NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. Description of Business
Cleveland BioLabs, Inc. ("
CBLI
" or the "
Company
") is 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 radiation protection and 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 medical radiation countermeasure and other indications in radiation oncology.
CBLI was incorporated in Delaware in June 2003 and is headquartered in Buffalo, New York. CBLI conducts business in the United States ("
U.S.
") itself and in the Russian Federation ("
Russia
") through
two
subsidiaries:
one
wholly owned subsidiary, BioLab 612, LLC ("
BioLab 612
"), which began operations in 2012; and Panacela Labs, Inc. ("
Panacela
"), which was formed by us and Joint Stock Company "RUSNANO" ("
Rusnano
"), our financial partner in the venture, in 2011. Unless otherwise noted, references to the "Company," "we," "us," and "our" refer to Cleveland BioLabs, Inc. together with its subsidiaries.
In addition, the Company has an investment in Genome Protection, Inc. ("
GPI
") that is recorded under the equity method of accounting in the accompanying financial statements. The Company has not recorded its
50%
share of the losses of GPI through March 31, 2019 as the impact would have reduced the Company's equity method investment in GPI below zero, and there are no requirements to fund the Company's share of these losses or contribute additional capital as of the date of these statements.
2. Summary of Significant Accounting Policies
Basis of Presentation and Consolidation
The accompanying unaudited consolidated condensed financial statements include the accounts of CBLI, BioLab 612, and Panacela. All significant intercompany balances and transactions have been eliminated in consolidation.
The consolidated condensed balance sheet as of
December 31, 2018
, which has been derived from audited financial statements, and the unaudited interim consolidated condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("
GAAP
") for interim consolidated financial information and in accordance with the instructions to Form 10-Q and Article 8 of Regulation S-X of the Securities and Exchange Commission ("
SEC
"). Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. These consolidated condensed financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2018
, as filed with the SEC (the "
2018
Form 10-K
").
In the opinion of the Company’s management, any adjustments contained in the accompanying unaudited consolidated financial statements are of a normal recurring nature, and are necessary to fairly present the financial position of the Company as of
March 31, 2019
, along with its results of operations for the
three
-month periods ended
March 31, 2019
and
2018
and cash flows for the
three
-month periods ended
March 31, 2019
and
2018
. Interim results are not necessarily indicative of results that may be expected for any other interim period or for an entire year.
At
March 31, 2019
, we had cash, cash equivalents, and short-term investments of
$3.3 million
. Of that total,
$0.5 million
was restricted for the use of our consolidated joint venture, Panacela, leaving
$2.8 million
available for general use, which management believes will be sufficient to support operations into December 2019. To ensure continuing operations beyond that point, management is evaluating all opportunities to secure additional financing, including investments from non-controlling interests, the sale or license of our drug candidates, the issuance of equity and securing additional revenues from the U.S. or Russian governments. Management believes that sufficient sources of financing will be available to support operations into the future, however there can be no assurances at this time. These matters raise substantial doubt about the Company’s ability to continue as a going concern. These financial statements have been prepared under the assumption that the Company will continue as a going concern and do not include any adjustments that might result from the outcome of this uncertainty.
Recent Accounting Pronouncements
From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board ("
FASB
") or other
standard-setting bodies that are adopted by us as of the specified effective date. Unless otherwise discussed, we believe that the impact of recently issued standards that are not yet effective will not have a material impact on our financial position or results of operations upon adoption.
In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)" ("
ASU 2016-02
"). ASU 2016-02 requires organizations that lease assets with lease terms of more than 12 months to recognize assets and liabilities for the rights and obligations created by those leases on their balance sheets. The ASU also requires new qualitative and quantitative disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. ASU 2016-02 is effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. The Company adopted this guidance during 2019 with no material impact to the financial statements.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, 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. Actual results could differ from those estimates.
Short-Term Investments
The Company’s short-term investments are classified as held to maturity and recorded at amortized cost. Short-term investments consisted of
$0.5 million
in certificates of deposit with maturity dates beyond three months and less than one year and are owned by Panacela. These investments are classified as held to maturity given the intent and ability to hold the investments to maturity. Realized gains and losses, and interest and dividends on short-term investments are recorded in our Consolidated Condensed Statement of Operations as Interest and Other Income. The cost of securities sold is based on the specific identification method.
Significant Customers and Accounts Receivable
The following table presents our revenue by customer, on a proportional basis, for the
three
months ended
March 31, 2019
and
2018
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
Customer
|
2019
|
|
2018
|
|
Variance
|
|
Department of Defense
|
32.3
|
%
|
|
59.5
|
%
|
|
(27.2
|
)%
|
|
Incuron
|
67.7
|
%
|
|
40.5
|
%
|
|
27.2
|
%
|
|
Total
|
100.0
|
%
|
|
100.0
|
%
|
|
—
|
%
|
Our current Department of Defense ("
DoD
") revenues come from development contracts that expire in 2019 and 2020, although each contract may be extended. Our Incuron revenues come from a service agreement that is renegotiated annually.
Accounts receivable consist of amounts due under reimbursement contracts with these customers. The Company extends unsecured credit to customers under normal trade agreements, which generally require payment within
30 days
.
Other Comprehensive Income (Loss)
The Company applies the Accounting Standards Codification ("
Codification
") on comprehensive income (loss) that requires disclosure of all components of comprehensive income (loss) on an annual and interim basis. Other comprehensive income (loss) 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. The following table presents the changes in accumulated other comprehensive loss for the
three months ended
March 31, 2019
.
|
|
|
|
|
|
|
|
|
Gains and losses on foreign exchange translations
|
|
Beginning balance
|
$
|
(611,370
|
)
|
|
Other comprehensive income (loss) before reclassifications
|
26,759
|
|
|
Amounts reclassified from accumulated other comprehensive loss
|
—
|
|
|
Ending balance
|
$
|
(584,611
|
)
|
Accounting for Stock-Based Compensation
The Cleveland Biolabs, Inc. Equity Incentive Plan, adopted in 2018 (the "
Plan
"), authorizes CBLI to grant (i) options to purchase common stock, (ii) restricted or unrestricted stock units, and (iii) stock appreciation rights, so long as the exercise or grant price of each are at least equal to the fair market value of the stock on the date of grant. As of
March 31, 2019
, an aggregate of
597,557
shares of common stock were authorized for issuance under the Plan, of which a total of
437,481
shares of common stock remained available for future awards. In addition, a total of
160,076
shares of common stock reserved for issuance were subject to currently outstanding stock options granted under The Cleveland BioLabs, Inc. Equity Incentive Plan, as in effect prior to the 2018 amendment and restatement. A single participant cannot be awarded more than
100,000
shares annually. Awards granted under the Plan have a contractual life of no more than
10 years
. The terms and conditions of equity awards (such as price, vesting schedule, term, and number of shares) under the Plan are specified in an award document, and approved by the Company’s board of directors or its management delegates.
The 2013 Employee Stock Purchase Plan (the "
ESPP
") provides a means by which eligible employees of the Company and certain designated related corporations may be given an opportunity to purchase shares of common stock. As of
March 31, 2019
, there are
625,000
shares of common stock reserved for purchase under the ESPP. The number of shares reserved for purchase under the ESPP increases on January 1st of each calendar year by the lesser of: (i)
10%
of the total number of shares of common stock outstanding on December 31st of the preceding year, or (ii)
100,000
shares of common stock. The ESPP allows employees to use up to
15%
of their compensation to purchase shares of common stock at an amount equal to
85%
of the fair market value of the Company’s common stock on the offering date or the purchase date, whichever is less.
The Company utilizes the Black-Scholes valuation model for estimating the fair value of all stock options granted where the vesting period is based on length of service or performance, while a Monte Carlo simulation model is used for estimating the fair value of stock options with market-based vesting conditions.
No
options were granted during the
three months ended
March 31, 2019
and
March 31, 2018
.
Income Taxes
No
income tax expense was recorded for the
three
months ended
March 31, 2019
and
2018
as the Company does not expect to have taxable income for
2019
and did not have taxable income in
2018
. A full valuation allowance has been recorded against the Company’s deferred tax asset.
At
March 31, 2019
, the Company had U.S. federal net operating loss carryforwards of approximately
$144.0 million
, of which
$139.8
million begins to expire if not utilized by 2023, and approximately
$4.2
million of tax credit carryforwards which begin to expire if not utilized by 2024. The Company also has state net operating loss carryforwards of approximately
$89.8
million, which begin to expire if not utilized by 2027 and state tax credit carryforwards of approximately
$0.3
, which begin to expire if not utilized by 2022. The purchase of
6,459,948
shares of common stock by David Davidovich on July 9, 2015, resulted in Mr. Davidovich owning
60.2%
of the Company, at that time. We therefore believe it highly likely that this transaction will be viewed by the U.S. Internal Revenue Service as a change of ownership as defined by Section 382 of the Internal Revenue Code. Consequently, our ability to utilize approximately
$124.8 million
of U.S. federal net operating loss carryforwards,
$3.65 million
of U.S. tax credit carryforwards, approximately
$73.4 million
of state net operating loss carryforwards, and
$0.3 million
of state tax credit carryforwards, all of which occurred prior to July 9, 2015, are limited. As such, a significant portion of these carryforwards will likely expire before they can be utilized, even if the Company is able to generate taxable income that, except for this transaction, would have been sufficient to fully utilize these carryforwards.
Earnings (Loss) per Share
Basic net loss per share of common stock excludes dilution for potential common stock issuances and is computed by dividing net loss by the weighted average number of shares outstanding for the period. Diluted net loss per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. Diluted net loss per share is identical to basic net loss per share as potentially dilutive securities have been excluded from the calculation of diluted net loss per common share because the inclusion of such securities would be antidilutive.
The Company has excluded the following securities from the calculation of diluted net loss per share because all such securities were antidilutive for the periods presented.
|
|
|
|
|
|
|
|
|
|
|
As of March 31,
|
|
Common Equivalent Securities
|
2019
|
|
2018
|
|
Warrants
|
482,763
|
|
|
535,867
|
|
|
Options
|
160,076
|
|
|
197,557
|
|
|
Total
|
642,839
|
|
|
733,424
|
|
Contingencies
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 was not a party to any pending material litigation that was estimable and had a probability of loss.
3. Fair Value of Financial Instruments
The Company measures and records warrant liabilities at fair value in the accompanying financial statements. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability, an exit price, in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value, includes:
|
|
|
|
•
|
Level 1 – Observable inputs for identical assets or liabilities such as quoted prices in active markets;
|
|
|
|
|
•
|
Level 2 – Inputs other than quoted prices in active markets that are either directly or indirectly observable; and
|
|
|
|
|
•
|
Level 3 – Unobservable inputs in which little or no market data exists, which are therefore developed by the Company using estimates and assumptions that reflect those that a market participant would use.
|
Cash equivalents include United States Treasury Notes with original maturities of three months or less at time of purchase and money market funds. Short-term investments primarily include United States Treasury Notes, along with certificates of deposit at commercial banking institutions, both with maturities of three months or more at time of purchase.
The valuation methodologies used to measure the fair value of the Company’s assets and instruments classified in stockholders’ equity are described as follows: U.S. Treasury Notes and money market funds included in cash equivalents and short-term investments are valued at the closing price reported by an actively traded exchange and are included as Level 1 measurements in the table below. Certificates of deposit are carried at amortized cost, which approximates fair value and are included within short-term investments as a Level 2 measurement in the table below.
The following tables represent the Company’s fair value hierarchy for its financial assets and liabilities measured at fair value on a recurring basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2019
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
Short-term investments
|
$
|
—
|
|
|
$
|
540,668
|
|
|
$
|
—
|
|
|
$
|
540,668
|
|
|
Total assets
|
$
|
—
|
|
|
$
|
540,668
|
|
|
$
|
—
|
|
|
$
|
540,668
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Accrued warrant liability
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
173,458
|
|
|
$
|
173,458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2018
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
1,130
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,130
|
|
|
Short-term investments
|
—
|
|
|
503,810
|
|
|
—
|
|
|
503,810
|
|
|
Total assets
|
$
|
1,130
|
|
|
$
|
503,810
|
|
|
$
|
—
|
|
|
$
|
504,940
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Accrued warrant liability
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
78,637
|
|
|
$
|
78,637
|
|
The Company uses the Black-Scholes model to measure the accrued warrant liability. The following are the assumptions used to measure the accrued warrant liability which were determined in a manner consistent with grants of options to purchase common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
December 31, 2018
|
|
Stock Price
|
$
|
1.68
|
|
|
$
|
1.01
|
|
|
Exercise Price
|
$3.64 - $20.40
|
|
|
$3.64 - $24.40
|
|
|
Term in years
|
1.79 – 2.35
|
|
|
0.04 - 2.60
|
|
|
Volatility
|
77.10% - 110.64%
|
|
|
88.07 - 108.18%
|
|
|
Annual rate of quarterly dividends
|
—
|
%
|
|
—
|
%
|
|
Discount rate- bond equivalent yield
|
2.25% - 2.30%
|
|
|
0.12 - 2.48%
|
|
The following table sets forth a summary of changes in the fair value of the Company’s Level 3 fair value measurements for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31, 2019
|
|
Three Months Ended March 31, 2018
|
|
|
Accrued
Warrant
Liability
|
|
Accrued
Warrant
Liability
|
|
Beginning Balance
|
$
|
78,637
|
|
|
$
|
1,041,455
|
|
|
Total (gains) or losses, realized and unrealized, included in earnings (1)
|
94,821
|
|
|
(508,542
|
)
|
|
Issuances
|
—
|
|
|
—
|
|
|
Settlements
|
—
|
|
|
—
|
|
|
Ending Balance
|
$
|
173,458
|
|
|
$
|
532,913
|
|
|
|
|
|
(1)
|
Unrealized gains or losses related to the accrued warrant liability were included as change in value of accrued warrant liability. There were
no
realized gains or losses for the
three
months ended
March 31, 2019
and
2018
.
|
As of
March 31, 2019
and
December 31, 2018
, the Company had
no
assets or liabilities that were measured at fair value on a nonrecurring basis.
The Company considers the accrued warrant liability to be Level 3 because some of the inputs into the measurements are neither directly nor indirectly observable. The accrued warrant liability uses management’s estimate for the expected term. As of
March 31, 2019
, the Black-Scholes pricing model was used as the valuation technique for the accrued warrant liability and used the unobservable input for the expected term of
1.79 – 2.35
years.
Management believes the value of the accrued warrant liability is more sensitive to a change in the Company’s stock price at the end of the respective reporting period as opposed to a change in the unobservable input described above.
The carrying amounts of the Company’s short-term financial instruments, which include cash and cash equivalents, accounts receivable and accounts payable, approximate their fair values due to their short maturities.
4. Stockholders’ Equity
The Company has granted options to purchase shares of common stock. The following is a summary of option award activity during the
three months ended March 31, 2019
:
|
|
|
|
|
|
|
|
|
|
|
|
Total Stock
Options
Outstanding
|
|
Weighted
Average Exercise
Price per Share
|
|
December 31, 2018
|
160,076
|
|
|
$
|
35.92
|
|
|
Granted
|
—
|
|
|
—
|
|
|
Vested
|
—
|
|
|
—
|
|
|
Forfeited, Canceled
|
—
|
|
|
—
|
|
|
March 31, 2019
|
160,076
|
|
|
$
|
35.92
|
|
The following is a summary of outstanding stock options as of
March 31, 2019
:
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2019
|
|
|
Stock Options
Outstanding
|
|
Vested Stock
Options
|
|
Quantity
|
160,076
|
|
|
160,076
|
|
|
Weighted Average Exercise Price
|
$
|
35.92
|
|
|
$
|
35.92
|
|
|
Weighted Average Remaining Contractual Term (in Years)
|
4.38
|
|
|
4.38
|
|
|
Intrinsic Value
|
$
|
—
|
|
|
$
|
—
|
|
For the
three months ended March 31, 2019
and
2018
, the Company granted
no
stock options. For
March 31, 2019
and
2018
, the total fair value of options vested was
$0
.
As of
March 31, 2019
, there was
no
total compensation cost not yet recognized related to unvested stock options.
5. Warrants
In connection with previous sales of the Company’s common stock and the issuance of debt instruments, warrants were issued which presently have exercise prices ranging from
$3.64
to
$20.40
. The warrants expire between
one
and
seven
years from the date of grant and are subject to the terms applicable in each agreement. The following table summarizes the activity in our outstanding warrants since
December 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Warrants
|
|
Weighted Average
Exercise Price
|
|
December 31, 2018
|
528,054
|
|
|
$
|
10.90
|
|
|
Granted
|
—
|
|
|
—
|
|
|
Exercised
|
—
|
|
|
—
|
|
|
Forfeited, Canceled
|
(45,291
|
)
|
|
24.40
|
|
|
March 31, 2019
|
482,763
|
|
|
$
|
9.63
|
|
6. Significant Alliances and Related Parties
Roswell Park Cancer Institute
The Company has entered into several agreements with Roswell Park Cancer Institute ("
RPCI
") including: various sponsored research agreements, an exclusive license agreement and clinical trial agreements for the conduct of the Phase 1 entolimod oncology study and the Phase 1 Curaxin CBL0137 intravenous administration study. Additionally, the Company’s Chief Scientific Officer, or CSO, Dr. Andrei Gudkov, is the Senior Vice President of Basic Research at RPCI. The Company had
$0
and
$84,429
in accrued expenses payable to RPCI at
March 31, 2019
and
2018
, respectively.
The Cleveland Clinic
CBLI has entered into an exclusive license agreement with The Cleveland Clinic pursuant to which CBLI was granted an exclusive license to The Cleveland Clinic’s research base underlying our therapeutic platform and certain product candidates licensed to Panacela. CBLI has the primary responsibility to fund all newly developed patents. However, The Cleveland Clinic retains ownership of those patents covered by the agreement. CBLI also agreed to use commercially diligent efforts to bring one or more products to market as soon as practical, consistent with sound and reasonable business practices and judgments. On August 6, 2018, CBLI sublicensed the intellectual property underlying entolimod's composition that CBLI licenses from The Cleveland Clinic to GPI. There were
no
milestone or royalty payments paid to The Cleveland Clinic during the
three months ended March 31, 2019
or
2018
.
The Company recognized
$30,710
and
$0
in research and development expense to The Cleveland Clinic for the
three
months ended
March 31, 2019
and
2018
, respectively. The Company had
$30,710
and
$0
in accrued expenses payable to The Cleveland Clinic at
March 31, 2019
and
2018
, respectively.
Buffalo BioLabs and Incuron
Our CSO, Dr. Andrei Gudkov, has business relationships with Buffalo BioLabs, LLC ("
BBL
") where Dr. Gudkov was a founder and currently serves as its uncompensated Principal Scientific Advisor. The Company recognized
$0
and
$287,880
in research and development expense to BBL for the
three
months ended
March 31, 2019
and
2018
, respectively. The Company also recognized
$11,553
from BBL as sublease and other income for the
three
months ended
March 31, 2019
and
2018
. Pursuant to our real estate sublease and equipment lease with BBL, the Company had gross accounts receivables of
$222,938
and
$206,002
, and net accounts receivables of
$20,787
and
$3,851
from BBL at
March 31, 2019
and
2018
, respectively.
Dr. Gudkov is also an uncompensated member of the board of directors for Incuron. Pursuant to master service and development agreements we have with Incuron, the Company performs various research, business development, clinical advisory, and management services. The Company recognized revenue of
$134,067
and
$92,120
for the
three
months ended
March 31, 2019
and
2018
, respectively. In addition, we also recognized
$1,134
and
$1,776
from Incuron for sublease and other income for the
three
months ended
March 31, 2019
and
2018
, respectively. Pursuant to these agreements, the Company had gross accounts receivable of
$134,823
and
$143,896
from Incuron at
March 31, 2019
and
2018
, respectively.
Genome Protection
GPI incurred
$47,425
in consultant expenses with members of the Company's Board of Directors and management team during the three months ended March 31, 2019, of which
$24,768
remained in GPI accounts payable and accrued expenses as of March 31, 2019. The Company also recognized
$3,031
in expense reimbursement from GPI during the three months ended March 31, 2019.