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CLEVELAND BIOLABS INC

10-QSB

11/14/2007

 

TABLE OF CONTENTS

				PAGE
PART I - FINANCIAL INFORMATION
ITEM 1:	Financial Statements
	Balance Sheets as of September 30, 2007 and December 31, 2006			3-4
	Statements of Operations For Three and Nine Months Ended September 30, 2007 and 2006			5
	Statement of Stockholders' Equity January 1, 2006 to December 31, 2006 and to September 30, 2007			6
	Statements of Cash Flows For Nine Months Ended September 30, 2007 and 2006			9
	Notes to Financial Statements			10
ITEM 2:	Management's Discussion and Analysis of Financial Condition and Results of Operations			20
ITEM 3:	Controls and Procedures			33
PART II - OTHER INFORMATION
ITEM 1:	Legal Proceedings			34
ITEM 2:	Unregistered Sales of Equity Securities and Use of Proceeds			34
ITEM 3:	Defaults Upon Senior Securities			34
ITEM 4:	Submission of Matters to a Vote of Securities Holders			34
ITEM 5:	Other Information			34
ITEM 6:	Exhibits			34
Signatures				35

 

In this report, “Cleveland BioLabs,” “CBLI,” “we,” “us” and “our” refer to Cleveland BioLabs, Inc. “common stock” refers to Cleveland BioLabs, Inc.’s common stock, par value $0.005 per share.

2

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CLEVELAND BIOLABS, INC.
BALANCE SHEETS
September 30, 2007 (unaudited) and December 31, 2006
		September 30			December 31
		2007			2006
ASSETS		(unaudited)
CURRENT ASSETS
Cash and equivalents		$	20,278,556		$	3,061,993
Short-term investments			1,003,869			1,995,836
Accounts receivable:
Trade			644,539			159,750
Interest			44,179			42,479
Notes receivable - Orbit Brands			-			50,171
Prepaid expenses			266,769			434,675
Total current assets			22,237,912			5,744,904
EQUIPMENT
Computer equipment			250,527			132,572
Lab equipment			886,731			347,944
Furniture			91,885			65,087
			1,229,143			545,603
Less accumulated depreciation			252,990			142,011
Construction in progress			147,889			-
			1,124,042			403,592
OTHER ASSETS
Intellectual property			406,395			252,978
Deposits			27,447			15,055
			433,842			268,033
TOTAL ASSETS		$	23,795,796		$	6,416,529

3

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CLEVELAND BIOLABS, INC.
BALANCE SHEETS
September 30, 2007 (unaudited) and December 31, 2006
		September 30			December 31
		2007			2006
LIABILITIES AND STOCKHOLDERS' EQUITY		(unaudited)
CURRENT LIABILITIES
Accounts payable		$	965,369		$	644,806
Deferred revenue			1,846,763			-
Accrued expenses			397,991			128,569
Total current liabilities			3,210,123			773,375
LONG-TERM LIABILITIES
Milestone payable (long-term)			-			50,000
Total long-term liabilities			-			50,000
STOCKHOLDERS' EQUITY
Series B convertible preferred stock, $.005 par value
Authorized - 10,000,000 shares at September 30, 2007
and December 31, 2006
Issued and outstanding 4,579,010 and 0
shares at September 30, 2007 and December 31, 2006, respectively			22,895			-
Additional paid-in capital			28,845,232			-
Common stock, $.005 par value
Authorized - 40,000,000 shares at September 30, 2007
and December 31, 2006
Issued and outstanding 12,182,748 and 11,826,389
shares at September 30, 2007 and December 31, 2006, respectively			60,914			59,132
Additional paid-in capital			22,949,868			18,314,097
Accumulated other comprehensive income (loss)			-			(4,165	)
Accumulated deficit			(31,293,236	)		(12,775,910	)
Total stockholders' equity			20,585,673			5,593,154
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY		$	23,795,796		$	6,416,529

4

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CLEVELAND BIOLABS, INC.
STATEMENT OF OPERATIONS
Three Months and Nine Months Ending September 30, 2007 and 2006 (unaudited)
		Three Months Ended						Nine Months Ended
		September 30			September 30			September 30			September 30
		2007			2006			2007			2006
		(unaudited)			(unaudited)			(unaudited)			(unaudited)
REVENUES
Grant		$	540,544		$	263,368		$	1,327,996		$	1,271,787
Service			120,000			60,000			290,000			205,000
			660,544			323,368			1,617,996			1,476,787
OPERATING EXPENSES
Research and development			4,105,480			1,281,055			11,663,054			4,341,535
Selling, general and administrative			1,442,669			708,776			6,968,565			1,367,457
Total operating expenses			5,548,149			1,989,831			18,631,619			5,708,992
LOSS FROM OPERATIONS			(4,887,605	)		(1,666,463	)		(17,013,623	)		(4,232,205	)
OTHER INCOME
Interest income			305,568			81,189			761,648			125,719
Sublease revenue			1,771			-			1,771			-
OTHER EXPENSE
Interest expense			-			2,257			1,087			11,198
Corporate relocation			901,964						1,152,643
Loss on investment			305,479			-			305,479			-
NET LOSS			(5,787,709	)		(1,587,531	)		(17,709,413	)		(4,117,684	)
DIVIDENDS ON CONVERTIBLE PREFERRED STOCK			(807,913	)		(22,035	)		(807,913	)		(215,933	)
NET LOSS AVAILABLE TO COMMON STOCKHOLDERS		$	(6,595,622	)	$	(1,609,566	)	$	(18,517,326	)	$	(4,333,617	)
NET LOSS AVAILABLE TO COMMON STOCKHOLDERS
PER SHARE OF COMMON STOCK - BASIC AND
DILUTED		$	(0.54	)	$	(0.15	)	$	(1.54	)	$	(0.55	)
WEIGHTED AVERAGE NUMBER OF SHARES USED
IN CALCULATING NET LOSS PER SHARE, BASIC AND DILUTED			12,148,718			10,681,032			12,010,177			7,922,195

5

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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
September 30, 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			-			-			2,745,287			-
Issuance of Series B Preferred Shares			-			-			-			-
Fees associated with Series B Preferred offering			-			-			-			-
Issuance of restricted shares			190,000			950			1,699,500			-
Exercise of options			118,296			591			100,709			-
Exercise of warrants			48,063			240			90,275			-
Dividends on Series B Preferred Shares			-			-			-			-
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 September 30, 2007			12,182,748		$	60,914		$	22,949,868		$	-

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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
September 30, 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			(1,154,308	)		-
Issuance of restricted shares			-			-			-			-
Exercise of options			-			-			-			-
Exercise of warrants			-			-			-			-
Dividends on Series B Preferred Shares			-			-			-			-
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 September 30, 2007			4,579,010		$	22,895		$	28,845,232		$	-

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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
September 30, 2007 (unaudited)
		Stockholders' Equity
		Other									Comprehensive
		Comprehensive			Accumulated						Income
		Income/(Loss)			Deficit			Total			(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			-			-			2,745,287
Issuance of Series B Preferred Shares			-			-			30,020,984
Fees associated with Series B Preferred offering			-			-			(1,152,857	)
Issuance of restricted shares			-			-			1,700,450
Exercise of options			-			-			101,300
Exercise of warrants			-			-			90,515
Dividends on Series B Preferred Shares			-			(807,913	)		(807,913	)
Net Loss			-			(17,709,413	)		(17,709,413	)		(17,709,413	)
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											$	(17,705,248	)
Balance at September 30, 2007		$	-		$	(31,293,236	)	$	20,585,673

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CLEVELAND BIOLABS, INC.
STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2007 and 2006 (unaudited)
		September 30			September 30
		2007			2006
		(unaudited)			(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss		$	(17,709,413	)	$	(4,117,684	)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation			110,979			68,204
Noncash interest expense			-			9,929
Noncash salaries and consulting expense			4,445,737			439,684
Deferred compensation			-			4,852
Loss on investments			305,479			-
Changes in operating assets and liabilities:
Accounts receivable - trade			(484,789	)		(76,644	)
Accounts receivable - interest			(7,008	)		(5,170	)
Prepaid expenses			167,907			(132,729	)
Deposits			(12,392	)		(3,055	)
Accounts payable			320,563			308,797
Deferred revenue			1,846,763			(100,293	)
Accrued expenses			269,424			15,596
Milestone payments			(50,000	)		50,000
Total adjustments			6,912,663			579,172
Net cash (used by) provided by operating
activities			(10,796,750	)		(3,538,512	)
CASH FLOWS FROM INVESTING ACTIVITIES
Sale/(purchase) of short-term investments			996,131			(500,000	)
Issuance of notes receivable			(250,000	)		-
Purchase of equipment			(831,430	)		(143,693	)
Costs of patents pending			(153,417	)		(106,059	)
Net cash (used in) provided by investing activities			(238,716	)		(749,752	)
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of preferred stock			30,020,984			-
Financing costs			(1,152,857	)		(1,679,456	)
Dividends			(807,913	)		(43	)
Issuance of common stock			-			10,200,000
Exercise of stock options			101,300			2,813
Exercise of warrants			90,515			-
Issuance of warrants			-			100
Net cash (used in) provided by financing activities			28,252,029			8,523,413
INCREASE (DECREASE) IN CASH AND EQUIVALENTS			17,216,563			4,235,149
CASH AND EQUIVALENTS AT BEGINNING OF			3,061,993			1,206,462
PERIOD
CASH AND EQUIVALENTS AT END OF PERIOD		$	20,278,556		$	5,441,611
Supplemental disclosures of cash flow information:
Cash paid during the period for interest		$	1,087		$	1,269
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		$	2,745,287		$	439,684
Issuance of shares to consultants		$	1,700,450		$	-
Issuance of common stock dividend to preferred shareholders		$	-		$	368,366
Conversion of notes payable and accrued interest to common stock		$	-		$	313,003
Conversion of preferred stock to common stock		$	-		$	5,308,142

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CLEVELAND BIOLABS, INC.

 

NOTES TO FINANCIAL STATEMENTS

 

Note 1. Organization

 

Cleveland BioLabs, Inc. (“CBLI” or the “Company”) is engaged in the discovery, development and commercialization of products for cancer treatment and protection of normal tissues from radiation and toxins. The Company was incorporated under the laws of the State of Delaware on June 5, 2003 and is headquartered in Buffalo, New York. The Company's 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 September 30, 2007 and September 30, 2006, and for the quarter and nine-month periods ended September 30, 2007 and September 30, 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 CBLI’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 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 September 30, 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 were to 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 were convertible into common stock of the Borrower and its subsidiaries. At September 30, 2007, the Company wrote off the balance outstanding of $300,000 plus accrued interest of $5,479 due to the fact that the Securities and Exchange Commission has initiated proceedings to permanently suspend trading in the shares of Borrower and to revoke its registration under the Securities Exchange Act of 1934. In addition, Borrower does not appear to have sufficient funds to emerge from its bankruptcy proceedings.

  

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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 $49,298, and $24,514 for the quarters ended September 30, 2007 and 2006, respectively. Depreciation expense was $110,979 and $68,206 for the nine months ended September 30, 2007 and 2006, respectively.

 

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, CBLI 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, filing and maintenance 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 were $366,918 and $222,789 on behalf of CCF for 12 patent applications as of September 30, 2007 and December 31, 2006, respectively. All of the 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, filing and maintenance of the patent application will be expensed as part of selling, general and administrative expenses at that time. Gross capitalized patents pending costs were $39,478 and $30,189 on behalf of the Company for three patent applications as of September 30, 2007 and December 31, 2006, respectively. The patent applications are still pending approval.
I.	Line of Credit - The Company has a working capital line of credit that is fully secured by short-term investments. This fully-secured, working capital line of credit carries an interest rate of prime minus 1%, a borrowing limit of $1,000,000, and expires on September 25, 2008. At September 30, 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.

 

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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 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). The Company has also begun recognizing revenue from a sponsored research agreement with Roswell Park Cancer Institute. This agreement was funded by the State of New York as part of the incentive for the Company to relocate its corporate headquarters and research facilities to Buffalo, New York. Commercial development revenues are recognized when the service or development is delivered.

M.

Deferred Revenue - Deferred revenue results when payment is received in advance of revenue being earned. 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.   The Company received $2,000,000 in funds from the Roswell Park Cancer Institute during the second quarter of 2007 and is recognizing this revenue over the terms and conditions of the sponsored research agreement. For the quarter ended September 30, 2007, the Company recognized $153,238 of this revenue resulting in a balance of deferred revenue of $1,846,763 at September 30, 2007. At September 30, 2006, the Company had no deferred revenue.

 

N.

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

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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 the aggregate number of shares of stock which may be delivered under the Plan shall not exceed 2,000,000 shares. On February 14, 2007, these 2,000,000 shares were registered with the SEC by filing a Form S-8 registration statement. For the quarter ended September 30, 2007, there were 18,000 options and 15,000 shares granted under the Plan, and as of September 30, 2007 there were 588,000 stock options and 190,000 shares granted under the Plan totaling 778,000 equity instruments awarded under the Plan.

 

P.	Stock-Based Compensation - The FASB issued SFAS No. 123(R) (revised December 2004), Share Based Payment, which is a revision of SFAS No. 123 Accounting for Stock-Based Compensation. SFAS 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the statement of operations based on their fair values. The Company values employee stock based compensation under the provisions of SFAS 123(R) and related interpretations.
	The fair value of each stock option granted is estimated on the grant date. The Black Scholes model is used for standard stock options, but if market conditions are present within the stock options, the Company utilizes Monte Carlo simulation to value the stock options. The assumptions used to calculate the fair value of options granted are evaluated and revised, as necessary, to reflect the Company's experience. The Company uses a risk-free rate published by the St. Louis Federal Reserve at the time of the option grant, assumes a forfeiture rate of zero, assumes an expected dividend yield rate of zero based on the Company's intent not to issue a dividend in the foreseeable future, uses an expected life based on the safe harbor method, and computes an expected volatility based on similar high-growth, publicly-traded, biotechnology companies. 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. The Company recognizes the fair value of share-based compensation in net income on a straight-line basis over the requisite service period.
	During the quarter ended September 30, 2007, the Company granted 18,000 additional stock options pursuant to a stock award agreement. The Company recognized a total of $395,129 in expense related to options for the three months ended September 30, 2007, and $2,745,287 for the nine months ended September 30, 2007. The weighted average, estimated grant date fair values of stock options granted during the quarter ended September 30, 2007 was $4.95. The weighted average, estimated grant date fair values of stock options granted during the nine months ended September 30, 2007 was $5.90.   The following tables summarize the stock option activity for the nine months ended September 30, 2007 and September 30, 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			543,000		$	9.82
Exercised			124,000		$	1.35
Forfeited, Canceled			0			n/a
Outstanding, September 30, 2007			902,490		$	6.89			8.77
Exercisable, September 30, 2007			599,930		$	6.58			8.78

 

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		Shares			Weighted Average Exercise Price per Share			Weighted Average Remaining Contractual Term (in Years)
Outstanding, December 31, 2005			324,240		$	.82
Granted			161,750		$	4.92
Exercised			625		$	4.50
Forfeited, Canceled			1,875		$	4.50
Outstanding, September 30, 2006			483,490		$	2.17			9.02
Exercisable, September 30, 2006			239,433		$	2.27			9.03

 

In addition, the Company recognized $1,700,450 in expense for shares issued under the Plan to various consultants during the nine months ended September 30, 2007. During the quarter ended September 30, 2007 the Company recognized $159,150 in compensation expense for shares issued to a key consultant under the Plan. For the quarter and nine months ended September 30, 2006 there was no compensation expense recognized for share issuance.

Q.

Other Expense - The Company recognizes those expenses that cannot be traced directly to operations as Other Expense in accordance with FASB guidelines. The Company recognized Other Expense for the following items: For the quarter ended September 30, 2007, the Company recognized $901,964 in Other Expense due to the relocation of the corporate headquarters and research facilities to Buffalo, New York. For the nine months ended September 30, 2007 the Company recognized $1,152,643 in Other Expense due to this relocation. The Company recognized $305,479 in Other Expense for the quarter and nine months ended September 30, 2007 for the loss on the investment in Notes Receivable from the Orbit Brands Corporation as described in Note E above. For the quarters ended September 30, 2007 and 2006, the Company recognized $0 and $2,257 in Other Expense due to interest charges, respectively. For the nine months ended September 30, 2007 and 2006, the Company recognized $1,087 and $11,198 in Other Expense due to interest charges, respectively.

  

R.	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 and nine months ended September 30, 2007 and 2006:

 

		Quarter Ended			Quarter Ended			Nine-Months Ended			Nine-Months Ended
		Sept. 30, 2007			Sept. 30, 2006			Sept. 30, 2007			Sept. 30, 2006
Net loss available to common shareholders		$	(6,595,622	)	$	(1,609,565	)	$	(18,517,326	)	$	(4,333,617	)
Net loss per share, basic and diluted		$	(.54	)	$	(.15	)	$	(1.54	)	$	(.55	)
Weighted-average shares used in computing			12,148,718			10,681,032			12,010,177			7,922,195

 

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.

 

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	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 3,453,268 and 764,424 for the quarters and nine months ended September 30, 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 902,490 and 483,490 for the quarters and nine months ended September 30, 2007 and 2006, respectively. Such securities, had they been dilutive, would have been included in the computation of diluted earnings per share.
S.	Concentrations of Risk - Grant revenue was comprised wholly from grants and contracts issued by the federal government and accounted for 81.8% and 81.4% of total revenue for the quarter ended September 30, 2007 and 2006, respectively. Grant revenue accounted for 82.1% and 86.1% for the nine months ended September 30, 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.

 

T.

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. As of September 30, 2007, the Company is obligated to make payments under the agreement of 537,017 Euros. The Company has established means to purchase forward contracts to hedge against this risk. As of September 30, 2007, the Company has commitments for 197,847 Euros of hedging transactions.

 

U.

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 4 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. On August 28, 2007, trading of the Company’s common stock moved from the Nasdaq Capital Market to the Nasdaq Global Market. In September 2007, the Company ceased its listing on the Boston Stock Exchange. In connection with its initial public offering, the Company sold warrants to purchase 170,000 shares of common stock to the underwriters and their designees at a cost of $100.00. The warrants have an exercise price of $8.70 per share.

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

On March 16, 2007, the Company entered into a Securities Purchase Agreement with various accredited investors (the “Buyers”), pursuant to which the Company agreed to sell to the Buyers Series B Convertible Preferred Stock (“Series B Preferred”) convertible into an aggregate of 4,288,712 shares of common stock and Series B Warrants that are exercisable for an aggregate of 2,144,356 shares of common stock. The Series B Preferred have an initial conversion price of $7.00 per share, 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 into an aggregate of 290,298 shares of common stock, Series B Warrants that are exercisable for an aggregate of 221,172 shares of the Company’s common stock, and Series C Warrants that are exercisable for 267,074 shares of the Company’s common stock. The Series C Warrants have an exercise price of $11.00 per share, and are also subject to anti-dilution protections that could increase the number of shares of common stock for which they are exercisable.

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

 

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

On April 6, 2007, the Company issued 152,500 stock options to officers and consultants under non-qualified stock option agreements. These options are immediately exercisable and allow for the purchase of 152,500 shares of common stock at a price of $8.36. These options expire on April 6, 2017.

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On April 9, 2007, the Company issued 145,000 shares of common stock to various outside consultants under the Plan.

 

On June 12, 2007, the Company issued a total of 140,000 stock options to four independent members of the Board of Directors of the Company under non-qualified stock option agreements. These options are immediately exercisable and allow for the purchase of 140,000 shares of common stock at a price of $9.40. These options expire on June 12, 2017.

On June 15, 2007, the Company issued 110,000 stock options to various key employees and consultants under non-qualified stock option agreements. These options have various vesting schedules including immediate vesting, up to three year vesting, and vesting upon the Company stock price matching or exceeding certain levels. These options allow for the purchase of 110,000 shares of common stock at a price ranging from $9.93 to $17.00. These options expire on June 15, 2017.

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

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

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

 

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.

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 September 30, 2007, $300,000 in milestone payments have been made under one of these agreements.

 

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

 

The Company currently has operating lease commitments in place for facilities in Buffalo, New York and Chicago, Illinois as well as office equipment. The Company recognizes rent expense on a straight-line basis over the term of the related operating leases. The operating lease expenses recognized were $79,054, and $42,715 for the quarters ended September 30, 2007 and 2006, respectively, and the operating lease expenses recognized were $166,986 and $117,824 for the nine months ended September 30, 2007 and 2006, respectively.

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

 

		Operating Leases
2007 (from October 1, 2007 through December 31, 2007)		$	83,120
2008			332,995
2009			347,214
2010			339,155
2011			307,300
2012			144,000
Total		$	1,636,904

 

The Company has entered into stock option agreements with key employees, board members and consultants with exercise prices ranging from $0.00 to $17.00. These awards were approved by the Company’s Board of Directors. 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 nine months ended September 30, 2007 and 2006:

 

		Number of Options			Weighted Average Exercise Price
Outstanding at December 31, 2006			483,490		$	2.17
Granted			543,000		$	9.82
Exercised			124,000		$	1.35
Forfeited			0			n/a
Outstanding at September 30, 2007			902,490		$	6.89

 

 

		Number of Options			Weighted Average Exercise Price
Outstanding at December 31, 2005			324,240		$	.82
Granted			161,750		$	4.92
Exercised			625		$	4.50
Forfeited			1,875		$	4.50
Outstanding at September 31, 2006			483,490		$	2.17

 

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

		Number of Warrants			Weighted Average Exercise Price
Outstanding at December 31, 2006			814,424		$	3.36
Granted			2,687,602		$	10.40
Exercised			48,758		$	2.00
Forfeited			--			N/A
Outstanding at September 30, 2007			3,453,268		$	8.86

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		Number of Warrants			Weighted Average Exercise Price
Outstanding at December 31, 2005			594,424		$	1.61
Granted			170,000		$	8.70
Exercised			--			N/A
Forfeited			--			N/A
Outstanding at September 30, 2006			764,424		$	3.19

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

 

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

 

Note 5. Subsequent Events

 

 No material subsequent events have occurred since the balance sheet date of September 30, 2007.

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

 

This management's discussion and analysis of financial condition and results of operations and other portions of this filing contain forward-looking information that involves risks and uncertainties. Our actual results could differ materially from those anticipated by the forward-looking information. Factors that may cause such differences include, but are not limited to, availability and cost of financial resources, results of our R&D efforts and clinical trials, product demand, market acceptance and other factors discussed in the Company's other SEC filings under the heading “Risk Factors”. This management's discussion and analysis of financial condition and results of operations should be read in conjunction with our financial statements and the related notes included elsewhere in this filing and in our Annual Report on Form 10-KSB for the year ended December 31, 2006.

 

Overview

General Overview

We commenced business operations in June 2003.  We are a drug discovery and development company leveraging our proprietary scientific research and discoveries relating to programmed cell death to treat cancer and protect normal tissues from exposure to radiation and other stresses.

Technology

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

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

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

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

 

Products In Development

 

Protectans

 

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