.27, $0.88 and $0 respectively. A table showing the number of options outstanding and exercisable (fully vested) at December 31, 2006 appears below:

		Outstanding						Exercisable
Exercise Price		Number of Options			Weighted Average Years to Expiration			Number of Options
$ 0.66			190,000			8.5			95,000
0.67			104,240			8.5			52,120
2.00			20,000			8.92			12,500
3.00			10,000			8.17			10,000
4.50			114,250			9.17			28,563
6.00			45,000			9.56			45,000
Total			483,490			8.77			243,183

 

The Company has entered into warrant agreements with strategic partners and consultants with exercise prices ranging from $1.13 to $8.70. These awards were approved by the 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 Warrants			Weighted Average Exercise Price
Outstanding at December 31, 2004			294,424		$	1.22
Granted			300,000		$	2.00
Exercised			—			N/A
Forfeited			—			N/A
Outstanding at December 31, 2005			594,424		$	1.61
Granted			220,000		$	8.09
Exercised			—			N/A
Forfeited			—			N/A
Outstanding at December 31, 2006			814,424		$	3.36

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.

While no legal actions are currently pending, the Company may be party to certain claims brought against it arising from certain contractual matters. It is not possible to state the ultimate liability, if any, in these matters. In management’s opinion, the ultimate resolution of any such claim will not have a material adverse effect on the financial position of the Company.

 

Note 9. Subsequent Events

 

On January 12, 2007 the Company entered into a Sponsored Research Agreement with the Roswell Park Cancer Institute in Buffalo, New York whereby a portion of the research and development activities of the Company will be relocated to Buffalo, New York. The Roswell Park Cancer Institute has awarded the Company $3,000,000 in research grant funding, $2,000,000 to be paid on April 1, 2007 and $1,000,000 to be paid on April 1, 2008.

 

F-22

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CLEVELAND BIOLABS, INC.

 

BALANCE SHEETS

 

March 31, 2007 (unaudited) and December 31, 2006

 

		March 31			December 31
		2007			2006
ASSETS		(unaudited)
CURRENT ASSETS
Cash and equivalents		$	11,968,017		$	3,061,993
Short-term investments			18,699,965			1,995,836
Accounts receivable:
Trade			214,048			159,750
Interest			53,255			42,479
Notes Receivable - Orbit Brands			300,000			50,171
Other prepaid expenses			512,969			434,675
Total current assets			31,748,254			5,744,904
EQUIPMENT
Computer equipment			143,426			132,572
Lab equipment			348,730			347,944
Furniture			65,087			65,087
			557,243			545,603
Less accumulated depreciation			169,677			142,011
			387,566			403,592
OTHER ASSETS
Intellectual Property			346,170			252,978
Deposits			15,055			15,055
			361,225			268,033
TOTAL ASSETS		$	32,497,045		$	6,416,529

 

F-23

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CLEVELAND BIOLABS, INC.

 

BALANCE SHEETS

 

March 31, 2007 (unaudited) and December 31, 2006

 

		March 31			December 31
		2007			2006
LIABILITIES AND STOCKHOLDERS' EQUITY		(unaudited)
CURRENT LIABILITIES
Accounts payable:
Trade		$	1,111,836		$	644,806
Accrued expenses			227,435			128,569
Total current liabilities			1,339,271			773,375
LONG-TERM LIABILITIES
Milestone payables			300,000			50,000
Total long-term liabilities			300,000			50,000
STOCKHOLDERS' EQUITY
Series B convertible preferred stock, $.005 par value
Authorized - 10,000,000 shares at March 31, 2007
and December 31, 2006			22,895			-
Issued and outstanding 4,579,010 and 0
shares at March 31, 2007 and December 31, 2006, respectively
Additional paid-in capital			28,849,983			-
Common stock, $.005 par value
Authorized - 40,000,000 shares at March 31, 2007
and December 31, 2006
Issued and outstanding 11,889,099 and 11,826,389
shares at March 31, 2007 and December 31, 2006, respectively			59,446			59,132
Additional paid-in capital			18,807,493			18,314,097
Accumulated other comprehensive income (loss)			-			(4,165	)
Accumulated deficit			(16,882,043	)		(12,775,910	)
Total stockholders' equity			30,857,774			5,593,154
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY		$	32,497,045		$	6,416,529

 

F-24

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CLEVELAND BIOLABS, INC.

STATEMENT OF OPERATIONS

Three Months Ending March 31, 2007 and 2006 (unaudited)

		March 31			March 31
		2007			2006
REVENUES		(unaudited)			(unaudited)
Grant		$	271,445		$	453,424
Service			50,000			125,000
			321,445			578,424
OPERATING EXPENSES
Research and Development			3,528,600			1,502,364
General and administrative			994,319			352,898
Total operating expenses			4,522,919			1,855,262
LOSS FROM OPERATIONS			(4,201,474	)		(1,276,838	)
OTHER INCOME (EXPENSE)
Interest Income			96,429			29,139
Interest Expense			(1,088	)		(4,446	)
Total other income (expense), net			95,341			24,693
NET LOSS		$	(4,106,133	)	$	(1,252,145	)
DIVIDENDS ON CONVERTIBLE PREFERRED STOCK			-			(59,185	)
NET LOSS AVAILABLE TO COMMON SHAREHOLDERS		$	(4,106,133	)	$	(1,311,330	)
NET LOSS AVAILABLE TO COMMON SHAREHOLDERS
PER SHARE OF COMMON STOCK - BASIC AND
DILUTED		$	(0.35	)	$	(0.20	)
WEIGHTED AVERAGE NUMBER OF SHARES USED
IN CALCULATING NET LOSS PER SHARE, BASIC AND
DILUTED			11,854,027			6,495,408

 

F-25

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CLEVELAND BIOLABS, INC.

 

STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS

 

Period From January 1, 2006 to December 31, 2006 and to March 31, 2007 (unaudited)

 

		Stockholders' Equity
		Common Stock
								Additional
								Paid-in			Penalty
		Shares			Amount			Capital			Shares
Balance at January 1, 2006			6,396,801.00			31,984			3,338,020			81,125
Issuance 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 income
Unrealized gains (losses) on short term investments
Changes in unrealized holding gains (losses)
arising during period			-			-			-			-
Less reclassification adjustment for (gains) losses
included in net loss			-			-			-			-
Comprehensive loss
Balance at December 31, 2006			11,826,389		$	59,132		$	18,314,097		$	-
Issuance of options			-			-			375,301			-
Issuance of Series B Preferred Shares			-			-			-			-
Fees associated with Series B Preferred offering			-			-			-			-
Exercise of options			18,505			93			29,907			-
Exercise of warrants			44,205			221			88,188			-
Net Loss			-			-			-			-
Other comprehensive income
Unrealized gains (losses) on short term investments
Changes in unrealized holding gains (losses)
arising during period			-			-			-			-
Less reclassification adjustment for (gains) losses
included in net loss			-			-			-			-
Comprehensive loss
Balance at March 31, 2007			11,889,099		$	59,446		$	18,807,493		$	-

 

F-26

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CLEVELAND BIOLABS, INC.

 

STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS

 

Period From January 1, 2006 to December 31, 2006 and to March 31, 2007 (unaudited)

 

		Stockholders' Equity
		Preferred Stock
								Additional
								Paid-in			Penalty
		Shares			Amount			Capital			Shares
Balance at January 1, 2006			3,051,219			15,256			4,932,885			360,000
Issuance 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 income
Unrealized gains (losses) on short term investments
Changes in unrealized holding gains (losses)
arising during period			-			-			-			-
Less reclassification adjustment for (gains) losses
included in net loss			-			-			-			-
Comprehensive loss
Balance at December 31, 2006			-		$	-		$	-		$	-
Issuance of options			-			-			-			-
Issuance of Series B Preferred Shares			4,288,712			21,444			29,999,540			-
Fees associated with Series B Preferred offering			290,298			1,451			(1,149,557	)		-
Exercise of options			-			-			-			-
Exercise of warrants			-			-			-			-
Net Loss			-			-			-			-
Other comprehensive income
Unrealized gains (losses) on short term investments
Changes in unrealized holding gains (losses)
arising during period			-			-			-			-
Less reclassification adjustment for (gains) losses
included in net loss			-			-			-			-
Comprehensive loss
Balance at March 31, 2007			4,579,010		$	22,895		$	28,849,983		$	-

 

F-27

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CLEVELAND BIOLABS, INC.

 

STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS

 

Period From January 1, 2006 to December 31, 2006 and to March 31, 2007 (unaudited)

 

		Stockholders' Equity
		Other Comprehensive Income/(Loss)			Accumulated Deficit			Total			Comprehensive Income (Loss)
Balance at January 1, 2006			(17,810	)		(5,184,856	)		3,556,604
Issuance of shares - previously accrued penalty shares			-			-			-
Issuance of shares - stock dividend			-			(368,410	)		(43	)
Issuance of penalty shares			-			-			-
Issuance of shares - initial public offering			-			-			10,200,000
Fees associated with initital public offering			-			-			(1,890,444	)
Conversion of preferred stock to common stock			-			-			-
Conversion of notes payable to common stock			-			-			313,003
Issuance of options			-			-			506,078
Exercise of options			-			-			2,813
Issuance of warrants			-			-			114,032
Proceeds from sales of warrants			-			-			110
Net loss			-			(7,222,644	)		(7,222,644	)		(7,222,644	)
Other comprehensive income
Unrealized gains (losses) on short term investments
Changes in unrealized holding gains (losses)
arising during period			6,678			-			6,678		$	6,678
Less reclassification adjustment for (gains) losses
included in net loss			6,967			-			6,967		$	6,967
Comprehensive loss											$	(7,208,999	)
Balance at December 31, 2006		$	(4,165	)	$	(12,775,910	)	$	5,593,154
Issuance of options			-			-			375,301
Issuance of Series B Preferred Shares			-			-			30,020,984
Fees associated with Series B Preferred offering			-			-			(1,148,106	)
Exercise of options			-			-			30,000
Exercise of warrants			-			-			88,409
Net Loss			-			(4,106,133	)		(4,106,133	)		(4,106,133	)
Other comprehensive income
Unrealized gains (losses) on short term investments
Changes in unrealized holding gains (losses)
arising during period			-			-			-		$	-
Less reclassification adjustment for (gains) losses
included in net loss			4,165			-			4,165		$	4,165
Comprehensive loss											$	(4,101,968	)
Balance at March 31, 2007		$	-		$	(16,882,043	)	$	30,857,774

F-28

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CLEVELAND BIOLABS, INC.
STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 2007 and 2006 (unaudited)

 

		March 31			March 31
		2007			2006
		(unaudited)			(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss		$	(4,106,133	)	$	(1,252,145	)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation			27,666			20,241
Noncash interest expense			-			4,446
Noncash salaries and consulting expense			375,301			233,031
Changes in operating assets and liabilities:
Accounts receivable - trade			(54,298	)		(119,935	)
Accounts receivable - interest			(10,605	)		3,894
Other prepaid expenses			(78,293	)		(3,380	)
Deposits			-			(2,271	)
Accounts payable			467,030			259,485
Deferred revenue			-			(100,293	)
Accrued expenses			98,866			16,293
Milestone payments			250,000			-
Total adjustments			1,075,667			311,511
Net cash (used in) provided by operating
activities			(3,030,466	)		(940,634	)
CASH FLOWS FROM INVESTING ACTIVITIES
Sale/(purchase) of short-term investments			(16,699,965	)		800,000
Issuance of notes receivable			(250,000	)		-
Purchase of equipment			(11,640	)		(87,243	)
Costs of patents pending			(93,193	)		(9,946	)
Net cash (used in) provided by investing activities			(17,054,798	)		702,811
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of preferred stock			30,020,984			-
Financing costs			(1,148,106	)		(164,777	)
Dividends			-			(23	)
Issuance of common stock			118,410			-
Net cash (used in) provided by financing activities			28,991,288			(164,800	)
INCREASE (DECREASE) IN CASH AND EQUIVALENTS			8,906,024			(402,622	)
CASH AND EQUIVALENTS AT BEGINNING OF			3,061,993			1,206,462
PERIOD
CASH AND EQUIVALENTS AT END OF PERIOD		$	11,968,017		$	803,840
Supplemental disclosures of cash flow information:
Cash paid during the period for interest		$	-		$	-
Cash paid during the year for income taxes		$	-		$	-
Supplemental schedule of noncash financing activities:
Issuance of stock options to employees, consultants, and independent board members		$	375,301		$	233,032
Issuance of common stock dividend to preferred shareholders		$	-		$	183,552

 

F-29

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CLEVELAND BIOLABS, INC.

 

NOTES TO FINANCIAL STATEMENTS

 

Note 1. Organization

 

Cleveland BioLabs, Inc. (“CBL” or the “Company”) is engaged in the discovery, development and commercialization of products for cancer treatment and protection of normal tissues from radiation and toxins. The Company was incorporated under the laws of the State of Delaware on June 5, 2003 and is headquartered in Cleveland, Ohio. The Company's initial technological development efforts are intended to be used as powerful antidotes with a broad spectrum of applications including protection from cancer treatment side effects, radiation and hypoxia. A recent discovery found that one of its compounds increases the number of progenitor (originator) stem cells in mouse bone marrow. To date, the Company has not developed any commercial products. The Company has developed and produced biological compounds under a single commercial development contract.

 

Note 2. Summary of Significant Accounting Policies

 

A.

Basis of Presentation - The information at March 31, 2007 and March 31, 2006, and for the three-month periods ended March 31, 2007 and March 31, 2006, is unaudited. In the opinion of management, these financial statements include all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the results for the interim periods presented. Interim results are not necessarily indicative of results for a full year. These financial statements should be read in conjunction with CBL’s audited financial statements for the year ended December 31, 2006, which were contained in the Company’s Annual Report on Form 10-KSB filed with the U.S. Securities and Exchange Commission.

B.

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

 

C.

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

 

D.

Accounts Receivable - The Company extends unsecured credit to customers under normal trade agreements, which generally require payment within 30 days. Management estimates an allowance for doubtful accounts which is based upon management's review of delinquent accounts and an assessment of the Company's historical evidence of collections. There is no allowance for doubtful accounts as of March 31, 2007 and December 31, 2006.

 

E.

Notes Receivable - On December 7, 2006 the Company entered into an agreement with the Orbit Brands Corporation (Borrower) and its subsidiaries whereby the Company would lend up to $150,000 each on two promissory notes to the Borrower at a rate of 5% per annum with a maturity date of one year. The proceeds of the loans shall be used by the Borrower solely to cover expenses associated with converting the notes into common stock and preparing the lending motions for the bankruptcy case involving the Borrower. The loans are convertible into common stock of the Borrower and its subsidiaries. As of March 31, 2007 the balance outstanding was $300,000 plus accrued interest of $2,363.

  

F.

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 $27,666, and $20,241 for the quarters ended March 31, 2007 and 2006 respectively.

 

F-30

---

 

G.

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 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.

H.	Intellectual Property - The Company capitalizes the costs associated with the preparation, filing, and maintenance of certain intellectual property rights. Capitalized intellectual property is reviewed annually for impairment.
	A portion of this intellectual property is owned by the Cleveland Clinic Foundation (“CCF”) and granted to the Company through an exclusive licensing agreement. As part of the licensing agreement, CBL agrees to bear the costs associated with the preparation, filing and maintenance of patent applications relating to this intellectual property. If the patent application is approved, the costs paid by the Company are amortized on a straight-line basis over the shorter of 17 years or the anticipated useful life of the patent. If the patent application is not approved, the costs associated with the preparation and filing of the patent application by the Company on behalf of CCF will be expensed as part of selling, general and administrative expenses. Gross capitalized patents pending costs are $306,302 and $222,789 on behalf of CCF for 13 patent applications as of March 31, 2007 and December 31, 2006, respectively. All of the 13 CCF patent applications are still pending approval.
	The Company also has submitted three patent applications as a result of intellectual property exclusively developed and owned by the Company. 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 17 years or the anticipated useful life of the patent. If the patent application is not approved, the costs associated with the preparation and filing of the patent application will be expensed as part of selling, general and administrative expenses at that time. Gross capitalized patents pending costs were $39,869 and $30,189 on behalf of the Company for three patent applications as of March 31, 2007 and December 31, 2006, respectively. The patent applications are still pending approval.

  

I.	Lines 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 $500,000, and expires on July 1, 2007. At March 31, 2007, there were no outstanding borrowings under this credit facility.
J.	Fair Value of Financial Instruments - Financial instruments, including cash and equivalents, accounts receivable, notes receivable, accounts payable and accrued liabilities, are carried at net realizable value. The carrying amounts of the convertible notes payable approximate their respective fair values as they bear terms that are comparable to those available under current market conditions.

 

K.

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

 

L.	Revenue Recognition - The Company recognizes revenue in accordance with Staff Accounting Bulletin No. 104, “Revenue Recognition.” Revenue sources consist of government grants, government contracts and commercial development contracts.
	Revenues from federal government grants and contracts are for research and development purposes and are recognized in accordance with the terms of the award and the government agency. Grant revenue is recognized in one of two different ways depending on the grant. Cost reimbursement grants require us to submit proof of costs incurred that are invoiced by us to the government agency, which then pays the invoice. In this case, grant revenue is recognized at the time of submitting the invoice to the government agency.
	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 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 periodically upon delivery of an invoice for allowable R&D expenses according to the terms of the contract. The Company has recognized grant revenue from the following agencies: the U.S. Army (DARPA), National Aeronautics and Space Administration (NASA), the National Institutes of Health (NIH) and the Department of Health and Human Services (HHS). Commercial development revenues are recognized when the service or development is delivered.

  

F-31

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M.

Deferred Revenue - Deferred Revenue results when payment is received in advance of revenue being earned. When cash is received, 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.

 

N.

Research and Development - Research and development expenses consist primarily of costs associated with the clinical trials of drug candidates, compensation and other expenses for research and development, personnel, supplies and development materials, costs for consultants and related contract research and facility costs. Expenditures relating to research and development are expensed as incurred.

 

O.

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 provides for up to 2,000,000 shares of stock to be awarded. For the year ended December 31, 2006, 45,000 options were granted to independent board members. On February 14, 2007, these 2,000,000 shares were registered with the SEC by filing a Form S-8 registration statement. For the quarter ended March 31, 2007, there were 119,500 options granted under this Equity Incentive Plan, and as of March 31, 2007 there were 164,500 stock options granted under this Equity Incentive Plan in total.

 

P.	Stock-Based Compensation - The FASB issued SFAS No. 123(R) (revised December 2004), Share Based Payment, which is a revision of SFAS No. 123 Accounting for Stock-Based Compensation. SFAS 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the statement of operations based on their fair values. The Company values employee stock based compensation under the provisions of SFAS 123(R) and related interpretations.
	The fair value of each stock option granted is estimated on the grant date using the Black-Scholes option valuation model. 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 based on published rates from 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 safe harbor method, and computes an expected volatility based on similar high-growth, publicly-traded, biotechnology companies. The Company does not include the use of its own stock in the volatility calculation at this time because of the brief history of the stock as a publicly traded security on a listed exchange. Compensation expense is recognized using the straight-line amortization method for all stock-based awards.
	During the quarter ended March 31, 2007, the Company granted 119,500 stock options pursuant to stock award agreements to certain employees and key consultants. The Company has adopted the safe harbor method for projecting the expected life of the options. The assumptions used to value these option and warrant grants using the Black-Scholes option valuation model are as follows:

 

				Quarter Ended March 31, 2007
Risk-free interest rate				4.50 - 4.72%
Expected dividend yield				0%
Expected life				5 - 6 years
Expected volatility				72.07 - 76.29%

 

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 the Company's employee stock options and warrants have characteristics significantly different from those of traded derivative securities, 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 the Company's options and warrants.

 

F-32

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	The Company recognized a total of $375,301 in expense related to options for the quarter-ended March 31, 2007.
	The weighted average, estimated grant date fair values of stock options granted during the quarter-ended March 31, 2007 was $9.09.
	The following tables summarize the stock option activity for the quarters ended March 31, 2007 and March 31, 2006, respectively.

 

		Shares			Weighted Average Exercise Price per Share			Weighted Average Remaining Contractual Term (in Years)
Outstanding, December 31, 2006			483,490		$	2.17
Granted, February 14, 2007			99,500			9.14
Granted, March 19, 2007			20,000			8.82
Exercised			20,000			2.50
Forfeited, Canceled			0			n/a
Outstanding, March 31, 2007			582,990		$	3.58			8.81
Exercisable, March 31, 2007			301,120		$	3.57			8.81

 

		Shares			Weighted Average Exercise Price per Share			Weighted Average Remaining Contractual Term (in Years)
Outstanding, December 31, 2005			324,240		$	.82
Granted, March 1, 2006			116,750			4.50
Exercised			0			n/a
Forfeited, Canceled			0			n/a
Outstanding, March 31, 2006			440,990		$	1.79			9.44
Exercisable, March 31, 2006			117,747		$	1.87			9.40

 

Q.	Net Loss Per Share - Basic and diluted net loss per share has been computed using the weighted-average number of shares of common stock outstanding during the period.
	The following table presents the calculation of basic and diluted net loss per share for the quarters ended:

 

		March 31, 2007			March 31, 2006
Net loss available to common stockholders		$	(4,106,133	)	$	(1,311,330	)
Net loss per share, basic and diluted		$	(.35	)	$	(.20	)
Weighted-average shares used in computing net loss per share, basic and diluted			11,854,027			6,495,408

 

F-33

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	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 for warrants, was 3,402,821 and 594,424 for the quarters ended March 31, 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 for options, was 582,990 and 440,990 for the quarters ended March 31, 2007 and 2006, respectively. Such securities, had they been dilutive, would have been included in the computation of diluted earnings per share.
R.	Concentrations of Risk - Grant revenue was comprised wholly from grants and contracts issued by the federal government and accounted for 84.4% and 78.4% of total revenue for the quarters ended March 31, 2007 and 2006, respectively. Although the Company anticipates ongoing federal 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.

 

S.

Foreign Currency Exchange Rate Risk - The Company has entered into a manufacturing agreement with a foreign third party to produce one of its drug compounds 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 Dollar. As of March 31, 2007, the Company is obligated to make payments under the agreement of 1,020,000 Euros. The Company has established means to purchase forward contracts to hedge against this risk. As of March 31, 2007, no hedging transactions have been consummated.

 

T.

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

  

Note 3. Stock Transactions

 

On 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. See Note 8 for further details on stock option agreements.

 

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. 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.

 

F-34

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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 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, upon stockholder approval, into an aggregate of 4,288,712 shares of common stock and Series B Warrants that are exercisable, upon stockholder approval, 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, 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.

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, upon stockholder approval, into an aggregate of 290,298 shares of common stock, Series B Warrants that are exercisable, upon stockholder approval, for an aggregate of 221,172 shares of the Company’s common stock, and Series C Warrants that are exercisable, upon stockholder approval, 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, upon stockholder approval, 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 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 19, 2017.

 

Note 4. Commitments and Contingencies

 

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

 

F-35

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The Company is also party to three agreements that require it to make milestone payments, royalties on net sales of the Company's products and payments on sublicense income received by the Company. As of March 31, 2007, no milestone payments have been made, although $300,000 has been accrued 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.

 

The Company currently has operating lease commitments in place for facilities in Cleveland, Ohio and Chicago, Illinois as well as office equipment. The Company recognizes rent expense on a straight-line basis over the term of the related operating leases. The operating lease expenses recognized were $43,598, and $42,941 for the quarters ended March 31, 2007 and 2006, respectively.

 

Annual future minimum lease payments under present lease commitments are as follows. These future minimum payments have not been adjusted to reflect an inflation adjustment included in the lease for the Cleveland facilities based on the Gross Domestic Product Price Deflator.

 

		Operating Leases
2007 (from April 1, 2007 through December 31, 2007)		$	22,360
2008			4,949
2009			1,935
		$	29,244

 

The Company has entered into stock option agreements with key employees, board members and consultants with exercise prices ranging from $0.00 to $9.14. These awards were approved by our Board of Directors. Option grants beginning in 2005 vest ratably over periods ranging from zero to three years. The options expire ten years from the date of grant, subject to the terms applicable in the agreement.

The following tables summarize the stock option activity for the three months ended March 31, 2007 and 2006:

 

		Number of Options			Weighted Average Exercise Price
Outstanding at December 31, 2006			483,490		$	2.17
Granted			119,500		$	9.09
Exercised			20,000		$	2.50
Forfeited			0			n/a
Outstanding at March 31, 2007			582,990		$	3.58

 

 

		Number of Options			Weighted Average Exercise Price
Outstanding at December 31, 2005			324,240		$	.82
Granted			116,750		$	4.50
Exercised			0			n/a
Forfeited			0			n/a
Outstanding at March 31, 2006			440,990		$	1.87

 

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 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 Warrants			Weighted Average Exercise Price
Outstanding at December 31, 2006			814,424		$	3.36
Granted			2,632,602		$	10.42
Exercised			44,205		$	2.00
Forfeited			—			N/A
Outstanding at March 31, 2007			3,402,821		$	8.84

 

F-36

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		Number of Warrants			Weighted Average Exercise Price
Outstanding at December 31, 2005			594,424			1.61
Granted			—		$	N/A
Exercised			—			N/A
Forfeited			—			N/A
Outstanding at March 31, 2006			594,424		$	1.61

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.

 

While no legal actions are currently pending, the Company may be party to certain claims brought against it arising from certain contractual matters. It is not possible to state the ultimate liability, if any, in these matters. In management's opinion, the ultimate resolution of any such claim will not have a material adverse effect on the financial position of the Company.

Note 5. Subsequent Events

 

 No material subsequent events have occurred since the balance sheet date of March 31, 2007.

F-37

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9,375,095 Shares

 

 

 

 

CLEVELAND BIOLABS, INC.

 

Common Stock, $0.005 Par Value

 

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PROSPECTUS 

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  ________________, 2007

 

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PART II

 

INFORMATION NOT REQUIRED IN PROSPECTUS

OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

 

The following table sets forth the costs and expenses. All amounts are estimates except the SEC registration fee.

SEC registration fee		$	2,692
Printing and engraving expenses		$
Legal fees and expenses		$
Accounting fees and expenses		$
Miscellaneous expense		$
Total		$

INDEMNIFICATION

 

Section 102 of the General Corporation Law of the State of Delaware (the “DGCL”) allows a corporation to eliminate the personal liability of directors to a corporation or its stockholders for monetary damages for a breach of a fiduciary duty as a director, except where the director breached his duty of loyalty, failed to act in good faith, engaged in intentional misconduct or knowingly violated a law, authorized the payment of a dividend or approved a stock repurchase or redemption in violation of Delaware corporate law or obtained an improper personal benefit. As permitted by Section 102(b)(7) of the DGCL, CBL’s Certificate of Incorporation contains a provision eliminating the personal liability of a director to CBL or its stockholders to the fullest extent permitted by the DGCL .

 

Section 145 of the DGCL empowers a Delaware corporation to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of such corporation) by reason of the fact that such person is or was a director, officer, employee or agent of such corporation, or is or was serving at the request of such corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise. The indemnity may include expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding, provided that such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the corporation and, with respect to any criminal action or proceeding, had no reasonable cause to believe such person’s conduct was unlawful. A Delaware corporation may indemnify directors, officers, employees and other agents of such corporation in an action by or in the right of a corporation under the same conditions against expenses (including attorneys’ fees) actually and reasonably incurred by the person in connection with the defense and settlement of such action or suit, except that no indemnification is permitted without judicial approval if the person to be indemnified has been adjudged to be liable to the corporation. Where a present or former director or officer of the corporation is successful on the merits or otherwise in the defense of any action, suit or proceeding referred to above or in defense of any claim, issue or matter therein, the corporation must indemnify such person against the expenses (including attorneys’ fees) which he or she actually and reasonably incurred in connection therewith. CBL’s Certificate of Incorporation contains provisions that provide for indemnification of officers and directors and each person who is or was serving at the request of CBL as a director, officer, trustee, employee or agent of another corporation, partnership, joint venture, trust or other enterprise to the full extent permitted by the DGCL.

 

Section 174 of the DGCL provides, among other things, that a director who willfully or negligently approves of an unlawful payment of dividends or an unlawful stock purchase or redemption, may be held liable for such actions. A director who was either absent when the unlawful actions were approved or dissented at the time, may avoid liability by causing his or her dissent to such actions to be entered into the books containing the minutes of the meetings of the board of directors at the time such action occurred or immediately after such absent director receives notice of the unlawful acts.

Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons, we have been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act, and is, therefore, unenforceable.

 

CBL maintains, at its expense, a policy of insurance which insures its directors and officers, subject to exclusions and deductions as are usual in these kinds of insurance policies, against specified liabilities which may be incurred in those capacities.

 

RECENT SALES OF UNREGISTERED SECURITIES

 

During the past three years, we have issued unregistered securities to the persons, as described below. None of these transactions involved any underwriters, underwriting discounts or commissions, except as specified below, or any public offering, and we believe that each transaction was exempt from the registration requirements of the Securities Act by virtue of Section 4(2) thereof and/or Regulation D. All recipients had adequate access to information about us.

 

II-1

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On September 30 2004, we issued 29,800 warrants to Sunrise Securities Corp. and its designees at an exercise price of $2.00 per share, which expire in March 2010. The warrants were issued to retain Sunrise Securities Corp. as an investment banker.

 

We issued on March 15, 2005 and March 28, 2005, pursuant to the closing of the Series A Preferred Stock financing, 3,000,000 shares of our Series A Preferred Stock to 29 different purchasers at a price of $2.00 per share, raising a total of $6 million, on March 15, 2005 and March 28, 2005, we also issued 308,000 shares of common stock to nine individuals and entities related to Sunrise Securities Corp. and warrants to purchase 300,000 shares of common stock to 10 individuals and entities related to Sunrise Securities Corp. both for consideration for services rendered by Sunrise Securities Corp. as placement agent in the Series A Preferred Stock financing.

 

From March 2005 to March 2006, we issued to 26 employees and third party consultants options to purchase 500,590 shares of common stock with exercise prices ranging from $0 to $4.50 per share.

 

We also issued in March 2005, pursuant to the conversion of $102,438 principal amount of outstanding promissory notes, 51,219 shares of Series A Preferred Stock to two investors.

 

On August 1, 2005, payment of the first part of the accrued dividends on the Series A Preferred Stock were made in the form of 69,201 shares of common stock to 31 holders of the Series A Preferred Stock. On February 1, 2006, we issued 91,776 shares of common stock as accrued dividends on the Series A Preferred Stock to the same preferred stockholders. On July 20, 2006, we issued 92,407 shares of common stock as accrued dividends on the Series A Preferred Stock.

 

On September 30, 2005, we issued 59,600 shares of common stock to an outside consultant upon the exercise of a fully vested stock option.

 

On January 27, 2006, we issued 240,000 shares of Series A Preferred Stock to 29 holders of the Series A Preferred Stock and 54,060 shares of common stock to 33 holders of our common and preferred stock in connection with certain provisions of the Series A Rights Agreement dated as of March 15, 2005.

 

On June 21, 2006, we issued 60,000 shares of Series A Preferred Stock to 29 holders of the Series A Preferred Stock and 15,295 shares of common stock to 33 holders of our common and preferred stock in connection with certain provisions of the Series A Rights Agreement dated as of March 15, 2005, as amended February 17, 2006.

 

On July 20, 2006, the effective date of our initial public offering, we issued 124,206 shares of common stock to three convertible note holders upon the automatic conversion of notes in the principal amount of $283,500 plus accrued interest.

 

On July 20, 2006, we issued warrants to purchase 170,000 shares of common stock to Sunrise Securities Corp., Roth Capital Partners, LLC and/or their designees at a cost of $100.00. The warrants have an exercise price of $8.70 per share.

 

On July 20, 2006, we issued options to purchase an aggregate of 45,000 shares of common stock with an exercise price of $6.00 per share to our three new independent directors.

 

On July 27, 2006, we issued 625 shares of common stock to an employee upon the exercise of a stock option, which was partially vested.

On November 16, 2006, we issued 50,000 warrants to an outside consultant in connection with assistance in capital raising activities that led to our March 2007 private placement. 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 26, 2007, we issued 55,000 warrants to an outside consultant in connection with capital raising activities. These warrants are immediately exercisable into common shares of the Company and have an exercise price of $9.19 per share and an expiration date of February 26, 2012.

On March 16, 2007, the Company entered into a Securities Purchase Agreement with various Buyers, pursuant to which the Company agreed to sell to the Buyers 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 aggregate purchase price paid by the Buyers for the Series B Preferred and Series B Warrants was approximately $30,000,000. After related fees and expenses, the Company received net proceeds of approximately $29,000,000. The Company intends 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. 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.

 

II-2

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The Company also issued to the 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, upon stockholder approval, into an aggregate of 290,298 shares of common stock, Series B Warrants that are exercisable, upon stockholder approval, for an aggregate of 221,172 shares of the Company’s common stock, and Series C Warrants that are exercisable, upon stockholder approval, 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.

II-3

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EXHIBITS

Exhibit No.		Description
3.1		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		Amended 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******
5.1		Opinion of Katten Muchin Rosenman LLPÆ
10.1		Restricted Stock Agreement between Cleveland BioLabs, Inc. and Michael Fonstein, dated as of July 5, 2003*
10.2		Restricted Stock Agreement between Cleveland BioLabs, Inc. and Yakov Kogan, dated as of July 5, 2003*
10.3		Restricted Stock Agreement between Cleveland BioLabs, Inc. and Andrei Gudkov, dated as of July 5, 2003*
10.4		Library Access Agreement by and between ChemBridge Corporation and Cleveland BioLabs, Inc., effective as of April 27, 2004*
10.5		Restricted Stock and Investor Rights Agreement between Cleveland BioLabs, Inc. and ChemBridge Corporation, dated as of April 27, 2004*
10.6		Common Stockholders Agreement by and among Cleveland BioLabs, Inc. and the stockholders named therein, dated as of July 1, 2004*
10.7		Exclusive License Agreement by and between The Cleveland Clinic Foundation and Cleveland BioLabs, Inc., effective as of July 1, 2004*
10.8		Employment Agreement by and between Cleveland BioLabs, Inc. and Dr. Michael Fonstein, dated August 1, 2004*
10.9		Employment Agreement by and between Cleveland BioLabs, Inc. and Dr. Yakov Kogan, dated August 1, 2004*

 

II-4

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10.10		Consulting Agreement between Cleveland BioLabs, Inc. and Dr. Andrei Gudkov, dated August 1, 2004*
10.11		Cooperative Research and Development Agreement by and between the Uniformed Services University of the Health Sciences, the Henry M. Jackson Foundation for the Advancement of Military Medicine, Inc., the Cleveland Clinic Foundation, and Cleveland BioLabs, Inc., dated as of August 1, 2004**
10.12		Form of Stock Purchase Agreement between Cleveland BioLabs, Inc. and the Purchasers party thereto, dated as of March 15, 2005*
10.13		Form of Series A Rights Agreement by and among Cleveland BioLabs, Inc. and the parties thereto, dated as of March 15, 2005*
10.14		Employment Agreement by and between Cleveland BioLabs, Inc. and Dr. Farrel Fort, dated June 1, 2005*
10.15		Amendment to Employment Agreement by and between Cleveland BioLabs, Inc. and Dr. Farrel Fort, dated September 30, 2005*
10.16		Amendment to Consulting Agreement between Cleveland BioLabs, Inc. and Dr. Andrei Gudkov, dated as of January 23, 2006*
10.17		Amendment to Restricted Stock Agreement between Cleveland BioLabs, Inc. and Michael Fonstein, dated as of January 23, 2006*
10.18		Amendment to Restricted Stock Agreement between Cleveland BioLabs, Inc. and Yakov Kogan, dated as of January 23, 2006*
10.19		Amendment to Restricted Stock Agreement between Cleveland BioLabs, Inc. and Andrei Gudkov, dated as of January 23, 2006*
10.20		Amendment to Common Stockholders Agreement by and among Cleveland BioLabs, Inc. and the parties thereto, dated as of January 26, 2006*
10.21		Form of Amendment to Series A Rights Agreement by and among Cleveland BioLabs, Inc. and the parties thereto, dated as of February 17, 2006*
10.22		Cleveland BioLabs, Inc. 2006 Equity Incentive Plan***
10.23		Process Development and Manufacturing Agreement between Cleveland BioLabs, Inc. and SynCo Bio Partners B.V., effective as of August 31, 2006****
10.24		Sponsored Research Agreement between Cleveland BioLabs, Inc. and Roswell Park Cancer Institute Corporation, effective as of January 12, 2007*****
10.25		Securities Purchase Agreement, dated March 16, 2007******
10.26		Registration Rights Agreement, dated March 16, 2007******
10.27		Voting Agreement, dated March 16, 2007******
10.28		Consulting agreement between Cleveland BioLabs, Inc. and Basic Investors, Inc., dated as of October 10, 2006, as amended April 9, 2007
16.1		Letter on change in certifying accountant*
23.1		Consent of Meaden & Moore, Ltd.
23.2		Consent of Katten Muchin Rosenman LLP (included in Exhibit 5.1)Æ

 

II-6

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Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated below. 

 

Signature		Title						Date
/s/ Michael Fonstein		Chief Executive Officer, President and Director						August 10, 2007
Michael Fonstein		(Principal Executive Officer)
/s/ John A. Marhofer, Jr.		Chief Financial Officer						August 10, 2007
John A. Marhofer, Jr.		(Principal Financial and Accounting Officer)
*		Director						August 10, 2007
James Antal
*		Director						August 10, 2007
Paul DiCorleto
*		Chief Scientific Officer and Director						August 10, 2007
Andrei Gudkov
*		Director, Chairman of the Board						August 10, 2007
Bernard L. Kasten
*		Executive Vice President of Business Development,						August 10, 2007
Yakov Kogan		Secretary and Director
*		Director						August 10, 2007
H. Daniel Perez

 

*By: /s/ John A. Marhofer, Jr.
John A. Marhofer, Jr. Attorney-in-fact

 

  

II-7

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EXHIBIT INDEX

 

Exhibit No.		Description
3.1		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		Amended 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******
5.1		Opinion of Katten Muchin Rosenman LLPÆ
10.1		Restricted Stock Agreement between Cleveland BioLabs, Inc. and Michael Fonstein, dated as of July 5, 2003*
10.2		Restricted Stock Agreement between Cleveland BioLabs, Inc. and Yakov Kogan, dated as of July 5, 2003*
10.3		Restricted Stock Agreement between Cleveland BioLabs, Inc. and Andrei Gudkov, dated as of July 5, 2003*
10.4		Library Access Agreement by and between ChemBridge Corporation and Cleveland BioLabs, Inc., effective as of April 27, 2004*
10.5		Restricted Stock and Investor Rights Agreement between Cleveland BioLabs, Inc. and ChemBridge Corporation, dated as of April 27, 2004*
10.6		Common Stockholders Agreement by and among Cleveland BioLabs, Inc. and the stockholders named therein, dated as of July 1, 2004*
10.7		Exclusive License Agreement by and between The Cleveland Clinic Foundation and Cleveland BioLabs, Inc., effective as of July 1, 2004*
10.8		Employment Agreement by and between Cleveland BioLabs, Inc. and Dr. Michael Fonstein, dated August 1, 2004*
10.9		Employment Agreement by and between Cleveland BioLabs, Inc. and Dr. Yakov Kogan, dated August 1, 2004*

 

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10.10		Consulting Agreement between Cleveland BioLabs, Inc. and Dr. Andrei Gudkov, dated August 1, 2004*
10.11		Cooperative Research and Development Agreement by and between the Uniformed Services University of the Health Sciences, the Henry M. Jackson Foundation for the Advancement of Military Medicine, Inc., the Cleveland Clinic Foundation, and Cleveland BioLabs, Inc., dated as of August 1, 2004**
10.12		Form of Stock Purchase Agreement between Cleveland BioLabs, Inc. and the Purchasers party thereto, dated as of March 15, 2005*
10.13		Form of Series A Rights Agreement by and among Cleveland BioLabs, Inc. and the parties thereto, dated as of March 15, 2005*
10.14		Employment Agreement by and between Cleveland BioLabs, Inc. and Dr. Farrel Fort, dated June 1, 2005*
10.15		Amendment to Employment Agreement by and between Cleveland BioLabs, Inc. and Dr. Farrel Fort, dated September 30, 2005*
10.16		Amendment to Consulting Agreement between Cleveland BioLabs, Inc. and Dr. Andrei Gudkov, dated as of January 23, 2006*
10.17		Amendment to Restricted Stock Agreement between Cleveland BioLabs, Inc. and Michael Fonstein, dated as of January 23, 2006*
10.18		Amendment to Restricted Stock Agreement between Cleveland BioLabs, Inc. and Yakov Kogan, dated as of January 23, 2006*
10.19		Amendment to Restricted Stock Agreement between Cleveland BioLabs, Inc. and Andrei Gudkov, dated as of January 23, 2006*
10.20		Amendment to Common Stockholders Agreement by and among Cleveland BioLabs, Inc. and the parties thereto, dated as of January 26, 2006*
10.21		Form of Amendment to Series A Rights Agreement by and among Cleveland BioLabs, Inc. and the parties thereto, dated as of February 17, 2006*
10.22		Cleveland BioLabs, Inc. 2006 Equity Incentive Plan***
10.23		Process Development and Manufacturing Agreement between Cleveland BioLabs, Inc. and SynCo Bio Partners B.V., effective as of August 31, 2006****
10.24		Sponsored Research Agreement between Cleveland BioLabs, Inc. and Roswell Park Cancer Institute Corporation, effective as of January 12, 2007*****
10.25		Securities Purchase Agreement, dated March 16, 2007******
10.26		Registration Rights Agreement, dated March 16, 2007******
10.27		Voting Agreement, dated March 16, 2007******
10.28		Consulting Agreement between Cleveland BioLabs, Inc. and Basic Investors, Inc., dated as of October 10, 2006, as amended April 9, 2007
16.1		Letter on change in certifying accountant*
23.1		Consent of Meaden & Moore, Ltd.
23.2		Consent of Katten Muchin Rosenman LLP (included in Exhibit 5.1)Æ

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