CLEVELAND BIOLABS, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS

 

 

See Notes to Consolidated Financial Statements

 

 

CLEVELAND BIOLABS, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

 

See Notes to Consolidated Financial Statements

 

 

CLEVELAND BIOLABS, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE LOSS

(UNAUDITED)

 

 

See Notes to Consolidated Financial Statements

 

 

CLEVELAND BIOLABS, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS’ EQUITY

(UNAUDITED)

 

 

See Notes to Consolidated Financial Statements

 

 

CLEVELAND BIOLABS, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

 

See Notes to Consolidated Financial Statements

 

 

CLEVELAND BIOLABS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(UNAUDITED)

 

 

 

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 quarterly report on Form 10-Q contain forward-looking statements that involve risks and uncertainties. All statements other than statements of current or historical fact contained in this quarterly report, including statements regarding our future financial position, business strategy, new products, budgets, liquidity, cash flows, projected costs, regulatory approvals, or the impact of any laws or regulations applicable to us, plans and objectives of management for future operations, the expected ownership in the combined company of the former Cytocom securityholders and securityholders of the Company as of immediately prior to the Merger and governance of the combined company, are forward-looking statements. The words "anticipate," "believe," "continue," "should," "estimate," "expect," "intend," "may," "plan," "project," "will," and similar expressions, as they relate to us, are intended to identify forward-looking statements. We have based these forward-looking statements on our current expectations about future events. While we believe these expectations are reasonable, such forward-looking statements are inherently subject to risks and uncertainties, many of which are beyond our control. Our actual future results may differ materially from those discussed here for various reasons. We discuss many of these risks in Item 1A under the heading "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2019. Factors that may cause such differences include, but are not limited to, the risk that the proposed merger may not be completed in a timely manner or at all, which may adversely affect the Company’s business and the price of Company’s common stock; the failure of either party to satisfy any of the conditions to the consummation of the proposed merger, including the approval of Company’s stockholders; uncertainties as to the timing of the consummation of the proposed merger; the occurrence of any event, change or other circumstance that could give rise to the termination of the merger agreement; the effect of the announcement or pendency of the proposed merger on the Company’s business relationships, operating results and business generally; risks that the proposed merger disrupts current plans and operations and the potential difficulties in employee retention as a result of the proposed merger; risks related to diverting management’s attention from the Company’s ongoing business operations; the outcome of any legal proceedings that may be instituted against the Company related to the merger agreement or the proposed merger; unexpected costs, charges or expenses resulting from the proposed merger; our need for additional financing to meet our business objectives; our history of operating losses; our ability to successfully develop, obtain regulatory approval for, and commercialize our products in a timely manner; our plans to research, develop and commercialize our product candidates; our ability to attract collaborators with development, regulatory and commercialization expertise; our plans and expectations with respect to future clinical trials and commercial scale-up activities; our reliance on third-party manufacturers of our product candidates; the size and growth potential of the markets for our product candidates, and our ability to serve those markets; the rate and degree of market acceptance of our product candidates; regulatory requirements and developments in the United States, the European Union and foreign countries; the performance of our third-party suppliers and manufacturers; the success of competing therapies that are or may become available; our ability to attract and retain key scientific or management personnel; our reliance on government funding for a significant portion of our operating costs and expenses; government contracting processes and requirements; the exercise of control over our company by our majority stockholder; the impact of the novel coronavirus ("COVID-19") pandemic on our business, operations and clinical development; the geopolitical relationship between the United States and the Russian Federation as well as general business, legal, financial and other conditions within the Russian Federation; our ability to obtain and maintain intellectual property protection for our product candidates; our potential vulnerability to cybersecurity breaches; and other factors discussed below and in our other SEC filings, including our Annual Report on Form 10-K for the year ended December 31, 2019.

 

Given these uncertainties, you should not place undue reliance on these forward-looking statements. The forward-looking statements included in this quarterly report are made only as of the date hereof. We do not undertake any obligation to update any such statements or to publicly announce the results of any revisions to any of such statements to reflect future events or developments. 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 with our historical consolidated financial statements and the related notes thereto in our Annual Report on Form 10-K for the year ended December 31, 2019.

 

OVERVIEW

 

We are an innovative biopharmaceutical company developing novel approaches to activate the immune system and address serious medical needs. Our proprietary platform of Toll-like immune receptor activators has applications in mitigation of radiation injury and radiation oncology. We combine our proven scientific expertise and our depth of knowledge about our products’ mechanisms of action into a passion for developing drugs to save lives. Our most advanced product candidate is entolimod, an immune-stimulatory agent, which we are developing as a radiation countermeasure and other indications in radiation oncology. We conduct business in the U.S. directly and in Russia through two subsidiaries, one of which is wholly owned, BioLab 612 (which the Company has decided to dissolve), and one of which is owned in collaboration with a financial partner, Panacela. In addition, we conduct business with a former subsidiary, Incuron, which will pay us a 2% royalty on future commercialization, licensing, or sale of certain technology we sold to Incuron. We also partner in a joint venture, GPI, with Everon Biosciences, Inc ("Everon").

 

Recent Developments

 

Merger with Cytocom, Inc.

 

As previously disclosed, on October 16, 2020, the Company, High Street Acquisition Corp., a Delaware corporation and a wholly owned subsidiary of the Company ("Merger Sub"), and Cytocom, Inc., a Delaware corporation ("Cytocom"), entered into an Agreement and Plan of Merger (the "Merger Agreement"), pursuant to which, among other matters, and subject to the satisfaction or waiver of the conditions set forth in the Merger Agreement, Merger Sub will merge with and into Cytocom, with Cytocom continuing as a wholly owned subsidiary of the Company and the surviving corporation of the merger (the "Merger"). Subject to the terms and conditions of the Merger Agreement, at the effective time of the Merger, each outstanding share of Cytocom common stock, each outstanding share of Cytocom preferred stock that was not, by its terms, converted into shares of Cytocom common stock immediately prior to the effective time of the merger, and each vested restricted stock unit of Cytocom will be converted into the right to receive a number of shares of the Company’s common stock determined by the application of an exchange formula set forth in the Merger Agreement. The exchange formula provides that the total number of shares of the Company’s common stock to be issued as merger consideration for the Cytocom’s capital stock will, upon issuance, be equal to approximately 61% of the outstanding shares of the combined company’s common stock. Accordingly, under the exchange ratio formula in the Merger Agreement, as of immediately after the Merger, the former Cytocom stockholders are expected to own approximately 61% of the outstanding shares of the combined company’s common stock on a fully diluted basis and stockholders of the Company as of immediately prior to the Merger are expected to own approximately 39% of the outstanding shares of the combined company’s common stock on a fully diluted basis. Certain adjustments to this ratio will be made in respect of each party’s net cash at the time of the closing of the Merger, as determined in accordance with the Merger Agreement. Each unvested Cytocom restricted stock unit award will be converted into a restricted stock unit award of the Company. Immediately following the effective time of the Merger, the board of directors of the Company will consist of seven members, three of whom will be designated by the Company and four of whom will be designated by Cytocom. In addition, upon the closing of the Merger, Cytocom’s Chief Executive Officer, Michael Handley, will serve as Chief Executive Officer of the combined company. The closing of the Merger is subject to the satisfaction or waiver of certain conditions including, among other things, (i) the required approvals by the Company’s stockholders, (ii) the accuracy of the respective representations and warranties of each party, subject to certain materiality qualifications, (iii) compliance by the parties with their respective covenants, (iv) the absence of any law or order preventing the Merger and related transactions, (v) the shares of the Company’s common stock to be issued in the Merger being approved for listing (subject to official notice of issuance) on Nasdaq as of the closing and (vi) a registration statement on Form S-4 having become effective in accordance with the provisions of the Securities Act of 1933, as amended, and not being subject to any stop order or proceeding (or threatened proceeding by the SEC) seeking a stop order with respect to such registration statement that has not been withdrawn.

 

NASDAQ Listing Status

 

As previously disclosed, on August 21, 2020, the Company received a letter from The Nasdaq Stock Market informing the Company that the Company had regained compliance with Nasdaq Listing Rule 5550(b), which requires that the Company maintain a minimum stockholders’ equity of at least $2.5 million (the "Rule"). As a result, the Nasdaq Hearings Panel (the "Panel") determined to continue the listing of the Company’s securities on The Nasdaq Stock Market. However, due to the marginal nature of compliance in the projections provided to the Panel and the staff of the Nasdaq Stock Market (the “Staff”) on August 17, 2020, the Staff has recommended, and the Panel has determined to impose, a Panel Monitor until February 10, 2021. The Company is under certain notification obligations during this time period, including the obligation to notify the Panel Monitor if it fails to comply with the Rule or any other applicable listing requirement. Additionally, if at any time during this time period the Company fails to satisfy any continued listing standard, the Panel will promptly conduct a hearing with respect to the deficiency, and the Company’s securities may be immediately delisted from The Nasdaq Stock Market.

 

COVID-19 Pandemic

 

The COVID-19 pandemic has continued to affect multiple countries, including the United States, where a national emergency was declared, and several European and Asian countries. The continued spread of COVID-19 in the United States and worldwide, as well as the government-ordered shutdown and shelter-in-place orders imposed to counter the pandemic, have led to severe disruptions to the global economy. In this connection, on March 20, 2020, the Governor of New York announced that 100% of the workforce of all businesses, excluding essential services, must stay home. During the effectiveness of this order , we implemented a work-from-home policy for all employees based in our Buffalo, New York headquarters.  Under new applicable state orders, our offices may be occupied at 50% of their normal capacity if other safety precautions are taken, however, generally very few of our employees have returned to the office.  We are continuing to monitor the situation and will take such further action  as may be required by federal, state or local authorities, or that we determine are in the best interests of our employees.  COVID-19 and the governmental responses to it may cause us to experience disruptions that could severely impact our business, operations, preclinical studies and clinical trials. The global outbreak of COVID-19 continues to rapidly evolve and has begun to have indeterminable adverse effects on general commercial activity and the world economy. The extent to which COVID-19 may impact our business, research and development efforts, preclinical studies, clinical trials, prospects for regulatory approval of our drug candidates, and operations will depend on future developments, which are highly uncertain and cannot be predicted with confidence, such as the ultimate geographic spread of the disease, the duration of the outbreak, the extent and duration of travel restrictions and social distancing in the United States and other countries, business closures or business disruptions and the effectiveness of actions taken in the United States and other countries to contain and treat the disease. In addition, a recession or market correction resulting from the spread of COVID-19 could materially affect our business prospects and the value of our common stock.  Furthermore, if we or any of the third parties with whom we engage were to experience shutdowns or other business disruptions, our ability to conduct our business in the manner and on the timelines presently planned could be materially and negatively impacted, which could have a material adverse effect on our business, financial condition and results of operations.

 

Financial Overview

 

Our discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect our reported amounts of assets, liabilities, revenues, and expenses.

 

On an ongoing basis, we evaluate our estimates and judgments, including those related to accrued expenses, income taxes, stock-based compensation, investments, and in-process research and development. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the reported amounts of revenues and expenses that are not readily apparent from other sources. Actual results may differ from these estimates.

 

Our revenue, operating results, and profitability have varied, and we expect that they will continue to vary on a quarterly basis, primarily due to the timing of work completed under new and existing grants, development contracts, and collaborative relationships.

 

 

Revenue

 

Our revenue originates from grants and contracts from both United States ("U.S.") federal government sources and service contracts with Incuron. U.S. federal grants and contracts are provided to advance research and development of entolimod, our lead product candidate, which we believe is of interest for potential sale to the DoD, or the Biomedical Advanced Research and Development Authority of the U.S. Department of Health and Human Services ("BARDA"). We provide various research, management, business development, and clinical advisory services to Incuron.

 

Research and Development Expenses

 

Research and development ("R&D") costs are expensed as incurred. Advance payments are deferred and expensed as performance occurs. R&D costs include the cost of our personnel (which consists of salaries and incentive and stock-based compensation), out-of-pocket pre-clinical and clinical trial costs usually associated with contract research organizations, drug product manufacturing and formulation, and a pro-rata share of facilities expense and other overhead items.

 

General and Administrative Expenses

 

General and administrative ("G&A") functions include executive management, finance and administration, government affairs and regulations, corporate development, human resources, and legal and compliance. The specific costs include the cost of our personnel consisting of salaries, incentive and stock-based compensation, out-of-pocket costs usually associated with attorneys (both corporate and intellectual property), bankers, accountants, and other advisors and a pro-rata share of facilities expense and other overhead items.

 

Other Income and Expenses

 

Other recurring income and expenses primarily consists of interest income on our investments, changes in the market value of our derivative financial instruments, and foreign currency transaction gains or losses.

 

Critical Accounting Policies and Significant Estimates

 

Our critical accounting policies and significant estimates are detailed in our Annual Report on Form 10-K for the year ended December 31, 2019. Other than as set forth below, our critical accounting policies and significant estimates have not changed substantially from those previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019.

 

Fair Value of Financial Instruments

 

We use the held-to-maturity accounting method to determine the fair value of certain cash equivalents and short-term investments in U.S. Treasury Notes or certificates of deposit. As of September 30, 2020, we held approximately $0.3 million in certificates of deposit which we classified as Level 2.

 

We use the Black-Scholes model to determine the fair value of certain common stock warrants on a recurring basis, and classify such warrants as Level 3 in the fair value hierarchy. The Black-Scholes model utilizes inputs consisting of: (i) the closing price of our common stock; (ii) the expected remaining life; (iii) the expected volatility using a weighted average of historical volatilities of CBLI common stock and a group of comparable companies; and (iv) the risk-free market rate.

 

As of September 30, 2020, we held approximately $0.01 million in accrued expenses related to warrants to purchase common stock, which we classified as Level 3.

 

 

Three Months Ended September 30, 2020 Compared to Three Months Ended September 30, 2019

 

Revenue

 

Revenue decreased from approximately $0.27 million for the three months ended September 30, 2019 to approximately $0.04 million for the three months ended September 30, 2020, representing a decrease of approximately $0.23 million, or 83.8%. This decrease is primarily due to decreases in revenues from our JWMRP contract with the DoD for continued preclinical development of entolimod, decreases in revenue from our PRMRP contract (as defined below) with the DoD for continued clinical development of entolimod, and decreases in revenue from our service contract with Incuron during the fiscal quarter ended June 30, 2020. The decrease in Incuron service contract revenue is due to the expiration of our service contract with Incuron. Differences in our revenue sources, by program, between the years are set forth in the following table. 

 

			Three Months Ended September 30,
Funding Source	Program		2020				2019				Variance
DoD	JWMRP Contract (1)		$	43,130			$	236,405			$	(193,275	)
DoD	PRMRP Contract (2)			515				6,302				(5,787	)
Incuron	Service contract			-				26,928				(26,928	)
			$	43,645			$	269,635			$	(225,990	)

 

(1)	The Congressionally Directed Medical Research Programs (CDMRP) Joint Warfighter Medical Research Program (JWMRP) contract was awarded on September 1, 2015.

(2)	The CDMRP Peer Reviewed Medical Research Program (PRMRP) grant was awarded effective as of September 30, 2015.

 

We anticipate a decrease in revenue from the DoD over the next quarter as the period of performance of the JWMRP and PRMRP Contracts has expired. We anticipate a decrease in Incuron revenue as the service contract has not been extended. The following table sets forth information regarding our revenues:

 

											As of September 30, 2020
Funding Source	Program		Total Award Value				Funded Award Value				Cumulative Revenue				Funded Backlog				Unfunded Backlog
DoD	JWMRP Contract		$	9,226,455			$	3,558,603			$	3,558,603			$	-			$	—
DoD	PRMRP Contract			6,573,992				214,860				214,860				-				—
			$	15,800,447			$	3,773,463			$	3,773,463			$	-			$	—

 

As previously disclosed, contract modifications with the DoD were entered into during the quarter that reduced the JWMRP and PRMRP funded awards from an aggregate of $15,800,447 to an aggregate of $3,773,463, as reflected in the table above. 

 

Research and Development Expenses

 

R&D expenses decreased from $0.26 million for the three months ended September 30, 2019 to $0.12 million for the three months ended September 30, 2020, representing a decrease of $0.14 million, or 55.1%. Variances in individual development programs are noted in the table below. The net decrease is primarily attributable to a $0.12 million decrease in R&D spending for biodefense applications of entolimod, and a $0.03 decrease in R&D spending on Curaxins. The decrease in spending for biodefense applications of entolimod is primarily due to a reduction in personnel costs. The remaining variances are not significant.

 

		Three Months Ended September 30,
		2020				2019				Variance
Entolimod for Biodefense Applications		$	109,726			$	231,082			$	(121,356	)
CBLB612			—				(554	)			554
Entolimod for Oncology Indications			—				(729	)			729
			109,726				229,799				(120,073	)
Curaxins			(4	)			25,269				(25,273	)
Panacela product candidates			8,122				7,342				780
Total research & development expenses		$	117,844			$	262,410			$	(144,566	)

 

General and Administrative Expenses

 

G&A expenses increased from $0.53 million for the three months ended September 30, 2019 to $0.70 million for the three months ended September 30, 2020, representing an increase of $0.17 million, or 33.0%. This increase consisted primarily of an increase of $0.16 million in professional fees in part for activities related to the potential Merger, and an increase of $0.15 million increase in other costs for cash awards to certain members of the Company's board of directors, offset in part by a $0.13 million decrease in personnel and consulting costs.

 

Other Income and Expenses

 

Other income decreased from $0.05 million of other income for the three months ended September 30, 2019 to $0.02 million of other income for the three months ended September 30, 2020, representing an other income decrease of $0.03 million, or 70.3%. This decrease primarily related to a decrease in non-cash income related to the change in valuation of our warrant liability as a result of stock price changes.

 

 

Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30, 2019

 

Revenue

 

Revenue decreased from approximately $0.74 million for the nine months ended September 30, 2019 to approximately $0.26 million for the nine months ended September 30, 2020, representing a decrease of approximately $0.48 million, or 64.7%. This decrease is primarily due to decreases in revenues from our service contract with Incuron and JWMRP contract with the DoD for continued preclinical development of entolimod, offset in part by an increase in revenues from our PRMRP contract with the DoD for continued clinical development of entolimod. The decrease in Incuron service contract revenue is due to delays in clinical trial activities being undertaken by Incuron as well as by the expiration of the service contract with Incuron during the fiscal quarter ended June 30, 2020. Differences in our revenue sources, by program, between the years are set forth in the following table. 

 

			Nine Months Ended September 30,
Funding Source	Program		2020				2019				Variance
DoD	JWMRP Contract (1)		$	156,685			$	439,464			$	(282,779	)
DoD	PRMRP Contract (2)			56,900				9,099				47,801
Incuron	Service contract			49,357				295,958				(246,601	)
			$	262,942			$	744,521			$	(481,579	)

 

(1)	The Congressionally Directed Medical Research Programs (CDMRP) Joint Warfighter Medical Research Program (JWMRP) contract was awarded on September 1, 2015.

(2)	The CDMRP Peer Reviewed Medical Research Program (PRMRP) grant was awarded effective as of September 30, 2015.

 

Research and Development Expenses

 

R&D expenses decreased from $1.38 million for the nine months ended September 30, 2019 to $0.51 million for the nine months ended September 30, 2020, representing a decrease of $0.87 million, or 63.2%. Variances in individual development programs are noted in the table below. The net decrease is primarily attributable to a $0.56 million decrease in R&D spending for biodefense applications of entolimod, and a $0.29 decrease in R&D spending on Curaxins. The decrease in spending for biodefense applications of entolimod is primarily due to comparison against the first nine months of  2019 during which certain studies that were completed in 2019 were still ongoing, as well as a reduction in personnel costs. The remaining variances are not significant.

 

		Nine Months Ended September 30,
		2020				2019				Variance
Entolimod for Biodefense Applications		$	474,186			$	1,033,006			$	(558,820	)
CBLB612			—				5,886				(5,886	)
Entolimod for Oncology Indications			—				7,745				(7,745	)
			474,186				1,046,637				(572,451	)
Curaxins			12,686				306,086				(293,400	)
Panacela product candidates			19,187				22,686				(3,499	)
Total research & development expenses		$	506,059			$	1,375,409			$	(869,350	)

 

General and Administrative Expenses

 

G&A expenses increased from $1.5 million for the nine months ended September 30, 2019 to $1.6 million for the nine months ended September 30, 2020, representing an increase of $0.1 million, or 8.1%. This increase consisted primarily of a $0.36 million increase in professional fees associated with activities related to the potential Merger and the filing of the Company's Form S-3 Registration Statement, a $0.15 million increase in other costs for cash awards to certain members of the Company's board of directors, and $0.08 million increase in CBLI's property taxes compared to the quarter ended September 30, 2019 when we received a property tax refund, partially offset by a $0.36 million decrease in personnel and consulting costs, and a $0.05 reduction in facilities costs.

 

Other Income and Expenses

 

Other income decreased from $0.09 million of other income for the nine months ended September 30, 2019 to $0.07 million of other income for the nine months ended September 30, 2020, representing a decrease in other income of $0.02 million, or 14.6%. This decrease primarily related to a decrease in non-cash income related to the change in valuation of our warrant liability as a result of stock price changes.

 

 

Liquidity and Capital Resources

 

We have incurred net losses of approximately $168 million from our inception through September 30, 2020. Historically, we have not generated, and do not expect to generate in the immediate future, revenue from sales of product candidates. Since our founding in 2003, we have funded our operations through a variety of means:

 

•     From inception through September 30, 2020, we have raised $147.9 million of net equity capital, including amounts received in connection with our June 2020 registered direct offering and from the exercise of options and warrants. We have also received $7.3 million in net proceeds from the issuance of long-term debt instruments;

 

 •     DoD and BARDA have funded grants and contracts totaling $49 million for the development of entolimod for its biodefense indication;

 

 •     The government of the Russian Federation has funded a series of our contracts totaling $17.3 million, based on the exchange rates in effect on the date of funding. These contracts included a requirement for us to contribute matching funds, which we have satisfied;

 

 •     We have been awarded $4.0 million in grants and contracts not described above, all of which have been recognized at September 30, 2020;

 

 •     Incuron was formed to develop and commercialize the Curaxins product line, including its lead oncology drug candidate CBL0137. In 2015, we sold our ownership interest in Incuron for approximately $4.0 million and retain a 2% royalty interest in the CBL0137 technology;

 

 •    Panacela was formed to develop and commercialize preclinical compounds, which were transferred to Panacela through assignment and lease agreements. RUSNANO contributed $9.0 million to Panacela and CBLI contributed $3.0 million plus intellectual property to Panacela. As of the date of this filing, CBLI owns 67.57% of Panacela; and

 

 •    The Company formed its GPI joint venture with Everon. GPI, which is currently 50% owned by the Company and 50% owned by Everon, is undertaking a research and development program aimed at clinical testing of entolimod and GP532 (a variant of our entolimod drug candidate) and the development of medications with anti-aging and other indications associated with genome damage. GPI has been funded by an initial investment of $10.5 million from venture capital fund Norma Investments Limited.

 

As discussed above, the Company filed the Form S-3 Registration Statement on May 21, 2020, which was subsequently declared effective on May 29, 2020 (File No. 333-238578).  The Form S-3 Registration Statement allows the Company to raise an aggregate of $50,000,000 of common stock, preferred stock, warrants and/or units, subject to the limitations on the use thereof by certain smaller public companies, giving the Company greater flexibility to access capital markets quickly.

 

We have incurred cumulative net losses and expect to incur additional losses related to our R&D activities. We do not have commercial products and have limited capital resources. At September 30, 2020, we had cash, cash equivalents and short-term investments of $3.0 million, which represents a increase of $1.5 million, or 92.3%, since the end of our last fiscal year. This increase was caused by our capital raise and warrant exercises, offset by our net cash used in operations of $1.6 million during the nine months ended September 30, 2020. We expect our cash, cash equivalents, and short-term investments, to fund our projected operating requirements and allow us to fund our operating plan, in each case, into November 2021. However, until we are able to commercialize our product candidates at a level that covers our cash expenses, we will need to raise substantial additional capital, which we may be unable to raise in sufficient amounts, when needed and at acceptable terms. Our plans with regard to these matters may include seeking additional capital through debt or equity financing, the sale or license of drug candidates, the sale of certain of our tangible and/or intangible assets, the sale of interests in our subsidiaries or joint ventures, obtaining additional government research funding, or entering into other strategic transactions. There can be no assurance that we will be able to obtain future financing on acceptable terms, obtain additional government financing for our operations, or enter into other strategic transactions. In addition, the recent outbreak of the novel coronavirus known as COVID-19 has significantly disrupted world financial markets, negatively impacted U.S. market conditions and may reduce opportunities for us to seek out additional funding. If we are unable to raise adequate capital and/or achieve profitable operations, future operations might need to be scaled back or discontinued. The financial statements do not include any adjustments relating to the recoverability of the carrying amount of recorded assets and liabilities that might result from the outcome of these uncertainties.

 

Cash Flows

 

The following table provides information regarding our cash flows for the nine months ended September 30, 2020 and 2019:

 

		For the Nine Months Ended September 30,
		2020				2019				Variance
Cash flows used in operating activities		$	(1,584,661	)		$	(2,298,935	)		$	714,274
Cash flows provided by investing activities			42,387				158,544				(116,157	)
Cash flows provided by financing activities			3,165,640				—				3,165,640
Effect of exchange rate change on cash and equivalents			(28,377	)			10,545				(38,922	)
Increase (decrease) in cash and cash equivalents			1,594,989				(2,129,846	)			3,724,835
Cash and cash equivalents at beginning of period			1,126,124				3,617,234				(2,491,110	)
Cash and cash equivalents at end of period		$	2,721,113			$	1,487,388			$	1,233,725

 

 

Operating Activities

 

Net cash used in operating activities decreased by $0.7 million to $1.6 million for the nine months ended September 30, 2020 from $2.3 million for the nine months ended September 30, 2019. Net cash used in operating activities for the period ending September 30, 2020 consisted of a reported net loss of $1.7 million, which was increased by $0.04 million of net non-cash operating activities, and offset by $0.2 million of changes in operating assets and liabilities. The $0.04 million of net non-cash operating activities was due primarily to $0.5 million of other income from an accrued liability extinguishment offset by a $0.4 million change in the valuation of our warrant liability. The $0.2 million of changes in operating assets and liabilities consisted primarily of a $0.2 million decrease in accounts receivable, offset by a $0.05 million decrease in accounts payable and accrued expenses.

 

Net cash used in operating activities for the nine months ended September 30, 2019 of $2.3 million consisted of a reported net loss of $2.0 million, which was increased by $0.09 million of net non-cash operating activities, and further increased by $0.2 million of changes in operating assets and liabilities. The $0.09 million of net non-cash operating activities was due primarily to changes in the valuation of our warrant liability and a gain on disposal of equipment. The $0.2 million of changes in operating assets and liabilities consisted primarily of a $0.3 million decrease in accounts payable and accrued expenses, offset by a $0.08 million decrease in accounts receivable and other current assets.

 

Investing Activities

 

Net cash provided by investing activities decreased by $0.1 million to $0.04 million for the nine months ended September 30, 2020 from $0.2 million for the nine months ended September 30, 2019. The net cash provided by investing activities for the nine months ended September 30, 2020 consisted of $0.04 million of net sales of short-term investments. Net cash provided by investing activities for the nine months ended September 30, 2019 consisted of $0.1 million of net sales of short-term investments and $0.04 million from the sale of equipment.

 

Financing Activities

 

Net cash provided by financing activities increased by $3.2 million for the nine months ended September 30, 2020 from $0.00 million for the nine months ended September 30, 2019 due to an issuance of common stock and a cash payment from the exercise of warrants during the nine months ended September 30, 2020.

 

Impact of Exchange Rate Fluctuations

 

Our reported financial results are affected by changes in foreign currency exchange rates between the U.S. dollar and the Russian ruble. Between January 1, 2020 and September 30, 2020, this rate fluctuated by 28.7%. For calendar year 2019, this rate fluctuated by 10.9%. Translation gains or losses result primarily from the impact of exchange rate fluctuations on the reported U.S. dollar equivalent of ruble-denominated cash and cash equivalents, and short-term investments. Variances in the exchange rate for these items have not been realized; as such the resulting gains or losses are recorded as other comprehensive income or loss in the equity section of the balance sheet.

 

Off-Balance Sheet Arrangements

 

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

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

Not required for smaller reporting company filers.

 

Item 4. Controls and Procedures

 

Effectiveness of Disclosure

 

Our management, with the participation of our Vice President of Finance (performing the functions of the Company's principal executive officer and principal financial officer), evaluated the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, as of September 30, 2020. Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of September 30, 2020, our Vice President of Finance (performing the functions of the Company's principal executive officer and principal financial officer) concluded that, as of such date, our disclosure controls and procedures were not effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is (1) recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and (2) accumulated and communicated to our management, including our Vice President of Finance (performing the functions of the Company's principal executive officer and principal financial officer), as appropriate to allow timely decisions regarding required disclosure due to the material weakness described below.

 

Material Weaknesses in Internal Control Over Financial Reporting

 

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.  As previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019, we identified material weaknesses in our accounting for revenue transactions. Specifically, the Company does not have adequate controls in place to monitor revenue recognition with respect to specific elements of contracts. In addition, controls to prevent or detect material misstatements on a timely basis related to contract compliance and proper revenue recognition are not operating effectively.

 

Remediation of Previously Reported Material Weakness

 

Management has been implementing changes to strengthen our internal controls over the monitoring of revenue recognition and the prevention or detection of material misstatements on a timely basis related to contract compliance and proper revenue recognition.  These changes are intended to address the identified material weaknesses and to enhance our overall control environment and include the ongoing activities described below.

 

Management has performed a comprehensive review of all contracts to which the Company is party, including a review of underlying schedules, to ensure a more complete understanding of these agreements to ensure compliance and proper application of revenue recognition principles. Upon completion of this review, management  implemented certain system controls to ensure compliance and prevent the recognition of revenue in excess of specific elements of the contract agreements. In addition, new processes have been implemented related to periodic invoicing and revenue recognition analysis designed to detect any potential issues and correct as applicable.

 

We believe the measures described above will facilitate the remediation of the control deficiencies we have identified and strengthen our internal control over financial reporting. However, these material weaknesses will not be considered remediated until the applicable remediated controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. We are committed to continuing to improve our internal control processes and will continue to review, optimize and enhance our financial reporting controls and procedures. As we continue to evaluate and work to improve our internal control over financial reporting, we may take additional measures to address control deficiencies, or we may modify, or, in appropriate circumstances, not complete, certain of the remediation measures described above.

 

Changes in Internal Control over Financial Reporting

 

Other than the mitigating controls referenced above, there was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15(d)-15(f) under the Exchange Act) during the fiscal quarter ended September 30, 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

 

PART II – Other Information

 

Item 1. Legal Proceedings

 

In the ordinary course of business, we may periodically become subject to legal proceedings and claims arising in connection with ongoing business activities. The results of litigation and claims cannot be predicted with certainty, and unfavorable resolutions are possible and could materially affect our results of operations, cash flows, or financial position. In addition, regardless of the outcome, litigation could have an adverse impact on us because of defense costs, diversion of management resources, and other factors.

 

While the outcome of these proceedings and claims cannot be predicted with certainty, there are no matters, as of September 30, 2020, that, in the opinion of management, might have a material adverse effect on our financial position, results of operations or cash flows, or that are required to be disclosed under the rules of the SEC.

 

Item 1A. Risk Factors

 

Risks Related to the Merger with Cytocom

 

The exchange ratio will not be adjusted based on the market price of our common stock so the merger consideration at the closing may have a greater or lesser value than at the time the Merger Agreement was signed.

 

At the effective time of the Merger, outstanding shares of Cytocom capital stock will be converted into shares of the Company’s common stock. Applying the exchange ratio, the former Cytocom securityholders immediately before the Merger are expected to own approximately 61% of the aggregate number of shares of the combined company’s common stock following the Merger on a fully diluted basis and our securityholders immediately before the Merger are expected to own approximately 39% of the aggregate number of shares of the combined company’s common stock following the Merger on a fully diluted basis. Certain adjustments to the exchange ratio will be made in respect of net cash, as determined in the Merger Agreement. Any changes in the market price of our stock before the completion of the Merger will not affect the number of shares Cytocom stockholders will be entitled to receive pursuant to the Merger Agreement. Therefore, if before the completion of the Merger, the market price of our common stock increases from the market price on the date of the Merger Agreement, then Cytocom stockholders could receive merger consideration with substantially more value for their shares of Cytocom capital stock than the parties had negotiated when they established the exchange ratio. Similarly, if before the completion of the Merger the market price of our common stock declines from the market price on the date of the Merger Agreement, then Cytocom stockholders could receive merger consideration with substantially lower value. The Merger Agreement does not include a price-based termination right.

 

Failure to complete the Merger may result in either the Company paying a termination fee and/or expense reimbursement amounts to Cytocom or Cytocom paying expense reimbursement amounts to us, which could harm the common stock price of our common stock and future business and operations of each company.

 

If the Merger is not completed, the Company and Cytocom are subject to the following risks:

 

●              if the Merger Agreement is terminated under specified circumstances, we may be required to pay Cytocom a termination fee of $300,000 and/or Cytocom’s expenses up to $200,000;

●              the price of our common stock may decline and could fluctuate significantly; and

●              costs related to the Merger, such as financial advisor, legal and accounting fees, which must be paid even if the Merger is not completed.

 

If the Merger Agreement is terminated and the board of directors of the Company or Cytocom determines to seek another business combination, there can be no assurance that either the Company or Cytocom will be able to find a partner with whom a business combination would yield greater benefits than the benefits to be provided under the Merger Agreement.

 

If the conditions to the Merger are not satisfied or waived, the Merger may not occur.

 

Even if the Merger is approved by the stockholders of Cytocom, specified conditions must be satisfied or waived to complete the Merger. These conditions are set forth in the Merger Agreement. The Company and Cytocom cannot assure you

that all of the conditions to the consummation of the Merger will be satisfied or waived. If the conditions are not satisfied or waived, the Merger may not occur or the closing may be delayed, and the Company and Cytocom each may lose some or all of

the intended benefits of the Merger.

 

The Merger may be completed even though a material adverse effect may result from the announcement of the Merger, industry-wide changes or other causes.

 

In general, neither we nor Cytocom is obligated to complete the Merger if there is a material adverse effect affecting the other party between October 16, 2020, the date of the Merger Agreement, and the closing of the Merger. However, certain types

of changes are excluded from the concept of a “material adverse effect.” Such exclusions include but are not limited to changes in general economic or political conditions, industry wide changes, changes resulting from the announcement of the Merger, natural disasters, pandemics (including the COVID-19 pandemic), other public health events and changes in GAAP. Therefore, if any of these events were to occur impacting the Company or Cytocom, the other party would still be obliged to consummate the closing of the Merger. If any such adverse changes occur and the Company and Cytocom consummate the closing of the Merger, the stock price of the combined company may suffer. This in turn may reduce the value of the Merger to the stockholders of the Company, Cytocom or both.

 

Our stockholders may not realize a benefit from the Merger commensurate with the ownership dilution they will

experience in connection with the Merger.

 

If the combined company is unable to realize the full strategic and financial benefits currently anticipated from the Merger, our stockholders will have experienced substantial dilution of their ownership interests without receiving any commensurate

benefit, or only receiving part of the commensurate benefit to the extent the combined company is able to realize only part of the strategic and financial benefits currently anticipated from the Merger.

 

If the Merger is not completed, the price of our common stock may decline significantly.

 

The market price of our common stock is subject to significant fluctuations. Market prices for securities of pharmaceutical, biotechnology and other life science companies have historically been particularly volatile. In addition, the market price of our common stock will likely be volatile based on whether stockholders and other investors believe that the Company can complete the Merger or otherwise raise additional capital to support our operations if the Merger is not consummated and another strategic transaction cannot be identified, negotiated and consummated in a timely manner, if at all. The volatility of the market price of our common stock is exacerbated by low trading volume. Additional factors that may cause the market price of our common stock to fluctuate include:

 

●              the initiation of, material developments in, or conclusion of litigation to enforce or defend its intellectual property rights or defend against claims involving the intellectual property rights of others;

●              the entry into, or termination of, key agreements, including commercial partner agreements;

●              announcements by commercial partners or competitors of new commercial products, clinical progress or lack thereof, significant contracts, commercial relationships or capital commitments;

●              adverse publicity relating to the combined company’s product candidates, including with respect to other products and potential products in that market;

●              the introduction of technological innovations or new therapies that compete with its future products;

●              the loss of key employees;

●              future sales of its common stock;

●              general and industry-specific economic conditions that may affect its research and development expenditures;

●              the failure to meet industry analyst expectations; and

●              period-to-period fluctuations in financial results.

 

Moreover, the stock markets in general have experienced substantial volatility that has often been unrelated to the operating performance of individual companies. These broad market fluctuations may also adversely affect the trading price of

our common stock. In the past, following periods of volatility in the market price of a company’s securities, stockholders have often instituted class action securities litigation against such companies.

 

Company and Cytocom securityholders will have a reduced ownership and voting interest in, and will exercise less influence over the management of, the combined company following the completion of the Merger as compared to their

current ownership and voting interests in the respective companies.

 

After the completion of the Merger, the current stockholders of the Company and Cytocom will own a smaller percentage of the combined company than their ownership of their respective companies prior to the Merger. Immediately after the Merger, Company securityholders as of immediately prior to the Merger are expected to own approximately 39% of the outstanding shares of the combined company on a fully diluted basis and former Cytocom securityholders are expected to own approximately 61% of the outstanding shares of the combined company on a fully diluted basis. The Chief Executive Officer of Cytocom will serve as the Chief Executive Officer of the combined company following the completion of the Merger.

 

During the pendency of the Merger, the Company and Cytocom may not be able to enter into a business combination with another party on more favorable terms because of restrictions in the Merger Agreement, which could adversely affect

their respective business prospects.

 

Covenants in the Merger Agreement impede the ability of the Company and Cytocom to make acquisitions during the pendency of the Merger, subject to specified exceptions. As a result, if the Merger is not completed, the parties may be at a

disadvantage to their competitors during that period. In addition, while the Merger Agreement is in effect, each party is generally prohibited from soliciting, proposing, seeking or knowingly encouraging, facilitating or supporting any inquiries, indications of interest, proposals or offers that constitute or may reasonably be expected to lead to certain transactions involving a third party, including a merger, sale of assets or other business combination, subject to specified exceptions. Any such transactions could be favorable to such party’s stockholders, but the parties may be unable to pursue them.

 

Certain provisions of the Merger Agreement may discourage third parties from submitting competing proposals, including proposals that may be superior to the transactions contemplated by the Merger Agreement.

 

The terms of the Merger Agreement prohibit each of the Company and Cytocom from soliciting competing proposals or cooperating with persons making unsolicited takeover proposals, except in limited circumstances. In addition, if the Company

terminates the Merger Agreement under specified circumstances, the Company may be required to pay Cytocom a termination fee of $300,000 and in some circumstances one party may be required to pay the other party such party’s expenses up to

$200,000. This termination fee may discourage third parties from submitting competing proposals to the Company or its stockholders, and may cause our board of directors to be less inclined to recommend a competing proposal.

 

Because the lack of a public market for Cytocom’s capital stock makes it difficult to evaluate the fair market value of Cytocom’s capital stock, we may pay more than the fair market value of Cytocom’s capital stock and/or the stockholders of

Cytocom may receive consideration in the Merger that is less than the fair market value of Cytocom’s capital stock.

 

The outstanding capital stock of Cytocom is privately held and is not traded in any public market. The lack of a public market makes it difficult to determine the fair market value of Cytocom’s capital stock. Because the percentage of our equity to

be issued to Cytocom stockholders was determined based on negotiations between the parties, it is possible that the value of our common stock to be received by Cytocom stockholders will be less than the fair market value of Cytocom’s capital stock, or the Company may pay more than the aggregate fair market value for Cytocom’s capital stock.

 

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

 

As previously disclosed, on July 15, 2020, the Company issued 82,399 shares of its common stock upon the exercise of previously outstanding warrants to purchase an aggregate of 94,404 shares of common stock.  In connection with such exercise, the Company amended the warrant to lower the exercise price thereof pursuant to that certain Settlement and General Release Agreement (the "Release Agreement") between the Company and the holder of such warrant. The parties to the Release Agreement also each released one another from any liabilities arising out of the warrants. The exercise was made on a “cashless” basis pursuant to the terms of the warrants and the Release Agreement, and accordingly, the Company did not receive any proceeds upon such exercise. The exercise of the warrants did not involve any underwriters, underwriting discounts or commissions, or any public offering, and the Company believes that such transactions were exempt from the registration requirements of the Securities Act in reliance on Section 4(a)(2) of the Securities Act as transactions by an issuer not involving a public offering.

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

None.

 

Item 5. Other Information

 

None.

 

 

Item 6. Exhibits

 

(a)

The following exhibits are included as part of this report:

 

Exhibit Number		Description of Document
2.1*		Merger Agreement, dated as of October 16, 2020, among Cleveland Biolabs, Inc., High Street Acquisition Corp. and Cytocom, Inc. (Incorporated by reference to Exhibit 2.1 to Form 8-K filed October 19, 2020).
3.1		Restated Certificate of Incorporation filed with the Secretary of State of Delaware on March 18, 2010 (Incorporated by reference to Exhibit 3.1 to Form 10-K for the year ended December 31, 2009, filed on March 22, 2010).
3.2		Certificate of Amendment to the Restated Certificate of Incorporation, filed with the Secretary of State of Delaware on June 20, 2013 (Incorporated by reference to Exhibit 3.1 to Form 10-Q for the period ended June 30, 2013, filed on August 9, 2013).
3.3		Certificate of Amendment of Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to Form 8-K filed on January 27, 2015).
3.4		Certificate of Amendment to Restated Certificate of Incorporation, filed with the Secretary of State of Delaware on April 20, 2016 (incorporated by reference to Exhibit 3.4 to Form 10-Q for the period ended March 31, 2016, filed May 16, 2016.
3.5		Certificate of Amendment to Restated Certificate of Incorporation, filed with the Secretary of State of Delaware on April 21, 2017 (incorporated by reference to Exhibit 3.5 to Form 10-Q for the period ended March 31, 2017, filed May 15, 2017.
3.6		Certificate of Designation of Preferences, Rights and Limitations of Series A Convertible Preferred Stock (incorporated by reference to Exhibit 3.1 to Form 8-K filed on February 9, 2015).
3.7		Certificate of Amendment of Certificate of Designation of Preferences, Rights and Limitations of Series A Convertible Preferred Stock (incorporated by reference to Exhibit 3.2 to Form 8-K filed on February 9, 2015).
3.8		Second Amended and Restated By-Laws (Incorporated by reference to Exhibit 3.1 to Form 8-K filed on December 5, 2007).
3.9		Amendment to Second Amended and Restated By-Laws of Cleveland BioLabs, Inc. (Incorporated by reference to Exhibit 3.1 to Form 8-K filed on May 18, 2015).
10.1		Consulting Agreement, dated as of August 10, 2020, between Cleveland BioLabs, Inc. and Sound Clinical Solutions, SP (Incorporated by reference to Exhibit 10.1 to Form 8-K filed on August 14, 2020).
10.2**		Award/Contract W81XWH-15-0101 modification dated September 29, 2020 issued by USA Med Research ACQ Activity
10.3**		Award/Contract W81XWH-15-0570 modification dated September 29, 2020 issued by USA Med Research ACQ Activity
10.4		Consulting Agreement, dated as of October 11, 2020, between Cleveland BioLabs, Inc. and Andrei Gudkov, Ph.D., D. Sci. (Incorporated by reference to Exhibit 10.1 to Form 8-K filed on October 13, 2020).
10.5		Form of Voting and Support Agreement (Incorporated by reference to Exhibit 10.1 to Form 8-K filed on October 19, 2020).
31.1**		Rule 13a-14(a)/15d-14(a) Certification of Christopher Zosh.
32.1**		Certification pursuant to 18 U.S.C. Section 1350.
101.1		The following information from CBLI’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2020, formatted in Extensible Business Reporting Language (XBRL): (i) Consolidated Condensed Balance Sheets as of September 30, 2020 and December 31, 2019; (ii) Consolidated Condensed Statements of Operations for the Three and Nine Months Ended September 30, 2020 and 2019; (iii) Consolidated Condensed Statements of Comprehensive Loss for the Three and Nine Months Ended September 30, 2020 and 2019; (iv) Consolidated Condensed Statement of Stockholders’ Equity for the Nine Months Ended September 30, 2020 and 2019; (v) Consolidated Condensed Statements of Cash Flows for the Nine Months Ended September 30, 2020 and 2019; and (vi) Notes to Consolidated Condensed Financial Statements.
*		Pursuant to Item 601(a)(5) of Regulation S-K, certain schedules have been omitted. A copy of any omitted schedule will be furnished supplementally to the Securities and Exchange Commission upon request.
**		Filed herewith.

 

 

Signatures

 

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

 

	CLEVELAND BIOLABS, INC.
Dated: November 16, 2020	By:	/s/ CHRISTOPHER ZOSH
		Christopher Zosh
		Vice President of Finance
		(Principal Executive and Principal Financial Officer)