424B3 1 nt10017679x7_424b3.htm FORM 424(B)(3)

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Filed Pursuant to Rule 424(b)(3)
Registration No. 333-253111


PROPOSED MERGER—YOUR VOTE IS VERY IMPORTANT
To the Stockholders of Cleveland BioLabs, Inc. and Cytocom Inc.,
Cleveland BioLabs, Inc., a Delaware corporation, or Cleveland BioLabs, and Cytocom Inc., a Delaware corporation, or Cytocom, entered into an Agreement and Plan of Merger, or the Merger Agreement, on October 16, 2020, pursuant to which High Street Acquisition Corp., a direct, wholly owned subsidiary of Cleveland BioLabs, or Merger Sub, will merge with and into Cytocom, with Cytocom surviving as a wholly owned subsidiary of Cleveland BioLabs, and the surviving corporation of the merger, which transaction is referred to herein as the merger. We refer to Cleveland BioLabs immediately following the merger as the combined company.
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 (excluding, in each case, dissenting shares and shares held in treasury) will be automatically converted into the right to receive a number of shares of Cleveland BioLabs’ common stock determined by the application of an exchange ratio formula set forth in the Merger Agreement.
Each share of Cleveland BioLabs common stock and each option to purchase shares of Cleveland BioLabs common stock that is issued and outstanding at the effective time of the merger will remain issued and outstanding. Immediately after the merger, Cleveland BioLabs securityholders as of immediately prior to the merger are expected to own approximately 49% of the outstanding shares of the combined company on a fully diluted basis and former Cytocom securityholders are expected to own approximately 51% of the outstanding shares of the combined company on a fully diluted basis.
Shares of Cleveland BioLabs common stock are currently listed on The Nasdaq Capital Market, or Nasdaq, under the symbol “CBLI.” Cytocom has filed an initial listing application for the combined company with Nasdaq. After consummation of the merger, Cleveland BioLabs will be renamed “Cytocom Inc.” and the parties expect that the common stock of the combined company will trade on Nasdaq under the symbol “CYTO.” On June 9, 2021, the last trading day before the date of the accompanying proxy statement/prospectus, the closing sale price of Cleveland BioLabs common stock was $5.45 per share.
Cleveland BioLabs stockholders are invited to attend the special meeting of Cleveland BioLabs stockholders to be held on July 6, 2021, at 10:00 a.m. Eastern Time, unless postponed or adjourned to a later date, in order to obtain the stockholder approvals necessary to complete the merger. The Cleveland BioLabs special meeting will be held in virtual format only via live audio webcast. Cleveland BioLabs stockholders will be able to attend and participate in the Cleveland BioLabs special meeting online by visiting www.virtualshareholdermeeting.com/CBLI2021SM where they will be able to listen to the meeting live, submit questions and vote. At the Cleveland BioLabs special meeting, Cleveland BioLabs will ask its stockholders of record as of the record date to:
1.
Approve the issuance of shares of common stock of Cleveland BioLabs to securityholders of Cytocom, pursuant to the terms of the Merger Agreement, a copy of which is attached as Annex A to the accompanying proxy statement/prospectus, and the change of control resulting from the merger;
2.
Approve an amendment to the certificate of incorporation of Cleveland BioLabs to effect an increase in the number of authorized shares of common stock, in the form attached as Annex D to the accompanying proxy statement/prospectus;
3.
Consider and vote upon an adjournment of the Cleveland BioLabs special meeting, if necessary, to solicit additional proxies if there are not sufficient votes in favor of Proposal Nos. 1 and 2; and
4.
Transact such other business as may properly come before the stockholders at the Cleveland BioLabs special meeting or any adjournment or postponement thereof.
As described in the accompanying proxy statement/prospectus, certain Cleveland BioLabs stockholders who in the aggregate owned approximately 42.3% of the outstanding shares of Cleveland BioLabs as of March 31, 2021 are parties to stockholder agreements with Cleveland BioLabs, whereby such stockholders have agreed to vote in favor of the approval of the issuance of Cleveland BioLabs common stock in the merger pursuant to the Merger Agreement.
After careful consideration, each of the Cleveland BioLabs and Cytocom boards of directors have approved the Merger Agreement and have determined that it is advisable to consummate the merger. Cleveland BioLabs’ board of directors has approved the proposals described in the accompanying proxy statement/prospectus and unanimously recommends that its stockholders vote “FOR” the proposals described in the accompanying proxy statement/prospectus. Approval of Proposal No. 1 and No. 2 is a condition to the consummation of the merger. Therefore, the merger cannot be consummated without the approval of Proposal No. 1 and No. 2.
More information about Cleveland BioLabs, Cytocom, the Merger Agreement and transactions contemplated thereby and the foregoing proposals is contained in the accompanying proxy statement/prospectus. Cleveland BioLabs urges you to read the accompanying proxy statement/prospectus carefully and in its entirety, including the annexes. IN PARTICULAR, YOU SHOULD CAREFULLY CONSIDER THE MATTERS DISCUSSED UNDER “RISK FACTORS” BEGINNING ON PAGE 25 OF THE ACCOMPANYING PROXY STATEMENT/PROSPECTUS.
Cleveland BioLabs and Cytocom are excited about the opportunities the merger brings to Cleveland BioLabs’ stockholders and thank you for your consideration and continued support.
Sincerely,



Christopher Zosh
Vice President of Finance
Cleveland BioLabs, Inc.
Michael K. Handley
President and Chief Executive Officer
Cytocom Inc.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of the accompanying proxy statement/prospectus. Any representation to the contrary is a criminal offense.
The accompanying proxy statement/prospectus is dated June 10, 2021 and is first being mailed to Cleveland BioLabs stockholders on or about June 10, 2021.

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NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TIME:
10:00 a.m. Eastern Time
DATE:
July 6, 2021
PLACE:
www.virtualshareholdermeeting.com/CBLI2021SM
PURPOSES:
1.
To approve the issuance of shares of common stock of Cleveland BioLabs, Inc., or Cleveland BioLabs, to stockholders of Cytocom Inc., or Cytocom, pursuant to the terms of the Agreement and Plan of Merger, among Cleveland BioLabs, Cytocom and High Street Acquisition Corp., or Merger Sub, dated as of October 16, 2020, a copy of which is attached as Annex A, which is referred to in this Notice as the Merger Agreement, and the change of control resulting from the merger;
2.
To approve an amendment to the certificate of incorporation of Cleveland BioLabs to effect an increase in the number of authorized shares of common stock, in the form attached as Annex D;
3.
To consider and vote upon an adjournment of the Cleveland BioLabs special meeting, if necessary, to solicit additional proxies if there are not sufficient votes in favor of Proposal Nos. 1 and 2; and
4.
To transact such other business as may properly come before the stockholders at the Cleveland BioLabs special meeting or any adjournment or postponement thereof.
WHO MAY VOTE:
You may vote if you were the record owner of Cleveland BioLabs common stock at the close of business on June 9, 2021, the record date. Only holders of record of shares of Cleveland BioLabs common stock at the close of business on the record date are entitled to notice of, and to vote at, the Cleveland BioLabs special meeting. At the close of business on the record date, Cleveland BioLabs had 15,468,945 shares of common stock outstanding and entitled to vote.
All stockholders as of the record date are cordially invited to attend the special meeting. Whether you plan to attend the virtual annual meeting or not, we urge you to vote and submit your proxy by Internet, by mobile device, or by mail in order to ensure the presence of a quorum. You may change or revoke your proxy at any time before your shares are voted at the meeting.
Your vote is important. The affirmative vote of the holders of a majority of shares present in attendance or represented by proxy at the Cleveland BioLabs special meeting and entitled to vote on the matter, assuming a quorum is present, is required for approval of Proposal Nos. 1, 3 and 4. The affirmative vote of the holders of a majority of the outstanding shares of Cleveland BioLabs common stock entitled to vote at the Cleveland BioLabs special meeting is required for approval of Proposal No. 2. Approval of Proposal No. 1, referred to as the merger proposal, is a condition to the consummation of the merger. Therefore, the merger cannot be consummated without the approval of Proposal No. 1.
Cleveland BioLabs’ board of directors has determined and believes that each of the proposals outlined above is fair to, in the best interests of, and advisable to Cleveland BioLabs and its stockholders and has approved each such proposal. Cleveland BioLabs’ board of directors unanimously recommends that Cleveland BioLabs stockholders vote “FOR” each such proposal.
Important Notice Regarding the Availability of Proxy Materials for the Stockholders’ Meeting
to Be Held on July 6, 2021 at 10:00 a.m. Eastern Time via the internet.
The proxy statement/prospectus/information statement and annual report to stockholders are available at www.proxyvote.com
BY ORDER OF THE BOARD OF DIRECTORS
 

 
Christopher Zosh
 
Senior Vice President of Finance
 
Buffalo, New York

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QUESTIONS AND ANSWERS ABOUT THE MERGER
The following section provides answers to frequently asked questions about the merger. This section, however, provides only summary information. For a more complete response to these questions and for additional information, please refer to the cross-referenced sections, including the annexes to this proxy statement/prospectus. See Where You Can Find More Information beginning on page 280 of this proxy statement/prospectus.
Q:
What is the merger?
A:
Cleveland BioLabs, Inc., or Cleveland BioLabs, and Cytocom Inc., or Cytocom, have entered into an Agreement and Plan of Merger, or the Merger Agreement, dated as of October 16, 2020, a copy of which is attached as Annex A to this proxy statement/prospectus. The Merger Agreement contains the terms and conditions of the proposed business combination of Cleveland BioLabs and Cytocom. Pursuant to the Merger Agreement, High Street Acquisition Corp., or Merger Sub, a direct, wholly owned subsidiary of Cleveland BioLabs, will merge with and into Cytocom, with Cytocom surviving as a wholly owned subsidiary of Cleveland BioLabs. This transaction is referred to in this proxy statement/prospectus as the merger. After the consummation of the merger, Cleveland BioLabs will change its corporate name to “Cytocom Inc.” Cleveland BioLabs following the merger is referred to herein as the combined company.
At the effective time of the merger each share of Cytocom’s common stock, each share of Cytocom’s preferred stock and each vested Cytocom restricted stock unit will be converted into the right to receive a number of shares of Cleveland BioLabs common stock determined in accordance with the exchange ratio described in more detail in the section titled “The Merger Agreement—Exchange Ratio” beginning on page 146 of this proxy statement/prospectus. Because the governing documents for Cytocom’s Series A-2 Preferred Stock, par value $0.001 per share, or the Series A-2 Preferred Stock, guarantee that the holders of such Series A-2 Preferred Stock will receive Cleveland BioLabs common stock with an aggregate market value of at least $12 million based on a 30-day volume weighted average price, we will not be able to issue the Cleveland BioLabs merger shares issuable upon exchange of the Series A-2 Preferred Stock until after the passing of 30 trading days from the closing of the merger.
In connection with the merger, each unvested Cytocom restricted stock unit award will be assumed by Cleveland BioLabs and will be converted into a Cleveland BioLabs restricted stock unit award, with necessary adjustments to reflect the exchange ratio formula. The terms (including, without limitation, the vesting terms) of each such converted restricted stock unit will be substantially equivalent to those of the Cytocom restricted stock unit being replaced.
Each share of Cleveland BioLabs common stock and each option to purchase Cleveland BioLabs common stock that is issued and outstanding at the effective time of the merger will remain issued and outstanding. Immediately after the merger, based on each party’s estimated net cash as of March 31, 2021, Cleveland BioLabs securityholders as of immediately prior to the merger are expected to own approximately 50% of the outstanding shares of the combined company on a fully diluted basis and former Cytocom securityholders are expected to own approximately 50% of the outstanding shares of the combined company on a fully diluted basis. This estimate is subject to adjustment prior to closing of the merger for net cash, inclusive of short-term and long-term liabilities, at the cash determination time and as a result, Cleveland BioLabs securityholders could own more, and Cytocom securityholders could own less, or vice versa, of the combined company. Additionally, this estimate excludes the impact of any issuances of the combined company’s common stock after the merger upon (i) the exercise of the warrant to be issued to Avenue Venture Opportunities Fund, L.P. (“Avenue”) immediately after closing of the merger and (ii) the conversion of the indebtedness owed by Cytocom to Avenue.
Q:
Why are the two companies proposing to merge?
A:
Cleveland BioLabs and Cytocom believe that combining the two companies will result in a company with a stronger pipeline, strong leadership team and greater ability to raise capital resources, positioning it to become a leading company researching, developing and commercializing immunotherapies for oncology, infectious disease, inflammation and auto-immune mediated conditions. For a more complete description of the reasons for the merger, please see the sections titled “The Merger— Cleveland BioLabs Reasons for the Merger” and “The Merger—Cytocom Reasons for the Merger” beginning on pages 120 and 122, respectively, of this proxy statement/prospectus.
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Q:
Why am I receiving this proxy statement/prospectus?
A:
You are receiving this proxy statement/prospectus because you have been identified as a stockholder of Cleveland BioLabs as of the record date, and you are entitled to vote at the Cleveland BioLabs special meeting to approve the matters set forth herein. This document serves as:
a proxy statement of Cleveland BioLabs used to solicit proxies for the Cleveland BioLabs special meeting to vote on the matters set forth herein; and
a prospectus of Cleveland BioLabs used to offer shares of Cleveland BioLabs common stock in exchange for shares of Cytocom common stock and preferred stock in the merger.
Q:
What proposals will be voted on at the Cleveland BioLabs special meeting in connection with the merger?
A:
Pursuant to the terms of the Merger Agreement, the following proposal must be approved by the requisite stockholder vote at the Cleveland BioLabs special meeting in order for the merger to close:
Proposal No. 1 to approve the issuance of shares of Cleveland BioLabs common stock to Cytocom stockholders pursuant to the Merger Agreement and the change of control resulting from the merger.
Proposal No. 1 is referred to herein as the merger proposal. The approval of the merger proposal is a condition to consummation of the merger. The issuance of Cleveland BioLabs common stock in connection with the merger and the change of control resulting from the merger will not take place unless approved by Cleveland BioLabs stockholders and the merger is consummated.
In addition to the requirement of obtaining Cleveland BioLabs stockholder approval, each of the other closing conditions set forth in the Merger Agreement must be satisfied or waived. For a more complete description of the closing conditions under the Merger Agreement, please see the section titled “The Merger Agreement—Conditions to the Consummation of the Merger” beginning on page 154 of this proxy statement/prospectus.
The presence, by accessing online or being represented by proxy, at the Cleveland BioLabs special meeting of the holders of a majority of the shares of Cleveland BioLabs common stock outstanding and entitled to vote at the Cleveland BioLabs special meeting is necessary to constitute a quorum at the meeting for the purpose of approving the merger proposal.
Q:
What proposals are to be voted on at the Cleveland BioLabs special meeting, other than the merger proposal?
A:
At the Cleveland BioLabs special meeting, the holders of Cleveland BioLabs common stock will also be asked to consider the following proposals:
to approve an amendment to the certificate of incorporation of Cleveland BioLabs to effect an increase in the number of authorized shares of common stock, in the form attached as Annex D to this proxy statement/prospectus;
to consider and vote upon an adjournment of the Cleveland BioLabs special meeting, if necessary, to solicit additional proxies if there are not sufficient votes in favor of Proposal Nos. 1 and 2; and
to transact such other business as may properly come before the stockholders at the Cleveland BioLabs special meeting or any adjournment or postponement thereof.
Such proposals, together with the merger proposal, are referred to collectively in this proxy statement/prospectus as the proposals.
The presence, by accessing online or being represented by proxy, at the Cleveland BioLabs special meeting of the holders of a majority of the shares of Cleveland BioLabs common stock outstanding and entitled to vote at the Cleveland BioLabs special meeting is necessary to constitute a quorum at the meeting for the purpose of approving the proposals.
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Q:
What stockholder votes are required to approve the proposals at the Cleveland BioLabs special meeting?
A:
The affirmative vote of the holders of a majority of shares present in attendance or represented by proxy at the Cleveland BioLabs special meeting and entitled to vote on the matter, assuming a quorum is present, is required for approval of Proposal Nos. 1, 3 and 4. The affirmative vote of the holders of a majority of the outstanding shares of Cleveland BioLabs common stock entitled to vote at the Cleveland BioLabs special meeting is required for approval of Proposal No. 2.
Votes will be counted by the inspector of election appointed for the meeting, who will separately count “FOR” and “AGAINST” votes, abstentions and any broker non-votes. Abstentions and broker non-votes will be treated as shares present for the purpose of determining the presence of a quorum for the transaction of business at the special meeting. Abstentions and broker non-votes will have no effect on Proposal Nos. 1, 3 and 4, and will have the same effect as “AGAINST” votes for Proposal No. 2.
The directors and executive officers of Cleveland BioLabs and David Davidovich, the largest single stockholder of Cleveland BioLabs, are subject to voting and support agreements pursuant to which they have agreed to vote all shares of Cleveland BioLabs common stock owned by them as of the record date in favor of Proposal Nos. 1, 2, 3 and 4 and against any competing “acquisition proposal” (as defined in the voting and support agreements). As of March 31, 2021, the directors and executive officers of Cleveland BioLabs, together with Mr. Davidovich, owned or controlled approximately 42.3% of the outstanding shares of Cleveland BioLabs common stock entitled to vote at the Cleveland BioLabs special meeting.
Q:
What will Cytocom stockholders and restricted stock unit award holders receive in the merger?
A:
Cytocom stockholders and the holders of vested Cytocom restricted stock units will receive shares of Cleveland BioLabs common stock, and the holders of unvested Cytocom restricted stock unit awards will receive Cleveland BioLabs restricted stock units, determined on the basis of an exchange ratio formula. Applying the exchange ratio formula, which will be calculated based on the total number of outstanding shares of Cleveland BioLabs common stock and Cytocom common stock, each on a fully-diluted basis, and the respective valuations of Cleveland BioLabs and Cytocom, as of immediately prior to the closing of the merger, the former Cytocom securityholders immediately before the merger are expected to own, or hold rights to acquire, approximately 50% of the aggregate number of shares of the combined company’s common stock on a fully diluted basis following the merger and Cleveland BioLabs securityholders immediately before the merger are expected to own approximately 50% of the aggregate number of shares of the combined company’s common stock on a fully diluted basis following the merger. This estimate is based on each partys estimated net cash as of March 31, 2021 and remains subject to adjustment prior to closing of the merger based on the outstanding number of shares of Cytocom and Cleveland BioLabs and the respective net cash balances of Cytocom and Cleveland BioLabs at the cash determination time and as a result, Cleveland BioLabs securityholders could own more, and former Cytocom securityholders could own less, or vice versa, of the fully diluted common stock of the combined company, following the closing of the merger. Additionally, this estimate excludes the impact of any issuances of the combined company’s common stock after the merger upon (i) the exercise of the warrant to be issued to Avenue immediately after closing of the merger and (ii) the conversion of the indebtedness owed by Cytocom to Avenue.
For a more complete description of what Cytocom stockholders and holders of restricted stock units will receive in the merger, please see the sections titled “The Merger Agreement—Merger Consideration” and The Merger Agreement—Exchange Ratio” beginning on pages 145 and 146, respectively, of this proxy statement/prospectus.
Q:
Will the common stock of the combined company trade on an exchange?
A:
Shares of Cleveland BioLabs common stock are currently listed on Nasdaq under the symbol “CBLI.” Cytocom has filed an initial listing application for the combined company with Nasdaq. After consummation of the merger, Cleveland BioLabs will be renamed “Cytocom Inc.” and it is expected that the common stock of the combined company will trade on Nasdaq under the symbol “CYTO.” On June 9, 2021, the last trading day before the date of this proxy statement/prospectus, the closing sale price of Cleveland BioLabs common stock was $5.45 per share.
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Q:
Who will be the directors of the combined company following the merger?
A:
Immediately following the merger, the combined company’s board of directors will be composed of up to seven members, consisting of (i) three individuals designated by Cleveland BioLabs, two of whom will be current board members Randy Saluck and Lea Verny and the third of whom will be designated at a later time, and (ii) four individuals designated by Cytocom, three of whom will be Michael K. Handley (who is Cytocom’s President and Chief Executive Officer and will serve as President and Chief Executive Officer of the combined company), Taunia Markvicka, and Steve Barbarick, and the fourth of whom will be designated at a later time.
Q:
Who will be the executive officers of the combined company immediately following the merger?
A:
Immediately following the merger, the executive management team of the combined company is expected to consist of the following individuals:
Name
Position
Michael K. Handley
President and Chief Executive Officer; Director
Taunia Markvicka, PharmD
Chief Operating Officer; Director
Andrei Gudkov, Ph.D., D. Sci.
Global Head of R&D
Peter Aronstam, Ph.D.
Chief Financial Officer
Clifford Selsky, M.D., Ph.D.
Chief Medical Officer
Cozette M. McAvoy, JD, M.S.
Chief Legal Officer
Robert W. Buckheit, Jr., Ph.D.
Chief Technology Officer
Q:
As a Cleveland BioLabs stockholder, how does Cleveland BioLabs’ board of directors recommend that I vote?
A:
After careful consideration, Cleveland BioLabs’ board of directors unanimously recommends that Cleveland BioLabs stockholders vote “FOR” all of the proposals.
Q:
What risks should I consider in deciding whether to vote in favor of the merger?
A:
You should carefully review the section titled “Risk Factors” beginning on page 25 of this proxy statement/prospectus, which set forth certain risks and uncertainties related to the merger, risks and uncertainties to which the combined company’s business will be subject, and risks and uncertainties to which each of Cleveland BioLabs and Cytocom, as independent companies, are subject.
Q:
When do you expect the merger to be consummated?
A:
The merger is anticipated to close in the third quarter of 2021, but the exact timing cannot be predicted. For more information, please see the section titled “The Merger Agreement—Conditions to the Consummation of the Merger” beginning on page 154 of this proxy statement/prospectus.
Q:
What do I need to do now?
A:
Whether you plan to attend the special meeting or not, we urge you to vote by proxy. All shares represented by valid proxies that we receive through this solicitation, and that are not revoked, will be voted in accordance with your instructions on the proxy card or as instructed via mobile device or over the Internet. If you properly submit a proxy without giving specific voting instructions, your shares will be voted in accordance with the recommendations of the Cleveland BioLabs board of directors. Voting by proxy will not affect your right to attend the special meeting. If your shares are registered directly in your name through our stock transfer agent, Continental Stock Transfer & Trust Company, or you have stock certificates registered in your name, you may vote:
By Internet. Follow the instructions included on the proxy card included with a paper copy of the proxy statement to vote by Internet.
By mobile device using smartphone or tablet. If you choose to vote by mobile device, scan the QR Code imprinted on the proxy card using either a smartphone or table and you will be taken directly to the Internet voting site.
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By mail (if you received a paper copy of the proxy materials by mail). Please sign, date, and promptly mail the enclosed proxy card in the postage-paid envelope that has been provided to you.
Electronically at the meeting. If you attend the virtual special meeting, you may vote electronically at the meeting. Further instructions on how to attend, participate in and vote at the virtual special meeting, including how to demonstrate your ownership of our stock as of the record date, are available at www.virtualshareholdermeeting.com/CBLI2021SM. Please note you will only be able to attend, participate, and vote in the meeting using this website.
Internet and mobile device voting facilities for stockholders of record will be available 24 hours a day and will close at 11:59 p.m. Eastern Time on July 5, 2021.
If your shares are held in “street name” (held in the name of a bank, broker or other holder of record), you will receive instructions from the holder of record. You must follow the instructions of the holder of record in order for your shares to be voted. Internet voting also may be offered to stockholders owning shares through certain banks and brokers. If your shares are not registered in your own name and you plan to vote your shares electronically at the special meeting, you should contact your bank, broker or other holder of record to obtain a legal proxy or broker’s proxy card in order to vote.
Q:
What happens if I do not return a proxy card or otherwise vote or provide proxy instructions, as applicable?
A:
If you are a Cleveland BioLabs stockholder, the failure to return your proxy card or otherwise vote or provide proxy instructions will reduce the aggregate number of votes required to approve Proposal Nos. 1, 3 and 4 and will have the same effect as a vote “AGAINST” Proposal No. 2.
Q:
May I attend the Cleveland BioLabs special meeting and vote in person?
A:
In light of the coronavirus/COVID-19 outbreak and governmental decrees that in-person large gatherings be postponed or cancelled, and in the best interests of public health and the health and safety of Cleveland BioLabs’ board of directors and stockholders, the Cleveland BioLabs special meeting will be held entirely online. Stockholders of record as of June 9, 2021 will be able to attend and participate in the Cleveland BioLabs special meeting online by accessing www.virtualshareholdermeeting.com/CBLI2021SM. To join the Cleveland BioLabs special meeting, you will need to have your 16-digit control number which is included on your proxy card.
Q:
Who counts the votes?
A:
Broadridge Financial Solutions, Inc., or Broadridge, has been engaged as Cleveland BioLabs’ independent agent to tabulate stockholder votes, which Cleveland BioLabs refers to as the inspector of election. If you are a stockholder of record, your executed proxy card is returned directly to Broadridge for tabulation. If you hold your shares through a broker, your broker returns one proxy card to Broadridge on behalf of all its clients.
Q:
If my Cleveland BioLabs shares are held in “street name” by my broker, will my broker vote my shares for me?
A:
Unless your broker has discretionary authority to vote on certain matters, your broker will not be able to vote your shares of Cleveland BioLabs common stock on matters requiring discretionary authority without instructions from you. If you do not give instructions to your broker, your broker can vote your Cleveland BioLabs shares with respect to “discretionary,” routine items but not with respect to “non-discretionary,” non-routine items. Discretionary items are proposals considered routine under Rule 452 of the New York Stock Exchange on which your broker may vote shares held in “street name” in the absence of your voting instructions. With respect to non-routine items for which you do not give your broker instructions, your Cleveland BioLabs shares will be treated as broker non-votes. It is anticipated that Proposal Nos. 1, 2 and 4 at the Cleveland BioLabs special meeting will be non-routine. It is anticipated that Proposal No. 3 will be routine. To make sure that your vote is counted, you should instruct your broker to vote your shares, following the procedures provided by your broker.
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Q:
What are broker non-votes and do they count for determining a quorum?
A:
Generally, broker non-votes occur when shares held by a broker in “street name” for a beneficial owner are not voted with respect to a particular proposal because the broker (i) has not received voting instructions from the beneficial owner and (ii) lacks discretionary voting power to vote those shares. A broker is entitled to vote shares held for a beneficial owner on routine matters without instructions from the beneficial owner of those shares. On the other hand, absent instructions from the beneficial owner of such shares, a broker is not entitled to vote shares held for a beneficial owner on non-routine matters.
Broker non-votes will be treated as shares present for the purpose of determining the presence of a quorum for the transaction of business at the Cleveland BioLabs special meeting. Broker non-votes will not have any effect with respect to Proposal Nos. 1, 3 and 4, and will have the same effect as “AGAINST” votes for Proposal No. 2.
It is anticipated that Proposal No. 3 will be a discretionary proposal considered routine under the rules of the NYSE and thus will not result in broker non-votes.
Q:
May I change my vote after I have submitted a proxy or provided proxy instructions?
A:
Cleveland BioLabs stockholders of record, unless such stockholder’s vote is subject to a voting and support agreement, may change their vote at any time before their proxy is voted at the Cleveland BioLabs special meeting in one of four ways:
You may submit another properly completed proxy with a later date by mail or via the internet.
You can provide your proxy instructions via mobile device at a later date.
You may send a written notice that you are revoking your proxy to Cleveland BioLabs’ Corporate Secretary at 73 High Street, Buffalo, New York 14203.
You may attend the Cleveland BioLabs special meeting online and vote by following the instructions at www.virtualshareholdermeeting.com/CBLI2021SM. Simply attending the Cleveland BioLabs special meeting will not, by itself, revoke your proxy.
Your vote must be received by July 5, 2021, 11:59 p.m. Eastern Time to be counted.
If a Cleveland BioLabs stockholder who owns Cleveland BioLabs shares in “street name” has instructed a broker to vote its shares of Cleveland BioLabs common stock, the stockholder must follow directions received from its broker to change those instructions.
Q:
Who is paying for this proxy solicitation?
A:
Cleveland BioLabs will pay the costs of printing and filing of this proxy statement/prospectus and the proxy card. Arrangements will also be made with brokerage firms and other custodians, nominees and fiduciaries who are record holders of Cleveland BioLabs common stock for the forwarding of solicitation materials to the beneficial owners of Cleveland BioLabs common stock. Cleveland BioLabs will reimburse these brokers, custodians, nominees and fiduciaries for the reasonable out-of-pocket expenses they incur in connection with the forwarding of solicitation materials.
Q:
What are the material U.S. federal income tax consequences of the merger to United States holders of Cytocom capital stock?
A:
Cleveland BioLabs and Cytocom intend the merger to qualify as a “reorganization” within the meaning of Section 368(a) of the Code. Assuming the merger constitutes a reorganization, subject to the limitations and qualifications described in the section titled “The Merger—Material U.S. Federal Income Tax Consequences of the Merger,” holders of Cytocom capital stock will not recognize gain or loss for U.S. federal income tax purposes on the receipt of shares of Cleveland BioLabs common stock issued in connection with the merger. However, a holder of Cytocom capital stock will recognize gain or loss attributable to cash received in lieu of fractional shares of Cleveland BioLabs common stock. Any gain recognized generally will be long-term capital gain, provided certain holding period and other requirements are met. For a more detailed discussion of the material U.S. federal income tax consequences of the merger, see “The Merger—Material U.S. Federal Income Tax Consequences of the Merger” beginning on page 137.
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Q:
Who can help answer my questions?
A:
If you are a Cleveland BioLabs stockholder and would like additional copies of this proxy statement/prospectus without charge or if you have questions about the merger, including the procedures for voting your shares, you should contact:
Cleveland BioLabs, Inc.
73 High Street
Buffalo, New York 14203
Telephone: (716) 849-6810
Attn: Investor Relations
Email: czosh@cbiolabs.com
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PROSPECTUS SUMMARY
This summary highlights selected information from this proxy statement/prospectus and may not contain all of the information that is important to you. To better understand the merger and the proposals being considered at the Cleveland BioLabs special meeting, you should read this entire proxy statement/prospectus carefully, including the Merger Agreement and the other annexes and documents to which you are referred in this proxy statement/prospectus. For more information, please see the section titled “Where You Can Find More Information” beginning on page 280 of this proxy statement/prospectus.
The Companies
Cleveland BioLabs, Inc.
73 High Street
Buffalo, NY 14203
Telephone: (510) 848-4400
Cleveland BioLabs is an innovative biopharmaceutical company developing novel approaches to activate the immune system and address serious medical needs. Its proprietary platform of Toll-like immune receptor activators has applications in mitigation of radiation injury and immuno-oncology. Cleveland BioLabs combines its proven scientific expertise and its depth of knowledge about its products’ mechanisms of action into a passion for developing drugs to save lives.
Entolimod, a Toll-like receptor 5, or TLR5, agonist, which Cleveland BioLabs is developing as a medical radiation countermeasure, or MRC, for reducing the risk of death following exposure to potentially lethal irradiation from Acute Radiation Syndrome, or ARS, is Cleveland BioLabs’ most advanced product candidate. Other indications, including immunotherapy for oncology, have been or will be investigated as well. Entolimod as a MRC is being developed under the United States Food & Drug Administration’s, or the FDA, Animal Efficacy Rule for the indication of reducing the risk of death following exposure to potentially lethal irradiation occurring as a result of a radiation disaster. Cleveland BioLabs believes that entolimod is the most efficacious MRC currently in development.
Cleveland BioLabs has completed two Good Clinical Practices clinical studies designed to evaluate the safety, pharmacokinetics and pharmacodynamics of entolimod in a total of 150 healthy subjects. It has completed a Good Laboratory Practices, or GLP, randomized, blinded, placebo-controlled, pivotal study designed to evaluate the dose-dependent effect of entolimod on survival and biomarker induction in 179 non-human primates exposed to 7.2 Gy total body irradiation when entolimod or a placebo was administered at 25 hours after radiation exposure. Cleveland BioLabs has also completed a GLP, randomized, open-label, placebo-controlled, pivotal study designed to evaluate the dose-dependent effect of entolimod on biomarker induction in 160 non-irradiated non-human primates. In 2015, following confirmation from the FDA of the sufficiency of Cleveland BioLabs’ existing efficacy and safety data and animal-to-human dose conversion, Cleveland BioLabs submitted to the FDA an application for pre-Emergency Use Authorization, or pre-EUA, a form of authorization granted by the FDA under certain circumstances. Since 2015, the FDA has indicated that a biocomparability exercise was necessary to compare the entolimod formulation used to perform early studies with the entolimod formulation planned for stock piling under the pre-EUA. This exercise is complete and the FDA agrees that for pre-EUA purposes, biocomparability has been demonstrated. This agreement is not yet in place for a future Biologics License Application, or BLA. The FDA has also indicated that additional chemistry and manufacturing work must be performed for pre-EUA and BLA purposes.
If the FDA authorizes the pre-EUA application, then Federal agencies will be free to procure entolimod for stockpiling so that the drug is available to distribute in the event of an emergency, i.e., prior to the drug being formally approved by FDA under a BLA. Such authorization is not equivalent to full licensure through approval of a BLA, but precedes full licensure and, importantly, would position entolimod for potential sales in advance of full licensure in the U.S. Cleveland BioLabs further believes pre-EUA status will position Cleveland BioLabs to explore sales opportunities with foreign governments. On May 27, 2021 Cleveland BioLabs received a response from the FDA relating to its Pre-EUA submission for entolimod. In its response, the FDA indicated that additional information was required to meet the criteria for a potential emergency use authorization. In order to meet the submission criteria, the FDA stated that it would need additional data to determine an effective dose for
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clinical use and would require additional efficacy information. The FDA will require additional clinical studies to evaluate this information. Cleveland BioLabs will continue to work with the FDA to determine the necessary next steps and clinical studies requested to demonstrate efficacy and safety for a EUA.
In September 2015, Cleveland BioLabs announced two awards totaling approximately $15.8 million in funding from the United States Department of Defense, office of Congressionally Directed Medical Research Programs to support further development of entolimod as a MRC. Through the third quarter of 2020, these awards funded additional preclinical and clinical studies of entolimod, which are needed for a BLA.
In addition to development work on the MRC for reducing the risk of death from ARS indication, Cleveland BioLabs has completed a Phase 1 open-label, dose-escalation trial of entolimod in 26 patients with advanced cancer in the U.S. The data for the U.S. study were presented at the 2015 annual meeting of the American Society of Clinical Oncology, or ASCO. Seven (7) additional patients have been dosed with the entolimod drug formulation proposed for commercialization under the pre-EUA in an extension of this study performed in the Russian Federation.
In the third quarter of 2018, Cleveland BioLabs created a joint venture called Genome Protection, Inc., or GPI, with Everon Biosciences, Inc., or Everon. GPI, which is currently 50% owned by Cleveland BioLabs and 50% owned by Everon, is undertaking a research and development program aimed at clinical testing of entolimod and GP532 (a variant of the entolimod drug candidate) and the development of medications with anti-aging and other indications associated with genome damage. GPI is being initially funded by an investment from venture capital fund Norma Investments Limited, or Norma. Under the terms of the arrangement with Norma, GPI granted Norma the right to purchase shares of GPI’s capital stock in the future in exchange for the payment of up to $30 million, of which $10.5 million was paid shortly after execution of the transaction documents.
Mobilan is a recombinant non-replicating adenovirus that directs expression of TLR5 and its agonistic ligand, a secretory non-glycosylated version of entolimod Cleveland BioLabs is also developing through its subsidiary, Panacela Labs, Inc. Two randomized, placebo-controlled, dose-ranging studies of Mobilan in men with prostate cancer are currently ongoing in the Russian Federation.
Cleveland BioLabs was incorporated in Delaware in June 2003 as a corporation spun off from The Cleveland Clinic. Cleveland BioLabs exclusively licenses its founding intellectual property from The Cleveland Clinic. In 2007, Cleveland BioLabs relocated its operations to Buffalo, New York and became affiliated with Roswell Park Cancer Institute, through technology licensing and research collaboration relationships. Cleveland BioLabs common stock is listed on the Nasdaq Capital Market under the symbol “CBLI.”
Cytocom Inc.
2537 Research Boulevard, Suite 201
Fort Collins, CO 80526
Telephone: (888) 613-8802
Cytocom Inc. is a clinical-stage biopharmaceutical company developing novel immunotherapies targeting autoimmune, inflammatory, infectious diseases and cancers based on a proprietary, multi receptor platform, or the AIMS platform, designed to rebalance the body’s immune system and restore homeostasis. Cytocom is developing therapies designed to elicit directly within patients a robust and durable response of antigen-specific killer T cells and antibodies, thereby activating essential immune defenses against autoimmune, inflammatory, infectious diseases, and cancers. Cytocom believes that its technologies can meaningfully leverage the human immune system for prophylactic and therapeutic purposes by eliciting killer T -cell response levels not achieved by other published immunotherapy approaches. Cytocom’s immunomodulatory technology restores the balance between the cellular (Th1) and the humoral (Th2) immune systems. Immune balance is regulated through T-helper cells that produce cytokines. The Th1 lymphocytes help fight pathogens within cells like cancer and viruses through interferon-gamma and macrophages. The Th2 lymphocytes target external pathogens like cytotoxic parasites, allergens, toxins through the activation of B-cells and antibody production to effect to dendritic cells, which are natural activators of killer T cells, also known as cytotoxic T -cells, or CD8+ T cells. Furthermore, the Cytocom technology antagonizes the toll-like receptors to inhibit proinflammatory cytokines.
Cytocom is pursuing clinical development of two product candidates, one as an adjunct to the standard of care in pediatric Crohn’s disease and one as an adjunct to standard of care therapy to extend the duration of
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disease remission in patients with pancreatic cancer. The company also filed an Investigational New Drug (IND) application with the U.S. Food and Drug Administration (FDA) to study CYTO-205 to prevent the advancement of COVID-19 infected patients from mild to severe disease. The Company has received a letter indicating it may proceed with its Phase 2 COVID-19 study from the FDA’s Division of Pulmonology, Allergy and Critical Care (DPACC), part of the Office of Immunology and Inflammation (OII). Cytocom also plans to submit INDs and initiate clinical trials for three additional products candidates, one to reduce the pain associated with fibromyalgia, one to prevent disease progression in patients with multiple sclerosis (MS) and one to be used as an adjunct to standard of care therapy for hepatocellular cancer.
OUR AIMS PLATFORM
Cytocom built AIMS, its proprietary multi-receptor platform, to serve as a groundbreaking drug discovery and development engine leveraging expertise, knowledge, chemistry and computational capabilities. The multi-receptor system develops analogs of noroxymorphone and proenkephalin to address numerous therapeutic areas including autoimmune, inflammation, infectious diseases and cancers. Cytocom has expanded its understanding of the relationship between noroxymorphone and proenkephalin analogs determining how multiple factors impact pharmacokinetic – pharmacodynamic relationships, potency, and selectivity in relation to the immune system. Cytocom believes its multi-receptor platform is an instrument permitting the increased probability of success.
High Street Acquisition Corp.
73 High Street
Buffalo, New York 14203
Telephone: (716) 849-6810
Merger Sub is a direct, wholly owned subsidiary of Cleveland BioLabs and was formed solely for the purpose of carrying out the merger.
The Merger (see page 115)
If the merger is consummated, Merger Sub will merge with and into Cytocom, with Cytocom surviving as a wholly owned subsidiary of Cleveland BioLabs.
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 (excluding, in each case, any dissenting shares and shares held in treasury) will be automatically converted into the right to receive a number of shares of Cleveland BioLabs’ common stock determined by the application of an exchange ratio formula set forth in the Merger Agreement. The exchange ratio will be calculated based on the total number of outstanding shares of Cleveland BioLabs common stock and Cytocom common stock, each on a fully diluted basis, and the respective valuations of Cleveland BioLabs and Cytocom, as of immediately prior to the effective time of the merger. As of the effective date of the Merger Agreement, the valuation of Cleveland BioLabs was assumed to be $39 million and the valuation of Cytocom was assumed to be $61 million. The respective valuations of Cytocom and Cleveland BioLabs will be increased or decreased, as applicable, based on the amount of each company’s net cash at closing, inclusive of short- and long-term liabilities. From these imputed valuation amounts, the number of shares of Cleveland BioLabs’ common stock to be issued as merger consideration to Cytocom securityholders will be equal to a percentage of the fully diluted common stock of the combined company following the closing determined by dividing the adjusted Cytocom valuation by the adjusted combined company valuation. Accordingly, if there is no adjustment to the respective valuations of each company, then Cytocom’s securityholders will own, or hold rights to acquire, approximately 61% of the common stock of the combined company, on a fully diluted basis. These adjustments for net cash at the cash determination time mean that Cleveland BioLabs’ securityholders could own more, and Cytocom securityholders could own less, or vice versa, of the fully diluted common stock of the combined company, following the closing of the merger.
The shares of Cleveland BioLabs’ common stock to be issued to the Cytocom securityholders in the merger will be allocated among the Cytocom securityholders in accordance with Cytocom’s organizational documents. In particular, the holders of shares of Cytocom preferred stock that are not automatically converted into common stock immediately prior to the closing of the merger will be entitled to receive an aggregate number of shares of
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Cleveland BioLabs’ common stock in the merger having a market value of $12 million (to be allocated on a pro rata basis among such holders of Cytocom preferred stock), to be determined based on the volume-weighted-average trading price of such shares over the period beginning on the date of the closing of the merger and ending 30 trading days following the closing of the merger. Therefore, the final allocation of the number of shares that will be issued to the Cytocom securityholders in the merger or subject to a restricted stock unit of Cleveland BioLabs following the merger will not be finally determined until after the passage of 30 trading days after the closing. Accordingly, while a portion of the shares of common stock of the combined company to be issued in exchange for Cytocom’s equity securities will be issued shortly after closing, the final allocation of such shares of Cleveland BioLabs’ common stock among the former Cytocom securityholders will not be finally determined until after the passage of at least 30 trading days following the closing. Because these provisions of the Merger Agreement will only affect the allocation of the shares of Cleveland BioLabs’ common stock to be issued in the merger among the former Cytocom securityholders, the total number of shares to be issued by Cleveland BioLabs in the merger is not subject to change based on the trading price, or for any other reason, following closing.
In addition, each unvested Cytocom restricted stock award will be converted into a number of restricted stock units of Cleveland BioLabs, as determined in accordance with the exchange ratio formula described above. The terms (including, without limitation, the vesting terms) of each such substitute restricted stock unit will be substantially equivalent to those of the Cytocom restricted stock unit being replaced.
Each share of Cleveland BioLabs common stock issued and outstanding at the time of the merger will remain issued and outstanding. In addition, each option to purchase shares of Cleveland BioLabs common stock that is outstanding immediately prior to the effective time of the merger, whether vested or unvested, will survive the closing and remain outstanding in accordance with its terms.
For a more complete description of the merger and the exchange ratio please see the section titled “The Merger Agreement” in this proxy statement/prospectus.
The merger will be consummated as promptly as practicable after all of the conditions to obligations of the parties to consummate the merger are satisfied or waived, including the approval by the Cleveland BioLabs stockholders of the issuance of Cleveland BioLabs common stock and the change of control resulting from the merger. Cleveland BioLabs and Cytocom are working to consummate the merger as quickly as practicable. The merger is anticipated to close in the third quarter of 2021, after the Cleveland BioLabs special meeting. However, Cleveland BioLabs and Cytocom cannot predict the exact timing of the consummation of the merger because it is subject to the satisfaction of various conditions. After consummation of the merger, assuming that Cleveland BioLabs receives the required stockholder approval, Cleveland BioLabs will be renamed “Cytocom Inc.”
Reasons for the Merger (see pages 120 and 122)
After consideration and consultation with its senior management and its financial and legal advisors, at a meeting held on October 16, 2020, upon the recommendation of a special committee of the board, the full Cleveland BioLabs board of directors unanimously (i) determined that the Merger Agreement, the merger and other transactions contemplated therein, are fair to and in the best interests of Cleveland BioLabs and its stockholders, (ii) approved the Merger Agreement, the merger and the transactions contemplated thereby in accordance with the General Corporation Law of the State of Delaware and (iii) resolved to recommend that the Cleveland BioLabs stockholders vote to approve the issuance of shares of Cleveland BioLabs common stock in the merger. For more information regarding the factors considered by the Cleveland BioLabs board of directors in reaching its decision to approve the Merger Agreement, the merger and the transactions contemplated thereby, see “The Merger—Cleveland BioLabs Reasons for the Merger” beginning on page 120 of this proxy statement/prospectus.
The Cytocom board of directors has unanimously approved the Merger Agreement, the merger and the transactions contemplated thereby. The Cytocom board of directors reviewed several factors in reaching its decision and believes that the Merger Agreement, the merger and the transactions contemplated thereby are in the best interests of, and fair to, Cytocom and its stockholders. Based upon the recommendation of the Cytocom board of directors, the holders of a majority of the shares of Cytocom’s outstanding voting capital stock approved the transaction by executing a written consent. For additional information, please see the section titled “The Merger—Cytocom Reasons for the Merger” beginning on page 122 of this proxy statement/prospectus.
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Opinion of Financial Advisor to the Cleveland BioLabs Special Committee (see page 126)
On October 16, 2020, Cassel Salpeter & Co., LLC, or Cassel Salpeter, the financial advisor to the special committee of the Cleveland BioLabs board of directors, rendered its oral opinion to the Cleveland BioLabs special committee (which was confirmed in writing by delivery of Cassel Salpeter’s written opinion dated such date), as to the fairness, from a financial point of view, to Cleveland BioLabs of the merger consideration to be issued by Cleveland BioLabs in the merger pursuant to the Merger Agreement.
The summary of Cassel Salpeter’s opinion in this proxy statement/prospectus is qualified in its entirety by reference to the full text of the written opinion, which is included as Annex B to this proxy statement/prospectus and sets forth the procedures followed, assumptions made, qualifications and limitations on the review undertaken and other matters considered by Cassel Salpeter in preparing its opinion. However, neither Cassel Salpeter’s written opinion nor the summary of its opinion and the related analyses set forth in this proxy statement/prospectus are intended to be, and do not constitute, advice or a recommendation to any stockholder as to how such stockholder should act or vote with respect to any matter relating to the proposed merger or otherwise.
The opinion was addressed to the Cleveland BioLabs special committee for the use and benefit of the members of the Cleveland BioLabs special committee (in their capacities as such) and at the request of the Cleveland BioLabs special committee, the Cleveland BioLabs board (in their capacities as such), in connection with the Cleveland BioLabs special committee’s and, as applicable, the board’s evaluation of the merger. Cassel Salpeter’s opinion was just one of the several factors the Cleveland BioLabs special committee and, as applicable, the board took into account in making their recommendations with respect to the merger, including those described elsewhere in this proxy statement/prospectus.
Interests of Certain Directors, Officers and Affiliates of Cleveland BioLabs and Cytocom (see pages 131 and 133)
In considering the recommendation of the Cleveland BioLabs board of directors with respect to issuing shares of Cleveland BioLabs common stock in the merger and the other matters to be acted upon by the Cleveland BioLabs stockholders at the Cleveland BioLabs special meeting, Cleveland BioLabs stockholders should be aware that Cleveland BioLabs’ directors and executive officers have interests in the merger that are different from, or in addition to, the interests of Cleveland BioLabs’ stockholders generally. Interests of the directors and executive officers may be different from or in addition to the interests of the stockholders for the following reasons, among others:
Certain current members of the Cleveland BioLabs board of directors will continue as directors of the combined company after the effective time of the merger, and, following the closing of the merger, will be eligible to be compensated as non-employee directors of the combined company pursuant to the Cleveland BioLabs non-employee director compensation policy following the effective time of the merger.
Under the Merger Agreement, Cleveland BioLabs’ directors and executive officers are entitled to continued indemnification and expense advancement.
These interests are discussed in more detail in the section titled “The Merger—Interests of Cleveland BioLabs Directors and Executive Officers in the Merger” beginning on page 131 of this proxy statement/prospectus. The members of Cleveland BioLabs’ board of directors were aware of and considered these interests, among other matters, in evaluating and negotiating the Merger Agreement and the merger, and in recommending to the stockholders that the merger proposal be approved.
Each of Cleveland BioLabs’ executive officers and directors has also entered into a voting and support agreement in connection with the merger. For a more detailed discussion of the voting and support agreements, please see the sections titled “Agreements Related to the Merger—Voting and Support Agreements” beginning on page 159 of this proxy statement/prospectus.
Certain members of the Cytocom board of directors and certain executive officers of Cytocom have interests in the merger that may be different from, or in addition to, interests they have as Cytocom stockholders. For example, Cytocom’s executive officers have restricted stock units, subject to vesting, to acquire shares of Cytocom common stock, a portion of which will vest immediately upon the consummation of the merger and the remainder of which will convert into Cleveland BioLabs restricted stock units determined by the exchange ratio.
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In addition, certain of Cytocom’s directors and executive officers are expected to become directors and executive officers of the combined company following the closing and all of Cytocom’s directors and executive officers are entitled to certain indemnification and liability insurance coverage pursuant to the terms of the Merger Agreement. These interests are discussed in more detail in the section titled “The Merger—Interests of Cytocom Directors and Executive Officers in the Merger.”
Management Following the Merger (see page 255)
Immediately following the effective time of the merger, the combined company’s board of directors will consist of seven members, three of whom have been or will be, in accordance with the Merger Agreement, designated by Cleveland BioLabs, and four of whom, have been or will be, in accordance with the Merger Agreement, designated by Cytocom. In addition, upon the closing of the merger, Cytocom’s President and Chief Executive Officer, Michael Handley, will serve as President and Chief Executive Officer of the combined company.
Overview of the Merger Agreement and Agreements Related to the Merger Agreement
Merger Consideration (see page 145)
At the effective time of the merger, upon the terms and subject to the conditions set forth in the Merger Agreement, 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 (excluding, in each case, any dissenting shares and shares held in treasury) will be automatically converted into the right to receive a number of shares of Cleveland BioLabs’ common stock determined by the application of an exchange ratio formula set forth in the Merger Agreement and described in more detail below.
The exchange ratio will be calculated based on the total number of outstanding shares of Cleveland BioLabs common stock and Cytocom common stock, each on a fully diluted basis, and the respective valuations of Cleveland BioLabs and Cytocom, as of immediately prior to the effective time of the merger. As of the effective date of the Merger Agreement, the valuation of Cleveland BioLabs was assumed to be $39 million and the valuation of Cytocom was assumed to be $61 million. The respective valuations of Cytocom and Cleveland BioLabs will be increased or decreased, as applicable, based on the amount of each company’s net cash at closing, inclusive of certain short- and long-term liabilities. From these imputed valuation amounts, the number of shares of Cleveland BioLabs’ common stock to be issued as merger consideration to Cytocom securityholders will be equal to a percentage of the fully diluted common stock of the combined company determined by dividing the adjusted Cytocom valuation by the adjusted combined company valuation. Accordingly, if there is no adjustment to the respective valuations of each company, then former Cytocom securityholders will own, or hold rights to acquire, approximately 61% of the common stock of the combined company, on a fully diluted basis. These adjustments for net cash at the cash determination time mean that Cleveland BioLabs securityholders could own more, and Cytocom securityholders could own less, or vice versa, of the fully diluted common stock of the combined company, following the closing of the merger.
The shares of Cleveland BioLabs’ common stock to be issued to the Cytocom securityholders in the merger will be allocated among the Cytocom securityholders in accordance with Cytocom’s organizational documents. In particular, the holders of shares of Cytocom preferred stock that are not automatically converted into common stock immediately prior to the closing of the merger will be entitled to receive an aggregate number of shares of Cleveland BioLabs’ common stock in the merger having a market value of $12 million (to be allocated on a pro rata basis among such holders of Cytocom preferred stock), to be determined based on the volume-weighted-average trading price of such shares over the period beginning on the date of the closing of the merger and ending 30 trading days following the closing of the merger. Therefore, the final allocation of the number of shares that will be issued in the merger or subject to a restricted stock unit following the merger will not be finally determined until after the passage of 30 trading days after the closing. Accordingly, while a portion of the shares of Cleveland BioLabs’ common stock to be issued in exchange for Cytocom’s equity securities will be issued shortly after closing, the final allocation of such shares of Cleveland BioLabs’ common stock among the former Cytocom securityholders will not be determined until after the passage of at least 30 trading days following the closing. Because these provisions of the Merger Agreement will only affect the allocation of the shares of Cleveland BioLabs’ common stock to be issued in the merger among the former Cytocom
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securityholders, the total number of shares to be issued by Cleveland BioLabs in the merger is not subject to change based on the trading price, or for any other reason, following closing.
In addition, each unvested Cytocom restricted stock unit will be converted into a number of restricted stock units of Cleveland BioLabs, as determined in accordance with the exchange ratio formula described above. The terms (including, without limitation, the vesting terms) of each such substitute restricted stock unit shall be substantially equivalent to those of the Cytocom restricted stock unit being replaced.
Treatment of Cleveland BioLabs Common Stock and Cleveland BioLabs Options (see page 131)
Each share of Cleveland BioLabs common stock issued and outstanding immediately prior to the effective time of the merger will remain issued and outstanding. In addition, each option to purchase shares of Cleveland BioLabs common stock that is outstanding immediately prior to the effective time of the merger, whether vested or unvested, will survive the closing and remain outstanding in accordance with its terms.
Conditions to the Consummation of the Merger (see page 154)
To complete the merger, Cleveland BioLabs stockholders must approve Proposal No. 1. Cytocom’s stockholders adopted the Merger Agreement and approved the merger and the additional transactions contemplated thereby by written consent immediately after the signing of the Merger Agreement. Additionally, each of the other closing conditions set forth in the Merger Agreement must be satisfied or waived.
Non-Solicitation (see page 150)
The Merger Agreement contains provisions prohibiting Cleveland BioLabs and Cytocom from inquiring about or seeking a competing transaction, subject to specified exceptions described in the Merger Agreement. Under these “non-solicitation” provisions, each of Cleveland BioLabs and Cytocom has agreed that neither it nor its subsidiaries, nor any of its directors, officers, employees, agents, attorneys, accountants, investment bankers, advisors or representatives, will directly or indirectly:
Initiate, seek, solicit or knowingly encourage or facilitate any inquiries or the making or submission of any Acquisition Proposal (as defined in the section of this proxy statement/prospectus entitled “The Merger Agreement—Non-Solicitation”);
Participate or engage in discussions or negotiations with, or disclose any non-public information or data relating to the other company or any of its subsidiaries to, or afford access to the properties, books or records of the other company or any of its subsidiaries to, any person with respect to any Acquisition Proposal; or
execute or enter into any agreement, including any letter of intent, memorandum of understanding, agreement in principal, merger agreement, acquisition agreement or other similar agreement, whether or not binding, with respect to an Acquisition Proposal.
Board Recommendation Change (see page 151)
Subject to specified exceptions described in the Merger Agreement, Cleveland BioLabs agreed that its board of directors may not take any of the following actions, each of which are referred to in this proxy statement/prospectus as a Cleveland BioLabs board recommendation change:
withhold, withdraw, amend or modify, or publicly propose to withhold, withdraw, amend or modify the recommendation of the Cleveland BioLabs board of directors with respect to the merger;
publicly propose to adopt, approve or recommend any Acquisition Proposal; or
fail to include the recommendation of the Cleveland BioLabs board of directors in this proxy statement/prospectus or fail to reaffirm or republish such recommendation upon Cytocom’s request.
Termination of the Merger Agreement (see page 156)
Either Cleveland BioLabs or Cytocom may terminate the Merger Agreement under certain circumstances, which would prevent the merger from being consummated.
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Expense Reimbursement (see page 157)
If the Merger Agreement is terminated under certain circumstances, one party may be required to reimburse the other party for expenses incurred in connection with the merger, up to a maximum expense reimbursement amount of $200,000.
Support Agreements (see page 159)
Each of the executive officers and directors of Cleveland BioLabs and Cleveland BioLabs’ largest stockholder is party to a voting and support agreement with Cytocom pursuant to which, among other things, each such person has agreed, solely in his or her capacity as a Cleveland BioLabs stockholder, to vote all of his or her shares of Cleveland BioLabs common stock in favor of (i) the approval of the Merger Agreement, (ii) the transactions contemplated thereby, including the issuance of Cleveland BioLabs common stock to Cytocom stockholders, (iii) if deemed necessary, an amendment to the certificate of incorporation of Cleveland BioLabs to effect an increase in the number of authorized shares and (iv) any proposal to adjourn or postpone the meeting to a later date, if there are not sufficient votes for the approval of the Merger Agreement and the transactions contemplated therein. These Cleveland BioLabs stockholders also agreed to vote against (i) any competing Acquisition Proposal (as defined in the section of this proxy statement/prospectus entitled “The Merger Agreement—Non-Solicitation”) with respect to Cleveland BioLabs and (ii) any other action, proposal, agreement or transaction that would reasonably be expected to impede, interfere with, delay, postpone, or adversely affect the merger or any of the other transactions contemplated by the Merger Agreement, subject to certain specified exceptions.
As of March 31, 2021, the Cleveland BioLabs stockholders that are party to a support agreement owned an aggregate of 6,535,957 shares of Cleveland BioLabs common stock representing approximately 42.3% of the outstanding shares of Cleveland BioLabs common stock.
Material U.S. Federal Income Tax Consequences of the Merger (see page 137)
As discussed in detail in the section titled “The Merger—Material U.S. Federal Income Tax Consequences of the Merger,” Cleveland BioLabs and Cytocom intend the merger to qualify as a “reorganization” within the meaning of Section 368(a) of the Code. In general, and subject to the qualifications and limitations set forth in the section titled “The Merger—Material U.S. Federal Income Tax Consequences of the Merger,” if the merger qualifies as a “reorganization” within the meaning of Section 368(a) of the Code, the material U.S. federal income tax consequences to a U.S. holder of Cytocom capital stock will be as follows:
such Cytocom stockholder will not recognize gain or loss upon the exchange of Cytocom capital stock for Cleveland BioLabs common stock pursuant to the merger;
such Cytocom stockholder’s aggregate tax basis for the shares of Cleveland BioLabs common stock received in the merger will equal the stockholder’s aggregate tax basis in the shares of Cytocom capital stock surrendered in the merger;
the holding period of the shares of Cleveland BioLabs common stock received by such Cytocom stockholder in the merger will include the holding period of the shares of Cytocom capital stock surrendered in exchange therefor; and
such Cytocom stockholder will recognize gain or loss attributable to any cash received in lieu of fractional shares of Cleveland BioLabs common stock. Any gain recognized generally will be long-term capital gain, provided certain holding period and other requirements are met. See “The Merger –Material U.S. Federal Income Tax Consequences of the Merger – Cash Received in Lieu of Fractional Shares.”
If the merger does not qualify as a “reorganization” within the meaning of Section 368(a) of the Code, then each U.S. holder of Cytocom capital stock will recognize gain or loss on the exchange of Cytocom shares for Cleveland BioLabs common stock in the merger equal to the difference between such Cytocom stockholder’s adjusted tax basis in the shares of Cytocom capital stock surrendered and the sum of the fair market value of the shares of Cleveland BioLabs common stock and the amount of cash received in lieu of fractional shares of
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Cleveland BioLabs common stock received in exchange therefor. Determining the actual tax consequences of the merger to you may be complex and will depend on the facts of your own situation. You should consult your tax advisors to fully understand the tax consequences to you of the merger, including estate, gift, state, local or non-U.S. tax consequences of the merger.
Nasdaq Stock Market Listing (see page 140)
Cytocom has filed an initial listing application for the combined company common stock with Nasdaq. If such application is accepted, Cleveland BioLabs anticipates that the common stock of the combined company will be listed on Nasdaq following the closing of the merger under the trading symbol “CYTO.”
Anticipated Accounting Treatment (see page 140)
The merger is expected to be treated by Cleveland BioLabs as a reverse merger and will be accounted for as a business combination in accordance with U.S. GAAP. For accounting purposes, Cytocom is considered to be acquiring the assets and liabilities of Cleveland BioLabs in this transaction based on the terms of the Merger Agreement and other factors, including: (i) Cytocom’s stockholders immediately prior to the merger will control a larger interest than current Cleveland BioLabs stockholders the combined company; (ii) Cytocom will designate a majority (four of seven) of the initial members of the board of directors of the combined company; (iii) Cytocom’s executive management team will become the majority of the management team of the combined company; and (iv) the combined company will be renamed “Cytocom Inc.” at the time of the merger. See “Unaudited Pro Forma Condensed Combined Financial Statements” included elsewhere in this proxy statement/prospectus for additional information.
Appraisal Rights and Dissenters’ Rights (see page 140)
Holders of Cleveland BioLabs common stock are not entitled to appraisal rights in connection with the merger under Delaware law. Holders of Cytocom capital stock are entitled to appraisal rights in connection with the merger under Delaware law.
Comparison of Stockholder Rights (see page 268)
Both Cleveland BioLabs and Cytocom are incorporated under the laws of the State of Delaware and, accordingly, the rights of the stockholders of each are currently, and will continue to be, governed by the DGCL. If the merger is consummated, Cytocom stockholders will become Cleveland BioLabs stockholders, and their rights will be governed by the DGCL, the bylaws of Cleveland BioLabs and the amended certificate of incorporation of Cleveland BioLabs, as may be further amended by Proposal No. 2 if approved by the Cleveland BioLabs stockholders at the Cleveland BioLabs special meeting. The rights of Cleveland BioLabs stockholders contained in the amended certificate of incorporation, as amended, and amended and restated bylaws, as amended, of Cleveland BioLabs differ from the rights of Cytocom stockholders under the certificate of incorporation and amended and restated bylaws of Cytocom, as more fully described under the section titled “Comparison of Rights of Holders of Cleveland BioLabs Capital Stock and Cytocom Capital Stock” beginning on page 268 of this proxy statement/prospectus.
Risk Factors (see page 25)
Both Cleveland BioLabs and Cytocom are subject to various risks associated with their businesses and their industries. In addition, the merger, including the possibility that the merger may not be consummated, poses a number of risks to each company and its respective securityholders, including the following risks:
The exchange ratio formula will not be adjusted based on the market price of Cleveland BioLabs 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;
If the conditions to the merger are not satisfied or waived, the merger may not occur;
The merger may be consummated even though material adverse effects may result from the announcement of the merger, industry-wide changes and other causes;
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The market price of the combined company’s common stock following the merger may decline as a result of the merger;
Cleveland BioLabs’ stockholders may not realize a benefit from the merger commensurate with the ownership dilution they will experience in connection with the merger, including the conversion of Cytocom common stock issued in the Cytocom pre-closing financing;
If the merger is not consummated, Cleveland BioLabs’ stock price may decline significantly;
Cleveland BioLabs and Cytocom may not be able to enter into a business combinations with another party on more favorable terms while the merger is pending due to restrictions in the Merger Agreement, which could adversely affect their respective business prospects;
Cleveland BioLabs may pay more than the fair market value of Cytocom’s capital stock because of the lack of a public market for Cytocom’s capital stock and therefore the difficulty of evaluating the fair market value of Cytocom’s capital stock;
The combined company may be unable to successfully integrate the businesses of Cleveland BioLabs and Cytocom and realize the anticipated benefits of the merger;
An active trading market for the combined company’s common stock may never develop and stockholders may not be able to resell shares of common stock for a profit, if at all;
The combined company’s common stock ownership may be highly concentrated and it could prevent other stockholders from influencing significant corporate decisions;
The combined company will incur additional costs and demands upon management as a result of compliance with laws and regulations that affect public companies;
Cleveland BioLabs and/or Cytocom have become involved in securities litigation or stockholder derivative litigation in connection with the merger, and may become involved in additional litigation, and this could harm the combined company’s business, and insurance coverage may not be sufficient to cover all related costs and damages; and
The combined company will have broad discretion in its use of cash and cash equivalents and may invest or spend the proceeds of any future capital-raising in ways with which stockholders do not agree and in way that may not increase the value of a stockholder’s investment.
These risks and other risks are discussed in greater detail under the section titled “Risk Factors” beginning on page 25 of this proxy statement/prospectus. Cleveland BioLabs and Cytocom both encourage you to read and consider all of these risks carefully.
Litigation Related to the Merger (see page 143)
Cleveland BioLabs, Cytocom and the members of the Cleveland BioLabs board of directors are parties to various claims and litigation related to the Merger Agreement and the Merger. As of June 1, 2021, eight complaints, two of which name Cytocom, have been filed by purported stockholders of Cleveland BioLabs, each of whom seeks to enjoin the Merger and other relief. The complaints assert claims against Cleveland BioLabs, Cytocom and the members of the Cleveland BioLabs board of directors under Section 14(a) of the Exchange Act and Rule 14a-9 promulgated thereunder for allegedly false and misleading statements in this joint proxy statement/prospectus as well as state law claims for breaches of fiduciary duty by Cleveland BioLabs’ board of directors.
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SELECTED HISTORICAL AND UNAUDITED PRO FORMA
COMBINED FINANCIAL INFORMATION AND DATA
The following tables present summary historical financial data for Cleveland BioLabs and Cytocom, summary unaudited pro forma condensed combined financial data for Cleveland BioLabs and Cytocom, and comparative historical and unaudited pro forma per share data for Cleveland BioLabs and Cytocom.
Selected Historical Consolidated Financial Data of Cleveland BioLabs
The selected consolidated statements of operations data for the years ended December 31, 2020 and 2019 and the selected consolidated balance sheet data as of December 31, 2020 and 2019 are derived from Cleveland BioLabs’ audited consolidated financial statements and the selected consolidated statements of operations data for the three months ended March 31, 2021 and 2020 and the selected consolidated balance sheet dated as of March 31, 2021 are derived from Cleveland BioLabs’ unaudited condensed consolidated financial statements. Cleveland BioLabs’ audited historical consolidated financial statements for the fiscal years ended December 31, 2020 and 2019 are contained in its Annual Report on Form 10-K for the fiscal year ended December 31, 2020 and Cleveland BioLabs’ unaudited historical consolidated financial statements for the three months ended March 31, 2021 and 2020 are contained in its Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2021, each of which are included elsewhere in this proxy statement/prospectus. Cleveland BioLabs’ historical results are not necessarily indicative of the results that may be expected in any future period.
The selected historical consolidated financial data below should be read in conjunction with Cleveland BioLabs’ consolidated financial statements and accompanying notes and the section titled “Cleveland BioLabs Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained elsewhere in this proxy statement/prospectus. For additional information, see the section titled “Where You Can Find More Information” beginning on page 280 of this proxy statement/prospectus.
 
For the Year Ended December 31,
For the three months ended March 31,
(unaudited)
 
2020
2019
2021
2020
Revenues:
 
 
 
 
 
 
 
 
 
Grants and contracts
$262,942
$1,113,421
$
$156,042
Operating expenses:
 
 
Research and development
691,070
1,656,427
118,258
218,208
General and administrative
2,158,423
1,817,830
433,004
382,166
Total operating expenses
2,849,493
3,474,257
551,262
600,374
Loss from operations
(2,586,551 )
(2,360,836)
(551,262)
(444,332)
Other income (expense):
 
 
 
 
Interest and other income (expense)
518,118
(404,722)
3,915
2,900
Foreign exchange gain (loss)
56,690
(1,329)
142
393
Change in value of warrant liability
(426,130)
72,223
(160,689)
Total other income (expense)
148,678
(333,828)
4,057
(157,396)
Net loss
(2,437,873)
(2,694,664)
(547,205)
(601,728)
Net loss attributable to noncontrolling interests
39,416
47,677
9,107
13,196
Net loss attributable to Cleveland BioLabs, Inc.
$(2,398,457)
$(2,646,987)
$(538,098)
$(588,532)
Net loss available to common stockholders per share of common stock, basic and diluted
$(0.19)
$(0.23)
$(0.04)
$(0.05)
Weighted average number of shares used in calculating net loss per share, basic and diluted
12,396,628
11,298,239
14,227,014
11,353,456
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As of December 31,
As of March 31,
 
2020
2019
2021
(unaudited)
Consolidated Balance Sheets Data:
 
 
 
Cash and cash equivalents
$1,946,418
$1,126,124
$14,359,297
Working capital(1)
2,009,695
950,105
14,175,459
Total assets
2,318,021
2,036,852
14,699,758
Accumulated deficit
(169,104,029)
(166,705,572)
(169,642,127)
Total stockholders’ equity
2,013,410
984,286
14,181,607
(1)
Cleveland BioLabs defines working capital as current assets less current liabilities.
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Selected Historical Consolidated Financial Data of Cytocom
The selected consolidated statements of operations data for the years ended December 31, 2020 and 2019 and the selected consolidated balance sheet data as of December 31, 2020 and 2019 are derived from Cytocom’s audited consolidated financial statements included elsewhere in this proxy statement/prospectus. The selected consolidated statements of operations data for the three months ended March 31, 2021 and 2020 and the selected consolidated balance sheet data as of March 31, 2021 are derived from Cytocom’s unaudited consolidated financial statements included elsewhere in this proxy statement/prospectus. Cytocom’s unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles. Cytocom’s historical results are not necessarily indicative of the results that may be expected for any future period.
The selected historical consolidated financial data below should be read in conjunction with the sections titled “Cytocom Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Risk Factors—Risks Related to Cytocom’s Financial Position” and Cytocom’s consolidated financial statements and related notes included elsewhere in this proxy statement/prospectus.
 
For the Year Ended
December 31,
For the three months ended March 31,
(unaudited)
 
2020
2019
2021
2020
 
 
 
 
 
Statements of Operations Data:
 
 
 
 
Operating expenses:
 
 
 
 
Research and development
$5,263,829
$587,000
$1,024,344
$28,000
Sales and marketing
2,406
2,796
General and administrative
5,235,433
2,227,176
4,166,889
83,919
Operating expenses:
10,501,668
2,814,176
5,194,029
111,919
Loss from operations
(10,501,668)
(2,814,176)
(5,194,029)
(111,919)
Other income (expense):
 
 
 
 
Interest (expense)
(1,130,693)
(124,233)
(92,617)
(36,191)
Other (expense) income, net
(461,500)
(285,613)
(500,000)
Total other income (expense)
(1,592,193)
(409,846)
(92,617)
(536,191)
Net loss
$(12,093,861)
$(3,224,022)
$(5,286,646)
$(648,110)
Net loss available to common stockholders per share of common stock, basic and diluted*
$(0.56)
$(0.16)
$(0.22)
$(0.03)
Weighted average number of shares used in calculating net loss per share, basic and diluted
21,558,650
19,607,850
24,423,700
20,509,499
*
Calculated to reflect the 1 for 4 reverse split effective August 2020.
 
As of December 31,
As of March 31,
 
2020
2019
2021
 
 
 
 
Consolidated Balance Sheet Data:
 
 
 
Cash and cash equivalents
$593,869
$1,650
$151,913
Working capital(1)
(3,695,095)
(4,209,860)
(4,716,335)
Total assets
1,035,485
1,650
750,013
Accumulated deficit
(27,631,321)
(15,537,460)
(32,917,967)
Total stockholders’ deficit
(3,655,737)
(4,209,860)
(4,672,297)
(1)
Working capital is defined as current assets less current liabilities.
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Selected Unaudited Pro Forma Condensed Combined Financial Data of Cleveland BioLabs and Cytocom
The following selected unaudited pro forma combined financial data presents the pro forma financial position and results of operations of the combined organization based on the historical consolidated financial statements of Cleveland BioLabs and Cytocom, after giving effect to the Merger and the acquisition of ImQuest Life Sciences, Inc. The information presented below should be read together with the historical consolidated financial statements of each of Cleveland BioLabs and Cytocom, including the related notes thereto, and with the unaudited pro forma combined financial statements, in each case, included elsewhere in this proxy statement/prospectus. The unaudited pro forma combined balance sheet data as of March 31, 2021 gives effect to the Merger as if it took place on March 31, 2021. The unaudited pro forma combined statement of operations data for the year ended December 31, 2020 gives effect to the Merger as if it took place on January 1, 2020 and the unaudited pro forma combined statement of operations data for the three months ended March 31, 2021 gives effect to the Merger as if it took place on January 1, 2021.
The allocation of purchase consideration reflected in the unaudited pro forma combined financial data is preliminary and will be adjusted based on the fair value of purchase consideration on the closing date of the Merger and upon completion of the final valuations of the fair value of the assets acquired and liabilities assumed of Cytocom on the closing date of the Merger. Although Cleveland BioLabs and Cytocom management believe that the fair values assigned to the assets to be acquired and liabilities to be assumed reflected in the unaudited pro forma combined financial data are based on reasonable estimates and assumptions using currently available data, the results of the final allocation could be materially different from the preliminary allocation.
The unaudited pro forma combined financial statements were prepared in accordance with Article 11 of SEC Regulation S-X. Accordingly, the historical consolidated financial data of Cleveland BioLabs and Cytocom has been adjusted to give pro forma effect to events that are (i) directly attributable to the Merger, (ii) factually supportable, and (iii) with respect to the unaudited pro forma combined statements of operations, expected to have a continuing impact on the combined results of operations of the combined organization. In addition, the pro forma adjustments reflecting the completion of the Merger are based upon the application of the acquisition method of accounting in accordance with GAAP and upon the assumptions set forth in the unaudited pro forma combined financial statements included elsewhere in this proxy statement/prospectus.
The unaudited pro forma combined financial data is presented for illustrative purposes only and is not necessarily indicative of the financial condition or results of operations of future periods or the financial condition or results of operations that actually would have been realized had the entities been combined during the periods presented.
 
For the Three Months
Ended March 31,
For the year
ended,
December 31,
 
2021
2020
 
 
 
Unaudited Pro Forma
 
 
Combined Statement of Operations Data:
 
 
Revenues:
 
 
Service
$836,686
$2,656,393
Product
52,040
Total Revenue
836,686
2,708,433
Cost of sales
460,746
1,401,805
Gross Profit
375,940
1,306,628
Operating expenses:
 
 
Research and development
1,305,914
5,954,899
Sales and marketing
3,395
346,175
General and administrative
4,688,084
8,094,917
Total operating expenses
5,997,393
14,049,816
Loss from operations
(5,621,453)
(13,089,363)
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For the Three Months
Ended March 31,
For the year
ended,
December 31,
 
2021
2020
Other income (expense):
 
 
Loss on debt extinguishment
(317,757)
Interest expense
(388,513)
(1,707,084)
Foreign exchange gain
142
56,690
Change in value of warrant liability
(426,130)
Total other expense
(388,371)
(2,394,061)
Net loss
(6,009,824)
(15,483,424)
Net loss attributable to noncontrolling interests
39,416
39,416
Net loss attributable to Cleveland BioLabs, Inc.
$(5,970,408)
(15,444,008)
Net loss attributable to common stockholders per share of common stock, basic and diluted
$(0.18)
$(0.47)
Weighted average number of shares used in calculating net loss per share, basic and diluted
32,633,112
32,633,112
 
As of
March 31,
2021
As of
December 31,
2020
Unaudited Pro Forma Combined Balance Sheet Data:
 
 
Total current liabilities
$10,169,290
$8,363,540
Non-current liabilities
15,685,262
703,504
Total liabilities
$25,854,552
$9,067,044
Stockholders’ equity:
 
 
Preferred stock, $.005 par value; 1,000,000 shares authorized as of December 31, 2020 and March 31, 2021
Common stock, $.005 par value; 150,000,000 shares authorized as of December 31, 2020 and March 31, 2021; 32,633,112 shares issued and outstanding as of December 31, 2020 and March 31, 2021
163,166
163,166
Additional paid-in capital
98,447,843
76,779,095
Accumulated other comprehensive loss
(690,864)
(685,680)
Accumulated deficit
(32,917,967)
(27,631,321)
Total Cleveland BioLabs, Inc. stockholders’ equity
65,002,178
48,625,260
Noncontrolling interest in stockholders’ equity
4,961,870
4,973,465
Total stockholders’ equity
69,964,048
53,598,725
Total liabilities and stockholders’ equity
$95,818,600
$62,665,769
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Comparative Historical and Unaudited Pro Forma Per Share Data
The information below reflects the historical net loss and book value per share of Cleveland BioLabs common stock and the historical net loss and book value per share of Cytocom common stock in comparison with the unaudited pro forma net loss book value per share after giving effect to the merger of Cleveland BioLabs with Cytocom and the acquisition of ImQuest Life Sciences, Inc. on a pro forma basis. You should read the tables below in conjunction with Cleveland BioLabs’ and Cytocom’s audited consolidated financial statements for the year ended December 31, 2020, Cleveland BioLabs’ and Cytocom’s unaudited consolidated financial statements for the three months ended March 31, 2021 and the notes related to such financial statements included elsewhere, in this proxy statement/prospectus. The Combined Company data below includes the results of ImQuest Life Sciences, Inc.
 
Three Months
Ended
March 31,
2021
Year Ended
December 31,
2020
Cleveland BioLabs Historical Per Common Share Data:
 
 
Basic and diluted net loss per share
$(0.04)
$(0.19)
Book value per share
1.00
$0.16
Cytocom Historical Per Common Share Data:
 
 
Basic and diluted net loss per share
$(0.22)
$(0.56)
Book value per share
$(0.19)
$(0.17)
Combined Company Pro Forma Per Common Share Data:
 
 
Basic and diluted net loss per share
$(0.18)
$(0.47)
Book value per share
$2.14
$1.64
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MARKET PRICE AND DIVIDEND INFORMATION
The closing price of Cleveland BioLabs common stock on October 16, 2020, the last trading day prior to the public announcement of the merger, was $2.17 per share and the closing price of Cleveland BioLabs common stock on June 9, 2021 was $5.45 per share, in each case as reported on Nasdaq.
Because the market price of Cleveland BioLabs common stock is subject to fluctuation, the market value of the shares of Cleveland BioLabs common stock that Cytocom stockholders will be entitled to receive in the merger may increase or decrease.
Cytocom is a private company and its shares of common stock and preferred stock are not publicly traded.
Dividends
Cleveland BioLabs has never declared or paid cash dividends on its capital stock and does not anticipate paying any cash dividends in the foreseeable future. Cytocom has never paid or declared any cash dividends on its capital stock. The combined company intends to retain all available funds and any future earnings for use in the operation of its business and does not anticipate paying any cash dividends on its capital stock in the foreseeable future. Notwithstanding the foregoing, any determination to pay cash dividends subsequent to the merger will be at the discretion of the combined company’s board of directors and will depend upon a number of factors, including the combined company’s results of operations, financial condition, future prospects, contractual restrictions, restrictions imposed by applicable law and other factors the combined company’s board of directors deems relevant.
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RISK FACTORS
The combined company will be faced with a market environment that cannot be predicted and that involves significant risks, many of which will be beyond its control. In addition to the other information contained in this proxy statement/prospectus, you should carefully consider the material risks described below before deciding how to vote your shares of Cleveland BioLabs common stock. You should also read and consider the other information in this proxy statement/prospectus and additional information about Cleveland BioLabs set forth in its Annual Report on Form 10-K for the fiscal year ended December 31, 2019 and its Quarterly Report on Form 10-Q for the quarter ended September 30, 2020, which are filed with the Securities and Exchange Commission, or the SEC.
Risks Related to the Merger
The exchange ratio will not be adjusted based on the market price of Cleveland BioLabs 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 Cleveland BioLabs common stock. Applying the exchange ratio, and based on each party’s estimated net cash as of the date of March 31, 2021, the former Cytocom securityholders immediately before the merger are expected to own approximately 50% of the aggregate number of shares of Cleveland BioLabs common stock following the merger on a fully diluted basis and Cleveland BioLabs securityholders immediately before the merger are expected to own approximately 50% of the aggregate number of shares of Cleveland BioLabs 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 Cleveland BioLabs stock before the consummation 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 consummation of the merger, the market price of Cleveland BioLabs 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 consummation of the merger the market price of Cleveland BioLabs 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. Because the exchange ratio does not adjust as a result of changes in the market price of Cleveland BioLabs common stock, for each one percentage point change in the market price of Cleveland BioLabs common stock, there is a corresponding one percentage point rise or decline, respectively, in the value of the total merger consideration payable to Cytocom’s stockholders.
Failure to complete the merger may result in either Cleveland BioLabs paying a termination fee and/or expense reimbursement amounts to Cytocom, or Cytocom paying expense reimbursement amounts to Cleveland BioLabs, which could harm the common stock price of Cleveland BioLabs and future business and operations of each company.
If the merger is not consummated, Cleveland BioLabs and Cytocom are subject to the following risks:
if the Merger Agreement is terminated under specified circumstances, Cleveland Biolabs 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 the other party’s expenses up to $200,000;
the price of Cleveland BioLabs common stock may decline and could fluctuate significantly; and
costs related to the merger, such as financial advisor, legal and accounting fees, which Cleveland BioLabs estimates will total approximately $100,000, $600,000, and $50,000, respectively, which must be paid even if the merger is not consummated.
If the Merger Agreement is terminated and the board of directors of Cleveland BioLabs or Cytocom determines to seek another business combination, there can be no assurance that either Cleveland BioLabs 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.
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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 and the merger proposal is approved by the Cleveland BioLabs stockholders, specified conditions must be satisfied or waived to complete the merger. These conditions are set forth in the Merger Agreement and described in the section titled “The Merger Agreement—Conditions to the Consummation of the Merger” beginning on page 154 of this proxy statement/prospectus. Cleveland BioLabs 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 Cleveland BioLabs and Cytocom each may lose some or all of the intended benefits of the merger.
The merger may be consummated even though a material adverse effect may result from the announcement of the merger, industry-wide changes or other causes.
In general, neither Cleveland BioLabs 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 Cleveland BioLabs or Cytocom, the other party would still be obliged to consummate the closing of the merger. If any such adverse changes occur and Cleveland BioLabs 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 Cleveland BioLabs, Cytocom or both. For a more complete discussion of what constitutes a material adverse effect on Cleveland BioLabs or Cytocom, see the section titled “The Merger Agreement—Representations and Warranties” beginning on page 147 of this proxy statement/prospectus.
Cleveland BioLabs 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, Cleveland BioLabs 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 consummated, Cleveland BioLabs’ stock price may decline significantly.
The market price of Cleveland BioLabs common stock is subject to significant fluctuations. During the 12-month period ended December 31, 2020, the closing sales price of Cleveland BioLabs’ common stock on Nasdaq ranged from a high of $4.26 on June 26, 2020 to a low of $0.57 on January 6, 2020. Market prices for securities of pharmaceutical, biotechnology and other life science companies have historically been particularly volatile. In addition, the market price of Cleveland BioLabs common stock will likely be volatile based on whether stockholders and other investors believe that Cleveland BioLabs can complete the merger or otherwise raise additional capital to support Cleveland BioLabs’ 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 Cleveland BioLabs common stock is exacerbated by low trading volume. Additional factors that may cause the market price of Cleveland BioLabs 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;
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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 Cleveland BioLabs 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.
Cleveland BioLabs 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 consummation of the merger as compared to their current ownership and voting interests in the respective companies.
After the consummation of the merger, based on each party’s estimated net cash as of March 31, 2021, the current stockholders of Cleveland BioLabs 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, Cleveland BioLabs securityholders as of immediately prior to the merger are expected to own approximately 50% of the outstanding shares of the combined company on a fully diluted basis and former Cytocom securityholders are expected to own approximately 50% of the outstanding shares of the combined company on a fully diluted basis. Additionally, both companies’ stockholders will be further diluted by issuances of the combined company’s common stock after the merger upon (i) the exercise of the warrant to be issued to Avenue immediately after closing of the merger and (ii) the conversion of the indebtedness owed by Cytocom to Avenue.
During the pendency of the merger, Cleveland BioLabs 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 Cleveland BioLabs and Cytocom to make acquisitions during the pendency of the merger, subject to specified exceptions. As a result, if the merger is not consummated, 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. For more information, see the section titled “The Merger Agreement—Non-Solicitation.”
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, Cleveland BioLabs 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 Cleveland BioLabs equity to be issued to Cytocom stockholders was determined based on negotiations between the parties, it is possible that the value of the Cleveland BioLabs common stock to be received by Cytocom stockholders will be less than the fair market value of Cytocom’s capital stock, or Cleveland BioLabs may pay more than the aggregate fair market value for Cytocom’s capital stock.
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Some of Cleveland BioLabs and Cytocom’s officers and directors have conflicts of interest that may influence them to support or approve the merger.
Cleveland BioLabs’ directors and executive officers have interests in the merger that are different from, or in addition to, the interests of Cleveland BioLabs’ stockholders generally. Interests of the directors and executive officers may be different from or in addition to the interests of the stockholders for the following reasons, among others:
Certain current members of the Cleveland BioLabs board of directors will continue as directors of the combined company after the effective time of the merger, and, following the closing of the merger, will be eligible to be compensated as non-employee directors of the combined company pursuant to the Cleveland BioLabs non-employee director compensation policy following the effective time of the merger.
Under the Merger Agreement, Cleveland BioLabs’ directors and executive officers are entitled to continued indemnification and expense advancement.
These interests are discussed in more detail in the section titled “The Merger—Interests of Cleveland BioLabs Directors and Executive Officers in the Merger” beginning on page 131 of this proxy statement/prospectus.
Certain members of the Cytocom board of directors and certain executive officers of Cytocom have interests in the merger that may be different from, or in addition to, interests they have as Cytocom stockholders. For example, Cytocom’s executive officers have restricted stock units, subject to vesting, to acquire shares of Cytocom common stock, which will convert into Cleveland BioLabs restricted stock units determined by the exchange ratio, certain of Cytocom’s directors and executive officers are expected to become directors and executive officers of the combined company upon the closing and all of Cytocom’s directors and executive officers are entitled to certain indemnification and liability insurance coverage pursuant to the terms of the Merger Agreement. These interests are discussed in more detail in the section titled “The Merger—Interests of Cytocom Directors and Executive Officers in the Merger.”
Risks Related to the Combined Company
The combined company will incur losses for the foreseeable future and might never achieve profitability.
The combined company may never become profitable, even if the combined company is able to complete clinical development for one or more product candidates and eventually commercialize such product candidates. The combined company will need to successfully complete significant research, development, testing and regulatory compliance activities that, together with projected general and administrative expenses, is expected to result in substantial increased operating losses for at least the next several years. Even if the combined company does achieve profitability, it may not be able to sustain or increase profitability on a quarterly or annual basis and may not continue as a going concern.
The market price of the combined company’s common stock is expected to be volatile, and the market price of the common stock may drop following the merger.
The market price of the combined company’s common stock following the merger could be subject to significant fluctuations. Market prices for securities of early-stage pharmaceutical, biotechnology, and other life sciences companies have historically been particularly volatile. Some of the factors that may cause the market price of the combined company’s common stock to fluctuate include:
results of clinical trials and preclinical studies of the combined company’s product candidates, or those of the combined company’s competitors or the combined company’s existing or future collaborators;
failure to meet or exceed financial and development projections the combined company may provide to the public;
failure to meet or exceed the financial and development projections of the investment community;
if the combined company does not achieve the perceived benefits of the merger as rapidly or to the extent anticipated by financial or industry analysts;
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announcements of significant acquisitions, strategic collaborations, joint ventures or capital commitments by the combined company or its competitors;
the entry into, or termination of, key agreements, including key licensing or collaboration agreements;
actions taken by regulatory agencies with respect to the combined company’s product candidates, clinical studies, manufacturing process or sales and marketing terms;
disputes or other developments relating to proprietary rights, including patents, litigation matters, and the combined company’s ability to obtain patent protection for its technologies;
additions or departures of key personnel;
significant lawsuits, including patent or stockholder litigation;
if securities or industry analysts do not publish research or reports about the combined company’s business, or if they issue adverse or misleading opinions regarding its business and stock;
changes in the market valuations of similar companies;
general market or macroeconomic conditions or market conditions in the pharmaceutical and biotechnology sectors;
sales of securities by the combined company or its securityholders in the future;
if the combined company fails to raise an adequate amount of capital to fund its operations and continued development of its product candidates;
trading volume of the combined company’s common stock;
announcements by competitors of new commercial products, clinical progress or lack thereof, significant contracts, commercial relationships or capital commitments;
adverse publicity relating to product candidates similar to those produced by the combined company;
the introduction of technological innovations or new therapies that compete with the products and services of the combined company; and
period-to-period fluctuations in the combined company’s 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 the combined company’s common stock. In addition, a recession, depression or other sustained adverse market event resulting from the spread of COVID-19 or otherwise could materially and adversely affect the combined company’s business and the value of its 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. Furthermore, market volatility may lead to increased shareholder activism if the combined company experiences a market valuation that activists believe is not reflective of its intrinsic value. Activist campaigns that contest or conflict with the combined company’s strategic direction or seek changes in the composition of its board of directors could have an adverse effect on its operating results and financial condition.
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Following the merger, the combined company may be unable to integrate successfully the businesses of Cleveland BioLabs and Cytocom and realize the anticipated benefits of the merger.
The merger involves the combination of two companies which currently operate as independent companies. Following the merger, the combined company will be required to devote significant management attention and resources to integrating its business practices and operations. The combined company may fail to realize some or all of the anticipated benefits of the merger if the integration process takes longer than expected or is more costly than expected. Potential difficulties the combined company may encounter in the integration process include the following:
the inability to successfully combine the businesses of Cleveland BioLabs in a manner that permits the combined company to achieve the synergies anticipated to result from the merger, which would result in the anticipated benefits of the merger not being realized partly or wholly in the time frame currently anticipated or at all;
complexities associated with managing the combined businesses;
integrating personnel from the two companies;
creation of uniform standards, controls, procedures, policies and information systems;
potential unknown liabilities and unforeseen increased expenses, delays or regulatory conditions associated with the merger; and
performance shortfalls at one or both of the companies as a result of the diversion of management’s attention caused by completing the merger and integrating the companies’ operations.
In addition, Cleveland BioLabs and Cytocom have operated and, until the consummation of the merger, will continue to operate, independently. It is possible that the integration process also could result in the diversion of each company’s management’s attention, the disruption or interruption of, or the loss of momentum in, each company’s ongoing businesses or inconsistencies in standards, controls, procedures and policies, any of which could adversely affect the combined company’s ability to maintain relationships with customers, suppliers and employees or the ability to achieve the anticipated benefits of the merger, or could otherwise adversely affect the business and financial results of the combined company.
The combined company may need to raise additional capital in the future, and such funds may not be available on attractive terms, or at all.
The combined company may to need to raise additional capital in the future to support its operations. The combined company cannot be certain that additional capital will be available as needed or on acceptable terms, or at all. If the combined company requires additional capital at a time when an investment in the combined company, in pharmaceutical and biotechnology companies or the market in general is limited, the combined company may not be able to raise additional funds at the time that it desires, or at all. If the combined company does raise additional funds through the issuance of equity or convertible securities, the percentage ownership of holders of its stock could be significantly diluted and these newly issued securities may have rights, preferences or privileges senior to those of holders of the common stock. Any debt financing the combined company enters into may involve covenants that restrict its operations. These restrictive covenants may include limitations on additional borrowing and specific restrictions on the use of the combined company’s assets, as well as prohibitions on its ability to create liens, pay dividends, redeem its stock or make investments.
The combined company will incur additional costs and increased demands upon management as a result of complying with the laws and regulations affecting public companies.
As a publicly-traded company, the combined company will incur significant additional legal, accounting and other expenses that Cytocom did not incur as a privately-held company. The obligations of being a public company in the United States requires significant expenditures and will place significant demands on the combined company’s management and other personnel, including costs resulting from public company reporting obligations under the Exchange Act and the rules and regulations regarding corporate governance practices, including those under the Sarbanes-Oxley Act of 2002 (referred to as the “Sarbanes-Oxley Act”), the Dodd-Frank Wall Street Reform and Consumer Protection Act (referred to as the “Dodd-Frank Act”) and the listing requirements of the stock exchange on which the combined company’s securities are listed. These rules
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require the establishment and maintenance of effective disclosure and financial controls and procedures, internal control over financial reporting and changes in corporate governance practices, among many other complex rules that are often difficult to implement, monitor and maintain compliance with. Moreover, the reporting requirements, rules, and regulations will make some activities more time-consuming and costly. In addition, the combined company expects these rules and regulations to make it more difficult and more expensive for the combined company to obtain director and officer liability insurance and the combined company may be required to incur substantial costs to maintain the same or similar coverage that Cytocom had as a privately-held company. The combined company’s management and other personnel will need to devote a substantial amount of time to ensure that the combined company complies with all of these requirements and to keep pace with new regulations, otherwise the combined company may fall out of compliance and risk becoming subject to litigation or being delisted, among other potential problems.
The combined company must maintain effective internal controls over financial reporting, and if the combined company is unable to do so, the accuracy and timeliness of the combined company’s financial reporting may be adversely affected, which could have a material adverse effect on the combined company’s business and stock price.
The combined company must maintain effective internal control over financial reporting in order to accurately and timely report its results of operations and financial condition. In addition, as a public company, the Sarbanes-Oxley Act requires, among other things, that the combined company assess the effectiveness of its disclosure controls and procedures quarterly and the effectiveness of the combined company’s internal control over financial reporting at the end of each fiscal year.
The rules governing the standards that must be met for the combined company management to assess the combined company’s internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act are complex and require significant documentation, testing and possible remediation. These stringent standards require that the combined company’s audit committee be advised and regularly updated on management’s review of internal control over financial reporting.
Cleveland BioLabs has identified material weaknesses in its internal control over financial reporting related to its accounting for revenue transactions. Specifically, the Cleveland BioLabs 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. Cleveland BioLabs is in the process of implementing measures designed to improve its internal control over financial reporting and remediate the control deficiencies that led to this material weakness. The combined company will continue this process.
The combined company’s management may not be able to effectively and timely implement controls and procedures that adequately remediate Cleveland BioLabs’ material weaknesses and respond to the increased regulatory compliance and reporting requirements that are applicable to the combined company as a public company. If the combined company fails to staff the combined company’s accounting, finance and information technology functions adequately or maintain internal control over financial reporting adequate to meet the demands that will be placed upon the combined company as a public company, including the requirements of the Sarbanes-Oxley Act, or to otherwise remediate Cleveland BioLabs’ existing or any future material weaknesses in internal control over financial reporting, or identify any additional material weaknesses the combined company’s business and reputation may be harmed and its stock price may decline. Furthermore, investor perceptions of the combined company may be adversely affected, which could cause a decline in the market price of its common stock.
The unaudited pro forma condensed combined financial data for Cleveland BioLabs and Cytocom included in this proxy statement/prospectus is preliminary, and the combined company’s actual financial position and operations after the merger may differ materially from the unaudited pro forma financial data included in this proxy statement/prospectus.
The unaudited pro forma financial data for Cleveland BioLabs and Cytocom included in this proxy statement/prospectus is presented for illustrative purposes only and is not necessarily indicative of the combined company’s actual financial condition or results of operations of future periods, or the financial condition or results of operations that would have been realized had the entities been combined during the periods presented. The combined company’s actual results and financial position after the merger may differ materially and adversely from the unaudited pro forma financial data included in this proxy statement/prospectus.
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Failure of the merger to qualify as a reorganization within the meaning of Section 368(a) of the Code could harm the combined company.
Cleveland BioLabs and Cytocom intend for the merger to qualify as a reorganization within the meaning of Section 368(a) of the Code, as amended. For a full description of the tax consequences of the merger, see “The Merger—Material U.S. Federal Income Tax Consequences of the Merger” beginning on page 137 of this proxy statement/prospectus. To comply with the requirements for a Section 368(a) reorganization, certain structural and other requirements for the transaction must be met; if not satisfied, Cytocom’s stockholders could be subject to tax liability.
Cleveland BioLabs and Cytocom do not anticipate that the combined company will pay any cash dividends in the foreseeable future.
The current expectation is that the combined company will retain its future earnings, if any, to fund the growth of the combined company’s business as opposed to paying dividends. As a result, capital appreciation, if any, of the common stock of the combined company will be your sole source of gain, if any, for the foreseeable future.
An active trading market for the combined company’s common stock may not develop and its stockholders may not be able to resell their shares of common stock for a profit, if at all.
Prior to the merger, there had been no public market for shares of Cytocom capital stock. An active trading market for the combined company’s shares of common stock may never develop or be sustained. If an active market for the combined company’s common stock does not develop or is not sustained, it may be difficult for its stockholders to sell their shares at an attractive price or at all.
If equity research analysts do not publish research or reports, or publish unfavorable research or reports, about the combined company, its business or its market, its stock price and trading volume could decline.
The trading market for the combined company’s common stock will be influenced by the research and reports that equity research analysts publish about it and its business. Equity research analysts may elect not to provide research coverage of the combined company’s common stock after the consummation of the merger, and such lack of research coverage may adversely affect the market price of its common stock. In the event it does have equity research analyst coverage, the combined company will not have any control over the analysts or the content and opinions included in their reports. The price of the combined company’s common stock could decline if one or more equity research analysts downgrade its stock or issue other unfavorable commentary or research. If one or more equity research analysts ceases coverage of the combined company or fails to publish reports on it regularly, demand for its common stock could decrease, which in turn could cause its stock price or trading volume to decline.
Cleveland BioLabs or Cytocom have become involved in securities litigation or stockholder derivative litigation in connection with the merger, and may become involved in additional litigation, and this could divert the attention of Cleveland BioLabs and Cytocom management and harm the combined company’s business, and insurance coverage may not be sufficient to cover all related costs and damages.
Securities litigation or stockholder derivative litigation frequently follows the announcement of certain significant business transactions, such as the sale of a business division or announcement of a business combination transaction. Cleveland BioLabs and Cytocom have become involved in this type of litigation in connection with the merger, and the combined company may become involved in this type of litigation in the future. Litigation often is expensive and diverts management’s attention and resources, which could adversely affect the business of Cleveland BioLabs, Cytocom and the combined company. Furthermore, if CBLI, Cytocom or the combined company are not able to successfully defend against these litigation matters, the business, financial condition and prospects of CBLI, Cytocom and the combined company could be materially harmed.
The combined company will have broad discretion in the use of the cash and cash equivalents of the combined company and may invest or spend the proceeds of any future capital-raising transactions in ways with which you do not agree and in ways that may not increase the value of your investment.
The combined company will have broad discretion over the use of the cash and cash equivalents of the combined company. You may not agree with the combined company’s decisions, and its use of the proceeds of any future capital-raising transactions may not yield any return on your investment. The combined company’s
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failure to apply these resources effectively could compromise its ability to pursue its growth strategy and the combined company might not be able to yield a significant return, if any, on its investment of these net proceeds. You will not have the opportunity to influence its decisions on how to use the combined company’s cash resources.
Risks Relating to Cleveland BioLabs’ Financial Position and Need for Additional Financing
Cleveland BioLabs will require substantial additional financing in order to meet its business objectives.
Since Cleveland BioLabs’ inception, most of its resources have been dedicated to preclinical and clinical research and development (“R&D”) of its product candidates. In particular, Cleveland BioLabs is currently developing several product candidates, each of which will require substantial funds to complete. Cleveland BioLabs believes that it will continue to expend substantial resources for the foreseeable future in the development of these product candidates. These expenditures will include costs associated with preclinical and clinical R&D, obtaining regulatory approvals, product manufacturing, corporate administration, business development, and marketing and selling for approved products. In addition, other unanticipated costs may arise. As of December 31, 2020, Cleveland BioLabs’ cash, cash equivalents, and short-term investments amounted to $2.3 million.
Because the outcome and timing of Cleveland BioLabs’ planned and anticipated clinical trials is highly uncertain, Cleveland BioLabs cannot reasonably estimate the actual amounts of capital necessary to successfully complete the development and commercialization of its product candidates. Cleveland BioLabs’ future capital requirements depend on many factors, including:
the number and characteristics of the product candidates Cleveland BioLabs pursues;
the scope, progress, results, and costs of researching and developing its product candidates, and conducting pre-clinical and clinical trials;
the timing of, and the costs involved in, obtaining regulatory approvals for its product candidates;
the cost of commercialization activities for any of its product candidates that are approved for sale, including marketing, sales, and distribution costs;
the cost of manufacturing its product candidates and any products Cleveland BioLabs successfully commercializes;
its ability to establish and maintain strategic partnerships, licensing or other arrangements and the financial terms of such agreements;
the costs involved in preparing, filing, prosecuting, maintaining, defending, and enforcing patent claims, including litigation costs and the outcome of such litigation;
the success of the pre Emergency Use Authorization (“pre-EUA”) submission Cleveland BioLabs made with the FDA, and any future submissions in the U.S., E.U., and other countries that Cleveland BioLabs may make; and
the timing, receipt, and amount of sales of, or royalties on, its future products, if any.
When Cleveland BioLabs’ available cash and cash equivalents become insufficient to satisfy its liquidity requirements, or if and when it identifies additional opportunities to do so, it will likely seek to sell additional equity or debt securities or obtain additional credit facilities. The sale of additional equity or convertible debt securities may result in additional dilution to Cleveland BioLabs’ stockholders. If Cleveland BioLabs raises additional funds through the issuance of debt securities or preferred stock or through additional credit facilities, these securities and/or the loans under credit facilities could provide for rights senior to those of Cleveland BioLabs common stockholders and could contain covenants that would restrict Cleveland BioLabs’ operations. Furthermore, any funds raised through collaboration and licensing arrangements with third parties may require Cleveland BioLabs to relinquish valuable rights to its technologies or product candidates, or grant licenses on terms that are not favorable to Cleveland BioLabs. In any such event, Cleveland BioLabs’ business prospects, financial condition and results of operations could be materially, adversely affected.
Cleveland BioLabs may require additional capital beyond its currently forecasted amounts and additional funds may not be available when Cleveland BioLabs needs them, on terms that are acceptable to it, or at all. In
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addition, the recent outbreak of the novel coronavirus known as COVID-19 has significantly disrupted world financial markets, negatively impacted US market conditions and may reduce opportunities for Cleveland BioLabs to seek out additional funding. In particular, a decline in the market price of its common stock could make it more difficult for Cleveland BioLabs to sell equity or equity-related securities in the future at a time and price that it deems appropriate. If Cleveland BioLabs fails to raise sufficient additional financing, on terms and dates acceptable to it, Cleveland BioLabs may not be able to continue its operations and the development of its product candidates, its patent licenses may be terminated, and it may be required to reduce staff, reduce or eliminate research and development, slow the development of its product candidates, outsource or eliminate several business functions or shut down operations.
Cleveland BioLabs expects to continue to incur losses.
Cleveland BioLabs has incurred significant losses to date. Cleveland BioLabs reported net losses of approximately $2.4 million and $2.7 million for the years ended December 31, 2020 and 2019, respectively. Cleveland BioLabs expects significant losses to continue for the next few years as it spend substantial sums on the continued R&D of its proprietary product candidates, and there is no certainty that it will ever become profitable as a result of these expenditures. As a result of losses that will continue throughout Cleveland BioLabs’ development stage, it may exhaust its financial resources and be unable to complete the development of its product candidates.
Cleveland BioLabs’ ability to become profitable depends primarily on the following factors:
its ability to obtain adequate sources of continued financing;
its ability to obtain approval for, and if approved, to successfully commercialize its product candidates;
its ability to successfully enter into license, development or other partnership agreements with third-parties for the development and/or commercialization of one or more of its product candidates;
its R&D efforts, including the timing and cost of clinical trials; and
its ability to enter into favorable alliances with third-parties who can provide substantial capabilities in clinical development, manufacturing, regulatory affairs, sales, marketing, and distribution.
Even if Cleveland BioLabs successfully develops and markets its product candidates, it may not generate sufficient or sustainable revenue to achieve or sustain profitability.
Cleveland BioLabs’ ability to use its net operating loss carryforwards may be limited.
As of December 31, 2020, Cleveland BioLabs had federal net operating loss carryforwards (“NOLs”) of $148.0 million to offset future taxable income, of which $139.7 million begins to expire if not utilized by 2023, and $8.3 million, which has no expiration. Cleveland BioLabs also had approximately $4.3 million of federal tax credit carryforwards which begin to expire if not utilized by 2024. Cleveland BioLabs also has U.S. state net operating loss carryforwards of approximately $93.8 million, which begin to expire if not utilized by 2027 and state tax credit carryforwards of approximately $0.3 million, which begin to expire if not utilized by 2022. The July 2015 purchase of 6,459,948 shares of Cleveland BioLabs common stock by David Davidovich, currently its largest stockholder, yielded a post-transaction ownership percentage of 60.2% for him. Cleveland BioLabs believes 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 (“Section 382”). Consequently, the utilization of the NOL and tax credit carryforwards in existence at July 9, 2015, will be limited according to the provisions of Section 382, which could significantly limit Cleveland BioLabs’ ability to use these carryforwards to offset taxable income on an annual basis in future periods. As such, a significant portion of these carryforwards could expire before they can be utilized, even if Cleveland BioLabs is able to generate taxable income that, except for this transaction, would have been sufficient to fully utilize these carry forwards.
Risks Related to Product Development
Cleveland BioLabs may not be able to successfully and timely develop its products.
Cleveland BioLabs’ product candidates range from ones currently in the research stage to ones currently in the clinical stage of development and all require further testing to determine their technical and commercial viability. Cleveland BioLabs’ success will depend on its ability to achieve scientific, clinical, and technological
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advances and to translate such advances into reliable, commercially competitive products in a timely manner. In addition, the success of Cleveland BioLabs’ subsidiaries and joint ventures will depend on their ability to meet developmental milestones in a timely manner or to fulfill certain other development requirements under contractual agreements, which are prerequisites to their receipt of additional funding from their non-controlling interest holders or the government agency funding their R&D efforts. Products that Cleveland BioLabs may develop are not likely to be commercially available for some time. The proposed development schedules for Cleveland BioLabs’ products may be affected by a variety of factors, including, among others, technological difficulties, proprietary technology of others, the government approval process, the availability of funds, disagreements with the financial partners in its subsidiaries or joint ventures, the effects of the ongoing coronavirus pandemic, including access to clinical trial sites both by patents and Cleveland BioLabs’ clinical research organizations, and changes in government regulation, many of which will not be within its control. Any delay in the development, introduction or marketing of Cleveland BioLabs’ products could result either in such products being marketed at a time when their cost and performance characteristics would not be competitive in the marketplace or in the shortening of their commercial lives. In light of the long-term nature of its projects and the unproven technology involved, Cleveland BioLabs may not be able to successfully complete the development or marketing of any products.
Cleveland BioLabs may fail to develop and commercialize some or all of its products successfully or in a timely manner because:
preclinical or clinical study results may show the product to be less effective than desired (e.g., a study may fail to meet its primary objectives) or to have harmful or problematic side effects;
it fails to receive the necessary regulatory approvals or there may be a delay in receiving such approvals. Among other things, such delays may be caused by slow enrollment in clinical studies, length of time to achieve study endpoints, additional time requirements for data analysis or pre-EUA, MAA, NDA, or BLA preparation, discussions with the FDA, EMA, and other regulatory agencies, and their request for additional preclinical or clinical data or unexpected safety or manufacturing issues;
its contract laboratories fail to follow good laboratory practices or sufficient quantities of the drug are not available for clinical studies or commercialization;
it fails to receive funding necessary for the development of one or more of its products;
they fail to conform to a changing standard of care for the diseases they seek to treat;
they are less effective or more expensive than current or alternative treatment methods;
patients withdraw or die during a clinical trial for a variety of reasons, including adverse events associated with the advanced stage of their disease and medical problems that may or may not be related to Cleveland BioLabs’ products or product candidates;
the clinical or animal trial design, although approved, is inadequate to demonstrate safety and/or efficacy;
the third-party clinical investigators or contract organizations do not perform Cleveland BioLabs’ clinical or animal studies on its anticipated schedule or consistent with the study protocol or do not perform data collection and analysis in a timely or accurate manner;
the economic feasibility of the product is not attainable due to high manufacturing costs, pricing or reimbursement issues, or other factors;
one or more of Cleveland BioLabs’ financial partners in its subsidiaries or joint ventures and Cleveland BioLabs do not agree on the development strategy of its products; or
proprietary rights of others and their competing products and technologies may prevent its product from being commercialized.
Cleveland BioLabs’ collaborative relationships with third parties could cause it to expend significant resources and incur substantial business risk with no assurance of financial return.
Cleveland BioLabs anticipates substantial reliance upon strategic collaborations for marketing and commercialization of its product candidates and it may rely even more on strategic collaborations for R&D of its
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product candidates. Cleveland BioLabs business depends on its ability to sell drugs to both government agencies and to the general pharmaceutical market. Offering entolimod for its biodefense indication to government agencies may require Cleveland BioLabs to develop new sales, marketing or distribution capabilities beyond those already existing in Cleveland BioLabs and it may not be successful in selling entolimod for its biodefense indication in the U.S. or in foreign countries despite its efforts. Selling oncology drugs will require a more significant infrastructure. Cleveland BioLabs plans to sell oncology drugs through strategic partnerships with pharmaceutical companies. If Cleveland BioLabs is unable to establish or manage such strategic collaborations on terms favorable to it in the future, its revenue and drug development may be limited. To date, Cleveland BioLabs has not entered into any strategic collaboration with a third-party capable of providing these services and it can make no guarantee that it will be able to enter into a strategic collaboration in the future. In addition, Cleveland BioLabs has not yet marketed or sold any of its product candidates or entered into successful collaborations for these services in order to ultimately commercialize its product candidates. Cleveland BioLabs also relies on third-party collaborations with its manufacturers. Manufacturers producing its product candidates must follow GMP regulations enforced by the FDA and foreign equivalents.
Establishing strategic collaborations is difficult and time-consuming. Cleveland BioLabs’ discussion with potential collaborators may not lead to the establishment of collaborations on favorable terms, if at all. Potential collaborators may reject collaborations based upon their assessment of Cleveland BioLabs’ financial, regulatory, or intellectual property position. Even if Cleveland BioLabs successfully establishes new collaborations, these relationships may never result in the successful development or commercialization of its product candidates or the generation of sales revenue. In addition, to the extent that Cleveland BioLabs enters into collaborative arrangements, its drug revenues are likely to be lower than if it directly marketed and sold any drugs that it may develop.
Cleveland BioLabs will not be able to commercialize its product candidates if its preclinical development efforts are not successful, its clinical trials do not demonstrate safety or its clinical trials or pivotal animal studies do not demonstrate efficacy.
Before obtaining required regulatory approvals for the commercial sale of any of its product candidates, Cleveland BioLabs must conduct extensive preclinical and clinical studies to demonstrate that its product candidates are safe and clinical or pivotal animal trials to demonstrate that its product candidates are efficacious. And for entolimod's biodefense indication Cleveland BioLabs must demonstrate a logical dosing correlation between animals and humans. These R&D activities are expensive, difficult to design and implement, can take many years to complete and are uncertain as to outcome. Success in preclinical testing and early clinical trials does not ensure that later clinical trials or animal efficacy studies will be successful and interim results of a clinical trial or animal efficacy study do not necessarily predict final results. In addition, Cleveland BioLabs will likely have to continue to outsource all or part of individual R&D activities and may not successfully or promptly finalize agreements for the conduct of these activities. Consequently, delays in completion of contracted activities may result.
Engagement of contract research organizations (“CROs”), study investigators, and other third parties for clinical or animal testing or data management services, for example, transfers substantial responsibilities to these parties. As such Cleveland BioLabs is dependent on these parties to timely execute their contracted work in a quality manner that complies with relevant standards and regulations such as Good Clinical Practices (“GLPs”). Failure of these parties to deliver timely and quality services could result in delays in, or termination of, contracted R&D activities. For example, if any of Cleveland BioLabs’ clinical trial sites fail to comply with GCPs or its pivotal animal studies fail to comply with GLP regulations Cleveland BioLabs may be unable to use the data generated. Consequently, if contracted CROs or other third parties do not properly execute their duties or fail to meet expected deadlines, Cleveland BioLabs’ research activities may be extended, delayed or terminated, and it may be unable to obtain regulatory approval for or successfully commercialize its product candidates.
Cleveland BioLabs’ pivotal nonclinical and clinical trial operations are subject to regulatory inspections at any time. If regulatory inspectors conclude that Cleveland BioLabs or its trial sites are not in compliance with applicable regulatory requirements for conducting such trials, Cleveland BioLabs or its trial sites may receive warning letters or other correspondence detailing deficiencies and Cleveland BioLabs will be required to implement corrective actions. If regulatory agencies deem Cleveland BioLabs’ responses to be inadequate, or are dissatisfied with the corrective actions that it or its clinical trial sites have implemented, Cleveland BioLabs’
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clinical trials may be temporarily or permanently discontinued, it may be fined, it or its investigators may be the subject of an enforcement action, the government may refuse to approve its marketing applications or allow it to manufacture or market its products or it may be criminally prosecuted.
In addition, a failure of one or more of Cleveland BioLabs’ clinical trials or animal studies can occur at any stage of testing and such failure could have a material adverse effect on its ability to generate revenue and could require Cleveland BioLabs to reduce the scope of or discontinue its operations. Cleveland BioLabs may experience numerous unforeseen events during, or as a result of, preclinical testing and the clinical trial or animal study process that could delay or prevent its ability to receive regulatory approval or commercialize its product candidates, including:
regulators or Institutional Review Boards (“IRBs”) may not authorize it to commence a clinical trial, conduct a clinical trial at a prospective trial site or continue a clinical trial following amendment of a clinical trial protocol or an IACUC may not authorize Cleveland BioLabs to commence an animal study at a prospective study site;
it may decide, or regulators may require Cleveland BioLabs, to conduct additional preclinical or clinical studies, or it may abandon projects that it expects to be promising, if its preclinical tests, clinical trials or animal efficacy studies produce negative or inconclusive results;
it may have to suspend or terminate its clinical trials if the participants are being exposed to unacceptable safety risks;
regulators or IRBs may require that Cleveland BioLabs hold, suspend or terminate clinical development for various reasons, including noncompliance with regulatory requirements or if it is believed that the clinical trials present an unacceptable safety risk to the patients enrolled in Cleveland BioLabs’ clinical trials;
the cost of Cleveland BioLabs’ clinical trials or animal studies could escalate and become cost prohibitive;
any regulatory approval Cleveland BioLabs ultimately obtains may be limited or subject to restrictions or post-approval commitments that render the product not commercially viable;
Cleveland BioLabs may not be successful in recruiting a sufficient number of qualifying subjects for its clinical trials or certain animals used in its animal studies or facilities conducting its studies may not be available at the time that it plans to initiate a study;
the effects of Cleveland BioLabs’ product candidates may not be the desired effects, may include undesirable side effects, or the product candidates may have other unexpected characteristics; and
Cleveland BioLabs’ collaborators that conduct its clinical or pivotal animal studies could go out of business and not be available for FDA inspection when Cleveland BioLabs submits its product for approval.
Even if Cleveland BioLabs or its collaborators complete its animal studies and clinical trials and receive regulatory approval, it is possible that a product may be found to be ineffective or unsafe due to conditions or facts that arise after development has been completed and regulatory approvals have been obtained. In this event, Cleveland BioLabs may be required to withdraw such product from the market. To the extent that Cleveland BioLabs’ success will depend on any regulatory approvals from government authorities outside of the U.S. that perform roles similar to that of the FDA, uncertainties similar to those stated above will also exist.
Panacela and GPI have significant non-controlling interest holders and, as such, each may not be operated solely for Cleveland BioLabs’ benefit.
As of December 31, 2020, Cleveland BioLabs owned 67.57% of the equity interests in Panacela and 50% of the equity interests in GPI. Rusnano, a fund regulated by the Russian government, is a significant shareholder, along with other minority shareholders, in Panacela. Everon, a Buffalo, New York-based biopharmaceutical company, holds the other 50% of the equity interest in GPI. Additionally, as a result of its investment in GPI, Norma was granted a number of governance and other rights with respect to GPI. As such, Cleveland BioLabs shares ownership and management of Panacela and GPI with other parties who may not have the same goals, strategies, priorities or resources as Cleveland BioLabs does.
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With respect to Panacela, both Cleveland BioLabs and Rusnano have certain rights, including the right to designate board members and the need for either supermajority votes or consent of all members of Panacela’s board of directors in order to take certain actions. Additionally, the right to transfer ownership is restricted by rights of first refusal, tag-along and drag-along rights. Consequently, if a co-owner sells its equity interest to a new party, the new party may adversely affect the operation of Panacela. These restrictions lead to organizational formalities that may be time-consuming. In addition, the benefits from a successful product development effort are shared among the co-owners.
With respect to GPI, under the terms of Norma’s investment, upon the occurrence of a number of different events, Norma has the right to require GPI to issue to Norma a number of shares in GPI, thereby further diluting Cleveland BioLabs’ interest. Additionally, Cleveland BioLabs, Everon, GPI and Norma each made certain commitments as to voting and transfer of their shares of GPI and GPI’s governance, including an agreement that the board of directors of GPI will consist of four members, two of whom will be selected by Norma, one of whom will be selected by Cleveland BioLabs and one of whom will be selected by Everon. GPI is also prohibited from taking a number of actions without the unanimous consent of all of the members of GPI’s board of directors, including, among other things, effecting a change of control transaction, terminating its operations, dissolving or liquidating, amending its organizational documents, transferring or licensing its intellectual property, or issuing any shares of capital stock.
If parties on whom Cleveland BioLabs relies to manufacture its product candidates do not manufacture them in satisfactory quality, in a timely manner, in sufficient quantities, or at an acceptable cost, clinical development and commercialization of its product candidates could be delayed.
Cleveland BioLabs does not own or operate manufacturing facilities. Consequently, it relies on third parties as sole suppliers of its product candidates. Cleveland BioLabs does not expect to establish its own manufacturing facilities and it will continue to rely on third-party manufacturers to produce supplies for preclinical, clinical, and pivotal animal studies and for commercial quantities of any products or product candidates that Cleveland BioLabs markets or may supply to its collaborators. Cleveland BioLabs also relies on third parties as sole providers of certain testing of its products. Cleveland BioLabs’ dependence on third parties for the manufacture and testing of its product candidates may adversely affect its ability to develop and commercialize any product candidates on a timely and competitive basis.
To date, Cleveland BioLabs’ product candidates have only been manufactured in quantities sufficient for preclinical studies and initial clinical trials. Cleveland BioLabs relies on a single contract organization, Wacker Biotech B.V., for production of each of its product candidates. For a variety of reasons, dependence on any single manufacturer may adversely affect Cleveland BioLabs’ ability to develop and commercialize its product candidates in a timely and competitive manner. In addition, Cleveland BioLabs’ current contractual arrangements alone may not be sufficient to guarantee that it will be able to procure the needed supplies as it completes clinical development and/or enter commercialization.
Additionally, in connection with Cleveland BioLabs’ application for commercial approvals and if any product candidate is approved by the FDA or other regulatory agencies for commercial sale, Cleveland BioLabs will need to procure commercial quantities of the product candidate from qualified third-party manufacturers. Cleveland BioLabs may not be able to contract for increased manufacturing capacity for any of its product candidates in a timely or economic manner or at all. A significant scale-up in manufacturing may require additional validation studies and commensurate financial investments by the contract manufacturers. If Cleveland BioLabs is unable to successfully increase the manufacturing capacity for a product candidate, the regulatory approval or commercial launch of that product candidate may be delayed or there may be a shortage of supply, which could limit its sales and could initiate regulatory intervention to minimize public health risk.
Other risks associated with Cleveland BioLabs’ reliance on contract manufacturers include the following:
contract manufacturers may encounter difficulties in achieving volume production, quality control, and quality assurance and also may experience shortages in qualified personnel and obtaining active ingredients for Cleveland BioLabs’ product candidates, including delays or shortages due to limited supply or capacity of production facilities as a result of the COVID-19 pandemic;
if, for any circumstance, Cleveland BioLabs is required to change manufacturers, it could be faced with significant monetary and lost opportunity costs with switching manufacturers. Furthermore, such change
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may take a significant amount of time. The FDA and foreign regulatory agencies must approve these manufacturers in advance. This requires prior approval of regulatory submissions as well as successful completion of pre-approval inspections to ensure compliance with FDA and foreign regulations and standards;
contract manufacturers are subject to ongoing periodic, unannounced inspection by the FDA and state and foreign agencies or their designees to ensure strict compliance with GMPs and other governmental regulations and corresponding foreign standards. Cleveland BioLabs does not have control over compliance by its contract manufacturers with these regulations and standards. Its contract manufacturers may not be able to comply with GMPs and other FDA requirements or other regulatory requirements outside the U.S. Failure of contract manufacturers to comply with applicable regulations could result in delays, suspensions or withdrawal of approvals, seizures or recalls of product candidates and operating restrictions, any of which could significantly and adversely affect Cleveland BioLabs’ business;
contract manufacturers might not be able or refuse to fulfill Cleveland BioLabs’ commercial or clinical trial needs, which would require Cleveland BioLabs to seek new manufacturing arrangements and may result in substantial delays in meeting market or clinical trial demands;
Cleveland BioLabs’ product costs may increase if its manufacturers pass their increasing costs of manufacture on to Cleveland BioLabs;
if Cleveland BioLabs’ contract manufacturers do not successfully carry out their contractual duties or meet expected deadlines, it will not be able to obtain or maintain regulatory approvals for its products and product candidates and will not be able to successfully commercialize its products and product candidates. In such event, Cleveland BioLabs may not be able to locate any necessary acceptable replacement manufacturers or enter into favorable agreements with such replacement manufacturers in a timely manner, if at all; and
contract manufacturers may breach the manufacturing agreements that Cleveland BioLabs has with them because of factors beyond its control or may terminate or fail to renew a manufacturing agreement based on their own business priorities at a time that is costly or inconvenient to Cleveland BioLabs.
Changes to the manufacturing process during the conduct of clinical trials or after marketing approval also require regulatory submissions and the demonstration to the FDA or other regulatory authorities that the product manufactured under the new conditions complies with GMPs requirements. These requirements especially apply to moving manufacturing functions to another facility. In each phase of investigation, sufficient information about changes in the manufacturing process must be submitted to the regulatory authorities and may require prior approval before implementation with the potential of substantial delay or the inability to implement the requested changes.
Risks Relating to Regulatory Approval
Cleveland BioLabs may not be able to obtain regulatory approval in a timely manner or at all and the results of future clinical trials and pivotal efficacy studies may not be favorable.
The testing, marketing, and manufacturing of any product for use in the U.S. and the E.U. will require approval from the FDA and the EMA, respectively. Cleveland BioLabs cannot predict with any certainty the amount of time necessary to obtain FDA approval and whether any such approval will ultimately be granted. Obtaining approval for products requires manufacturing the product and testing in animals and human subjects of substances whose effects on humans are not fully understood or documented. The manufacturing processes for Cleveland BioLabs’ product candidates are not yet fully developed and identifying a reproducible process may prove difficult. Additionally, preclinical studies, animal efficacy studies, or clinical trials may reveal that one or more products are ineffective or unsafe, in which event, further development of such products could be seriously delayed, terminated or rendered more expensive.
In addition, Cleveland BioLabs expects to rely on the FDA Animal Rule to obtain approval for entolimod’s biodefense indication in the U.S. The Animal Rule permits the use of animal efficacy studies together with human clinical safety trials to support an application for marketing approval of products when human efficacy studies are neither ethical nor feasible. These regulations have limited prior use and Cleveland BioLabs has
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limited experience in the application of these rules to the product candidates that it is developing. Additionally, Cleveland BioLabs submitted an application with the FDA for pre-EUA in 2015 so that entolimod may be used in an emergency situation. Cleveland BioLabs cannot guarantee that the FDA will review the data submitted in a timely manner, or that the FDA will accept the data when reviewed. The FDA may decide that Cleveland BioLabs’ data are insufficient for pre-EUA or BLA approval and require additional preclinical, clinical, or other studies, refuse to approve Cleveland BioLabs’ products, or place restrictions on Cleveland BioLabs’ ability to commercialize those products. The FDA has previously requested additional data and studies with respect to Cleveland BioLabs’ pre-EUA application for entolimod (as a result of which the FDA has placed Cleveland BioLabs’ clinical protocol on clinical hold), and the FDA may do so again in the future. Additionally, on May 27, 2021 Cleveland BioLabs received a response from the FDA relating to its Pre-EUA submission for entolimod. In its response, the FDA indicated that additional information was required to meet the criteria for a potential Emergency Use Authorization. In order to meet the submission criteria, the FDA stated that it would need additional data to determine an effective dose for clinical use and would require additional efficacy information. The FDA will require additional clinical studies to evaluate this information. Cleveland BioLabs will continue to work with the FDA to determine the necessary next steps and clinical studies requested to demonstrate efficacy and safety for a EUA. If Cleveland BioLabs is not successful in completing the development, licensure, and commercialization of entolimod for its biodefense indication, or if it is significantly delayed in doing so, Cleveland BioLabs’ business will be materially harmed.
Delays in obtaining FDA, EMA, or any other necessary regulatory approvals of any proposed product or the failure to receive such approvals would have an adverse effect on Cleveland BioLabs’ ability to develop such product, the product’s potential commercial success and/or on Cleveland BioLabs’ business, prospects, financial condition and results of operations.
Failure to obtain regulatory approval in international jurisdictions could prevent Cleveland BioLabs from marketing its products abroad.
Cleveland BioLabs intends to market its product candidates, including specifically the product candidates being developed by its Russian subsidiaries, in the U.S., Europe, Russia, and other countries and regulatory jurisdictions. In order to market its product candidates in the U.S., Europe, Russia, and other jurisdictions, Cleveland BioLabs must obtain separate regulatory approvals in each of these countries and territories. The procedures and requirements for obtaining marketing approval vary among countries and regulatory jurisdictions and may involve additional clinical trials or other tests. In addition, Cleveland BioLabs does not have in-house experience and expertise regarding the procedures and requirements to file for and obtain marketing approval for drugs in countries outside of the U.S., Europe, and Japan and may need to engage and rely upon expertise of third parties when it files for marketing approval in countries outside of the U.S., Europe, and Japan. Also, the time required to obtain approval in markets outside of the U.S. may differ from that required to obtain FDA approval, while still including all of the risks associated with obtaining FDA approval. Cleveland BioLabs may not be able to obtain all of the desirable or necessary regulatory approvals on a timely basis, if at all. Approval by a regulatory authority in a particular country or regulatory jurisdiction, such as the FDA in the U.S. or the EMA in the E.U., does not ensure approval by a regulatory authority in another country.
Cleveland BioLabs may not be able to file for regulatory approvals and may not receive necessary approvals to commercialize its product candidates in any or all of the countries or regulatory jurisdictions in which it desires to market its product candidates. At this time, to Cleveland BioLabs’ knowledge, other countries do not have an equivalent to the Animal Rule and, as a result, such countries do not likely have established criteria for review and approval for this type of product outside their normal review process. Specifically, because such other countries do not have an equivalent to the Animal Rule, Cleveland BioLabs may not be able to file for or receive regulatory approvals for entolimod’s biodefense indication outside the U.S. based on Cleveland BioLabs’ animal efficacy and human safety data.
The Fast Track designation for entolimod may not actually lead to a faster development or regulatory review or approval process.
Cleveland BioLabs has obtained a “Fast Track” designation from the FDA for entolimod’s biodefense indication. However, Cleveland BioLabs may not experience a faster development process, review, or approval compared to conventional FDA procedures. The FDA may withdraw Cleveland BioLabs’ Fast Track designation if the FDA believes that the designation is no longer supported by data from its clinical or pivotal development
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program. Cleveland BioLabs’ Fast Track designation does not guarantee that Cleveland BioLabs will qualify for or be able to take advantage of the FDA’s expedited review procedures or that any application that it may submit to the FDA for regulatory approval will be accepted for filing or ultimately approved.
The pre-EUA submission Cleveland BioLabs made to the FDA in 2015 may not be successful and, even if such submission is successful, it may not accelerate BLA approval of entolimod or result in any purchase by the U.S. government for this product.
In July 2014, Cleveland BioLabs met with the FDA regarding human dose-conversion of entolimod and based on the results of that meeting, it submitted a pre-EUA dossier in the second quarter of 2015 in order to inform and expedite the FDA’s issuance of an EUA, should one become necessary in the event of an emergency. The FDA does not have review deadlines with respect to pre-EUA submissions and, therefore, the timing of any approval of a pre-EUA submission is uncertain.
The FDA may decide not to accept the data or may decide that Cleveland BioLabs’ data are insufficient for pre-EUA. The FDA may require additional Chemistry, Manufacturing, and Controls (“CMC”), preclinical, clinical or other studies, refuse to approve Cleveland BioLabs’ products, or place restrictions on Cleveland BioLabs’ ability to commercialize those products. For example, in 2016, the FDA asked Cleveland BioLabs to establish the comparability of an older formulation of entolimod that had been used for preclinical and clinical studies and a newer to-be-marked formulation. The FDA requested that Cleveland BioLabs perform a side-by-side analytical comparability study and then an in vivo study in non-human primates (“NHP”) to establish bio-comparability between the two entolimod drug formulations. The FDA agreed last year that Cleveland BioLabs had documented analytical comparability and bio-comparability in NHP and agreed to continue the review of the pre-EUA dossier by the Agency. However, on May 27, 2021 Cleveland BioLabs received a response from the FDA relating to its Pre-EUA submission for entolimod. In its response, the FDA indicated that additional information was required to meet the criteria for a potential Emergency Use Authorization. In order to meet the submission criteria, the FDA stated that it would need additional data to determine an effective dose for clinical use and would require additional efficacy information. The FDA will require additional clinical studies to evaluate this information. Cleveland BioLabs will continue to work with the FDA to determine the necessary next steps and clinical studies requested to demonstrate efficacy and safety for a EUA. There can be no guarantee that the FDA will reverse this determination or refrain from requesting additional information related to Cleveland BioLabs’ preclinical, clinical or manufacturing programs. Additionally, an authorization of Cleveland BioLabs’ pre-EUA submission will not guarantee, and may not accelerate, BLA approval of entolimod as a radiation countermeasure.
Further, even if Cleveland BioLabs’ pre-EUA submission is authorized, there is no guarantee that such authorization will lead to procurement by the U.S. or other governments or any additional development funding as it is possible that the U.S. or other government may not be interested in Cleveland BioLabs’ product or its proposed terms of sale for any number of reasons including, but not limited to, lack of available funding, potential lack of government co-sponsorship of its pre-EUA, perceptions about the safety and effectiveness of entolimod, the storage requirements for entolimod or one of its competitors receiving pre-EUA authorization for their product. If Cleveland BioLabs is not successful in partnering entolimod or completing the development, licensure and commercialization of entolimod for its biodefense indication use, or if it is significantly delayed in doing so, its business may be materially harmed.
Even if Cleveland BioLabs’ drug candidates obtain regulatory approval, Cleveland BioLabs will be subject to ongoing government regulation.
Even if Cleveland BioLabs’ drug candidates obtain regulatory approval, Cleveland BioLabs’ products will be subject to continuing regulation by international health authorities, including record-keeping requirements, submitting periodic reports, reporting of any adverse experiences with the product and complying with Risk Evaluation and Mitigation Strategies and drug sampling and distribution requirements. In addition, updated safety and efficacy information must be maintained and provided to the authorities. Cleveland BioLabs or its collaborative partners, if any, must comply with requirements concerning advertising and promotional labeling, including the prohibition against promoting non-approved or “off-label” indications or products. Failure to comply with these requirements could result in significant enforcement action by the international health authorities, including warning letters, orders to pull the promotional materials and substantial fines.
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After the approval of a product, the discovery of problems with a product or its class, or the failure to comply with requirements may result in restrictions on a product, manufacturer or holder of an approved marketing application. These include withdrawal or recall of the product from the market or other voluntary or regulatory agency-initiated action that could delay or prevent further marketing. Newly discovered or developed safety or effectiveness data, including from other products in a therapeutic class, may require changes to a product’s approved labeling, including the addition of new warnings and contraindications. Also, the FDA and other international health authorities are likely to require post-market clinical testing of products approved under the Animal Rule or similar regulations at the time of a declared emergency and may require post-market clinical testing of other products. They may also require surveillance to monitor the product’s safety or efficacy to evaluate long-term effects. It is also possible that rare but serious adverse events not seen in Cleveland BioLabs’ drug candidates may be identified after marketing approval. This could result in withdrawal of Cleveland BioLabs’ product from the market.
Compliance with post-marketing regulations may be time-consuming and costly and could delay or prevent Cleveland BioLabs from generating revenue from the commercialization of its drug candidates.
If physicians and patients do not accept and use Cleveland BioLabs’ drugs, Cleveland BioLabs will not achieve sufficient product revenues and its business will suffer.
Even if Cleveland BioLabs gains marketing approval of its drug candidates, government purchasers, physicians and/or patients may not accept and use them. Acceptance and use of these products may depend on a number of factors including:
perceptions by members of the government healthcare community, including physicians, about the safety and effectiveness of Cleveland BioLabs’ drugs;
published studies demonstrating the safety and effectiveness of Cleveland BioLabs’ drugs;
adequate reimbursement for Cleveland BioLabs’ products from payors; and
effectiveness of marketing and distribution efforts by Cleveland BioLabs and its licensees and distributors, if any.
The failure of Cleveland BioLabs’ drugs, if approved for marketing, to gain acceptance in the market would harm Cleveland BioLabs’ business and could require it to seek additional financing.
Risks Related to Cleveland BioLabs’ Dependence on U.S. and Foreign Government Contracts and Grants
If Cleveland BioLabs is unable to procure additional government funding, it may not be able to fund future R&D and implement technological improvements, which would materially harm its financial condition and operating results.
In September 2015, Cleveland BioLabs announced the grant of two awards from DoD, totaling approximately $15.8 million for advanced development of entolimod as a medical radiation countermeasure. These awards, the contracts for which have been amended since the initial grants to approximately $3.8 million, were earned as the contracted development work was performed over a multi-year period. For the years ended December 31, 2020 and 2019, Cleveland BioLabs received 81.2%, and 64.5% of its revenues from the U.S. government. The contracts with the DoD providing for these awards have expired.
These revenues have funded some of Cleveland BioLabs’ operating costs and expenses. However, Cleveland BioLabs will continue to incur substantial additional costs to fund its operations for which it may apply for other sources of government funding. If Cleveland BioLabs does submit proposals for new grants or contracts, the review of such proposals and ultimate funding of an award may take significant time. Contract and grant awards are subject to a significant amount of uncertainty, including, but not limited to, successful negotiation and availability of funds. In addition, in Cleveland BioLabs’ experience, contracts from Russian government entities require matching funds and posting of performance guarantees. Therefore, Cleveland BioLabs expects that its acceptance of new contracts or grants from Russian government entities will also be subject to its ability to provide matching funds and to post performance guarantees.
If Cleveland BioLabs is unable to obtain sufficient grants and contracts on a timely basis, its ability to fund future operations would be diminished, which would negatively impact its ability to compete in its industry and could materially and adversely affect its business, financial condition and operating results.
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Cleveland BioLabs’ future business may be harmed as a result of the foreign and U.S. government contracting process as it involves risks not present in the commercial marketplace.
Cleveland BioLabs expects that a significant portion of the business that it will seek in the near future will be under government contracts or subcontracts, both U.S. and foreign, which may be awarded through competitive bidding. For example, as described above, since 2015, Cleveland BioLabs has received funding from DoD to support further development of entolimod. Additionally, in Russia it may seek additional funding from the Skolkovo Foundation or the Russian Federation Ministry of Industry and Trade (the “MPT”). Competitive bidding for government contracts presents a number of risks that are not typically present in the commercial contracting process, which may include:
the need to devote substantial time and attention of management and key employees to the preparation of bids and proposals for contracts that may not be awarded to Cleveland BioLabs;
the need to accurately estimate the resources and cost structure that will be required to perform any contract that it might be awarded;
the risk that the government will issue a request for proposal to which it would not be eligible to respond;
the risk that third parties may submit protests to its responses to requests for proposal that could result in delays or withdrawals of those requests for proposal;
the expenses that it might incur and the delays that it might suffer if its competitors protest or challenge contract awards made to it pursuant to competitive bidding and the risk that any such protest or challenge could result in the resubmission of bids based on modified specifications, or in termination, reduction or modification of the awarded contract; and
the risk that review of its proposal or award of a contract or an option to an existing contract could be significantly delayed for reasons including, but not limited to, the need for it to resubmit its proposal or limitations on available funds due to government budget cuts.
The U.S. government may choose to award future contracts for the supply of medical radiation countermeasures to its competitors instead of to Cleveland BioLabs. If Cleveland BioLabs is unable to win particular contracts, or if the government chooses not to fully exercise all options under contracts awarded to us, it may not be able to operate in the market for products that are provided under those contracts for a number of years. If Cleveland BioLabs is unable to consistently win new contract awards, or if it fails to anticipate all of the costs and resources that will be required to secure such contract awards, Cleveland BioLabs’ growth strategy and its business, financial condition and operating results could be materially adversely affected.
Additionally, government authorities have a high degree of discretion in Russia and have at times exercised their discretion selectively or arbitrarily, without hearing or prior notice, and sometimes in a manner that is perceived to be influenced, or may be influenced, by political or commercial considerations. The government also has the power, in certain circumstances, to interfere with the performance of, nullify or terminate contracts.
The market for U.S. and other government funding is highly competitive.
Cleveland BioLabs periodically submits applications for funding of various research studies of its product candidates to the U.S. and other governments. There is no guarantee that any proposals that Cleveland BioLabs plans to submit will be funded even if it receives positive reviews of such proposals as funding by the government is highly competitive and limited to the availability of funds. Failure to receive funding from U.S. and other government sources for the development of Cleveland BioLabs’ product candidates could impair its ability to fund the development programs for its product candidates and thus could result in delays in development, or even stopping of development, of certain indications for its product candidates.
Notably, Cleveland BioLabs’ biodefense product candidate, entolimod, faces significant competition for U.S. government funding for both development and procurement of medical countermeasures for biological, chemical and nuclear threats, diagnostic testing systems and other emergency preparedness countermeasures. In addition, Cleveland BioLabs may not be able to compete effectively if entolimod does not satisfy procurement
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requirements of the U.S. government with respect to biodefense products. Cleveland BioLabs opportunities to succeed in the biodefense industry could be reduced or eliminated if its competitors develop and commercialize products that are safer, more effective, have fewer side effects, are more convenient or are less expensive than any products that Cleveland BioLabs may develop.
U.S. government agencies have special contracting requirements, which create additional risks.
Cleveland BioLabs has historically entered into contracts with various U.S. government agencies. Due to these contracts with government agencies, Cleveland BioLabs is subject to various federal contract requirements. Future sales to U.S. government agencies will depend, in part, on its ability to meet these requirements, certain of which Cleveland BioLabs may not be able to satisfy.
U.S. government contracts typically contain unfavorable termination provisions and are subject to audit by the government at its sole discretion even after the end of the period of performance under the contract, which subjects Cleveland BioLabs to additional risks. These risks include the ability of the U.S. government to unilaterally:
suspend or prevent Cleveland BioLabs for a set period of time from receiving new contracts or extending existing contracts based on violations or suspected violations of laws or regulations;
terminate Cleveland BioLabs’ existing contracts;
reduce the scope and value of Cleveland BioLabs’ existing contracts;
audit and object to Cleveland BioLabs’ contract-related costs and fees, including allocated indirect costs;
control and potentially prohibit the export of Cleveland BioLabs’ products; and
change certain terms and conditions in Cleveland BioLabs’ contracts.
Pursuant to Cleveland BioLabs’ government contracts, it is generally permitted to retain title to any patentable invention or discovery made while performing the contract. However, the U.S. government is generally entitled to receive a non-exclusive, non-transferable, irrevocable, paid-up license to the subject inventions throughout the world. In addition, Cleveland BioLabs’ government contracts generally provide that the U.S. government retains unlimited rights in the technical data produced under such government contract.
Cleveland BioLabs’ business could be adversely affected by a negative audit by the U.S. government.
As a U.S. government contractor, Cleveland BioLabs may become subject to periodic audits and reviews by U.S. government agencies such as the Defense Contract Audit Agency (“DCAA”). These agencies review a contractor’s performance under its contracts, cost structure and compliance with applicable laws, regulations and standards. The DCAA also reviews the adequacy of, and a contractor’s compliance with, its internal control systems and policies, including the contractor’s accounting, purchasing, property, estimating, compensation and management information systems. Any costs found to be improperly allocated to a specific contract will not be reimbursed and, such costs already reimbursed must be refunded.
Based on the results of these audits, the U.S. government may adjust Cleveland BioLabs’ contract-related costs and fees, which have already been paid to it, including allocated indirect costs. In addition, if an audit or review uncovers any improper or illegal activity, Cleveland BioLabs may be subject to civil and criminal penalties and administrative sanctions, including termination of its contracts, forfeiture of profits, suspension of payments, fines and suspension or prohibition from doing business with the U.S. government. Cleveland BioLabs could also suffer serious harm to its reputation if allegations of impropriety were made against Cleveland BioLabs. In addition, under U.S. government purchasing regulations, some of Cleveland BioLabs’ costs, including most financing costs, amortization of intangible assets, portions of its R&D costs, and some marketing expenses, may not be reimbursable or allowed under its contracts. Further, as a U.S. government contractor, Cleveland BioLabs may become subject to an increased risk of investigations, criminal prosecution, civil fraud, whistleblower lawsuits, and other legal actions and liabilities to which purely private sector companies are not.
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Risks Relating to Cleveland BioLabs’ Intellectual Property
Cleveland BioLabs relies upon licensed patents to protect its technology and it may be unable to obtain or protect such intellectual property rights and it may be liable for infringing upon the intellectual property rights of others.
Cleveland BioLabs’ ability to compete effectively will depend on its ability to maintain the proprietary nature of its technologies and the proprietary technology of others with which it has entered into licensing agreements. Cleveland BioLabs has entered into five separate exclusive license agreements to license from third parties its product candidates that are not owned by Cleveland BioLabs and some product candidates are covered by up to three separate license agreements. Pursuant to these license agreements Cleveland BioLabs maintains patents and patent applications covering its product candidates. Cleveland BioLabs does not know whether any of these patent applications that are still in the approval process will ultimately result in the issuance of a patent with respect to the technology owned by Cleveland BioLabs or licensed to Cleveland BioLabs. The patent position of pharmaceutical or biotechnology companies, including Cleveland BioLabs’ position, is generally uncertain and involves complex legal and factual considerations. The standards that the United States Patent and Trademark Office use to grant patents are not always applied predictably or uniformly and can change. There is also no uniform, worldwide policy regarding the subject matter and scope of claims granted or allowable in pharmaceutical or biotechnology patents. Accordingly, Cleveland BioLabs does not know the degree of future protection for its proprietary rights or the breadth of claims that will be allowed in any patents issued to Cleveland BioLabs or to others.
Cleveland BioLabs’ technology may be found in the future to infringe upon the rights of others or be infringed upon by others. In such a case, others may assert infringement claims against Cleveland BioLabs, and should Cleveland BioLabs be found to infringe upon their patents, or otherwise impermissibly utilize their intellectual property, it might be forced to pay damages, potentially including treble damages, if Cleveland BioLabs is found to have willfully infringed on such parties’ patent rights. Furthermore, parties making claims against Cleveland BioLabs may be able to obtain injunctive or other equitable relief which could effectively block its ability to further develop, commercialize and sell products. In addition to any damages Cleveland BioLabs might have to pay, it may be required to obtain licenses from the holders of this intellectual property, enter into royalty agreements, or redesign its products so as not to utilize this intellectual property, each of which may prove to be uneconomical or otherwise impossible. Conversely, Cleveland BioLabs may not always be able to successfully pursue its claims against others that infringe upon its technology and the technology exclusively licensed by Cleveland BioLabs or developed with its collaborative partners. Thus, the proprietary nature of Cleveland BioLabs’ technology or technology licensed by it may not provide adequate protection against competitors.
Moreover, the cost to Cleveland BioLabs of any litigation or other proceeding relating to its patents and other intellectual property rights, even if resolved in its favor, could be substantial and the litigation would divert its management’s efforts and its resources. Uncertainties resulting from the initiation and continuation of any litigation could limit its ability to continue its operations.
If Cleveland BioLabs fails to comply with its obligations under its license agreement with third parties, it could lose its ability to develop its product candidates.
The manufacture and sale of any products developed by Cleveland BioLabs may involve the use of processes, products or information, the rights to certain of which are owned by others. Although Cleveland BioLabs has obtained exclusive licenses for its product candidates from The Cleveland Clinic and RPCI with regard to the use of patent applications as described above and certain processes, products and information of others, these licenses could be terminated or expire during critical periods and Cleveland BioLabs may not be able to obtain licenses for other rights that may be important to Cleveland BioLabs, or, if obtained, such licenses may not be obtained on commercially reasonable terms. Furthermore, some of its product candidates require the use of technology licensed from multiple third parties, each of which is necessary for the development of such product candidates. If Cleveland BioLabs is unable to maintain and/or obtain licenses, Cleveland BioLabs may have to develop alternatives to avoid infringing upon the patents of others, potentially causing increased costs and delays in product development and introduction or precluding the development, manufacture, or sale of
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planned products. Additionally, the patents underlying any licenses may not be valid and enforceable. To the extent any products developed by Cleveland BioLabs are based on licensed technology, royalty payments on the licenses will reduce its gross profit from such product sales and may render the sales of such products uneconomical.
Cleveland BioLabs’ current exclusive licenses impose various development, royalty, diligence, record keeping, insurance, solvency and other obligations on Cleveland BioLabs. If Cleveland BioLabs breaches any of these obligations and does not cure such breaches within the relevant cure period, the licensor may have the right to terminate the license, which could result in Cleveland BioLabs being unable to develop, manufacture, and sell products that are covered by the licensed technology or enable a competitor to gain access to the licensed technology.
In addition, while Cleveland BioLabs cannot currently determine the dollar amount of the royalty and other payments it will be required to make in the future under the license agreements, if any, the amounts may be significant. The dollar amount of Cleveland BioLabs’ future payment obligations will depend on the technology and intellectual property it uses in products that it successfully develops and commercializes, if any.
If Cleveland BioLabs is not able to protect and control its unpatented trade secrets, know-how and other technology, it may suffer competitive harm.
Cleveland BioLabs also relies on a combination of trade secrets, know-how, technology and nondisclosure and other contractual agreements and technical measures to protect its rights in the technology. However, trade secrets are difficult to protect and Cleveland BioLabs relies on third parties to develop its products and thus must share trade secrets with them. Cleveland BioLabs seeks to protect its proprietary technology in part by entering into confidentiality agreements and, if applicable, material transfer agreements, collaborative research agreements, consulting agreements or other similar agreements with its collaborators, advisors, employees, and consultants prior to beginning research or disclosing proprietary information. These agreements will typically restrict the ability of Cleveland BioLabs’ collaborators, advisors, employees, and consultants to publish data potentially relating to its trade secrets. Cleveland BioLabs’ academic collaborators typically have rights to publish data, provided that Cleveland BioLabs is notified in advance and may delay publication for a specified time in order to secure its intellectual property rights arising from the collaboration. Despite Cleveland BioLabs’ efforts to protect its trade secrets, its competitors may discover its trade secrets, either through breach of these agreements, independent development or publication of information including its trade secrets in cases where Cleveland BioLabs does not have proprietary or otherwise protected rights at the time of publication. If any trade secret, know-how or other technology not protected by a patent or intellectual property right were disclosed to, or independently developed by, a competitor, Cleveland BioLabs’ business, financial condition, and results of operations could be materially adversely affected.
Risks Relating to Cleveland BioLabs’ Industry and Other External Factors
The biopharmaceutical market in which Cleveland BioLabs competes is highly competitive.
The biopharmaceutical industry is characterized by rapid and significant technological change. Cleveland BioLabs’ success will depend on its ability to develop and apply its technologies in the design and development of its product candidates and to establish and maintain a market for its product candidates. In addition, there are many companies, both public and private, including major pharmaceutical and chemical companies, specialized biotechnology firms, universities and other research institutions engaged in developing pharmaceutical and biotechnology products. Many of these companies have substantially greater financial, technical, research and development resources, and human resources than Cleveland BioLabs. Competitors may develop products or other technologies that are more effective than those that are being developed by Cleveland BioLabs or may obtain FDA or other governmental approvals for products more rapidly than Cleveland BioLabs. If Cleveland BioLabs commences commercial sales of products, it still must compete in the manufacturing and marketing of such products, areas in which it has no experience.
The COVID-19 pandemic could adversely impact Cleveland BioLabs’ business, operations and clinical development timelines and plans.
In December 2019, a novel strain of coronavirus, COVID-19, was reported to have surfaced in Wuhan, China. Since then, COVID-19 has spread to multiple countries, including the United States, where a national
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emergency was declared, and several European countries. If COVID-19 continues to spread in the United States and worldwide, Cleveland BioLabs may experience disruptions that could severely impact its business, operations, preclinical studies and clinical trials, including:
delays, difficulties or postponement in enrolling and retaining patients in its clinical trials;
delays, difficulties or postponement in clinical site initiation, including difficulties in recruiting clinical site investigators and clinical site staff;
diversion of healthcare resources away from the conduct of clinical trials unrelated to infectious diseases;
interruption of key clinical trial activities, such as clinical trial site monitoring, due to limitations on travel imposed or recommended by federal or state governments, employers and others;
limitations in employee resources that would otherwise be focused on the conduct of its research and development efforts, preclinical studies and clinical trials, including because of sickness of employees or their families or the desire of employees to avoid contact with other individuals; or
inability or difficulty in obtaining additional financing or access the financial markets.
Additionally, 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, Cleveland Biolabs implemented a work-from-home policy for all employees based in its Buffalo, New York headquarters. Under new applicable state orders, Cleveland BioLabs’ offices may be occupied at 50% of their normal capacity if other safety precautions are taken, however, generally very few of its employees have returned to the office.
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 Cleveland BioLabs’ business, research and development efforts, preclinical studies, clinical trials, prospects for regulatory approval of its 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 pace and effectiveness of vaccination efforts, 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 Cleveland BioLabs’ business prospects and the value of its common stock. Furthermore, if Cleveland BioLabs or any of the third parties with whom it engages were to experience or re-experience shutdowns or other business disruptions, Cleveland BioLabs’ ability to conduct its business in the manner and on the timelines presently planned could be materially and negatively impacted, which could have a material adverse effect on its business, financial condition and results of operations.
Cleveland BioLabs’ growth could be limited if Cleveland BioLabs is unable to attract and retain key personnel and consultants.
Cleveland BioLabs’ success depends, in large part, on its ability to identify, hire, integrate, retain, and motivate qualified executive officers and other key employees throughout all areas of its business. Cleveland BioLabs greatly depends on the efforts of its executive officers to manage its operations. However, Cleveland BioLabs currently does not employ a permanent chief executive officer or chief financial officer. Its board of directors is currently undertaking a search for permanent replacement officers. While Cleveland BioLabs has designated its Vice President of Finance as its interim principal executive officer and principal financial officer, its lack of a permanent chief executive officer and chief financial officer may materially and adversely affect Cleveland BioLabs’ business prospects and investor confidence in it, which could cause the trading price of its common stock to decline. In addition, Cleveland BioLabs utilizes highly skilled personnel in operating and supporting its business, as it has limited experience in filing and prosecuting regulatory applications to obtain marketing approval from the FDA or other regulatory authorities. The loss of services of one or more members of Cleveland BioLabs’ management, key employees or consultants could have a negative impact on its business or its ability to expand its research, development and clinical programs. Furthermore, Cleveland BioLabs may be unable to attract and retain additional qualified executive officers and key employees as needed in the future. Cleveland BioLabs currently does not maintain directors’ and officers’ liability insurance, which may make it more difficult for it to retain and attract talented and skilled directors and officers to serve Cleveland BioLabs.
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Additionally, Cleveland BioLabs depends on its scientific, manufacturing, regulatory clinical collaborators and advisors, all of whom have outside commitments that may limit their availability to Cleveland BioLabs. Furthermore, to the extent that Cleveland BioLabs is unable to engage certain collaborators or advisors for certain periods of time due to lack of relevant work or lack of available funds, there is a risk that such collaborators or advisors will not be available to provide services in the future at such time when there is available work and/or funds. In addition, Cleveland BioLabs believes that its future success will depend in large part upon its ability to attract and retain highly skilled scientific, managerial and marketing personnel, particularly as it expands its activities in clinical trials, the regulatory approval process, external partner solicitations and sales and manufacturing. Cleveland BioLabs routinely enters into consulting agreements with its scientific, manufacturing, business development, regulatory, clinical collaborators, advisors, and opinion leaders in the ordinary course of its business. Cleveland BioLabs also enters into contractual agreements with physicians and institutions who recruit patients into its clinical trials on its behalf in the ordinary course of its business. Cleveland BioLabs faces significant competition for this type of personnel and for employees from other companies, research and academic institutions, government entities and other organizations. Cleveland BioLabs cannot predict its success in hiring or retaining the personnel it requires for continued growth.
Cleveland BioLabs may be subject to damages resulting from claims that it, its employees or its consultants have wrongfully used or disclosed alleged trade secrets of their former employers.
Cleveland BioLabs engages as employees and consultants individuals who were previously employed at other biotechnology or pharmaceutical companies, including at competitors or potential competitors. Although no claims against Cleveland BioLabs are currently pending, Cleveland BioLabs may become subject to claims that Cleveland BioLabs or its employees have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of their former employers. Litigation may be necessary to defend against these claims. Even if Cleveland BioLabs is successful in defending against these claims, litigation could result in substantial costs and distract management.
Cleveland BioLabs may incur substantial liabilities from any product liability and other claims if its insurance coverage for those claims is inadequate.
Cleveland BioLabs faces an inherent risk of product liability exposure related to the testing of its product candidates in human clinical trials and will face an even greater risk if the product candidates are sold commercially. An individual may bring a product liability claim against Cleveland BioLabs if one of the product candidates causes, or merely appears to have caused, an injury. If Cleveland BioLabs cannot successfully defend itself against the product liability claim, it will incur substantial liabilities. Regardless of merit or eventual outcome, product liability claims may result in:
decreased demand for its product candidates;
injury to its reputation;
withdrawal of clinical trial participants;
costs of related litigation;
diversion of its management’s time and attention;
substantial monetary awards to patients or other claimants;
loss of revenues;
the inability to commercialize product candidates; and
increased difficulty in raising required additional funds in the private and public capital markets.
Cleveland BioLabs currently has product liability insurance and intend to expand such coverage from coverage for clinical trials to include the sale of commercial products if marketing approval is obtained for any of its product candidates. However, insurance coverage is increasingly expensive. Cleveland BioLabs may not be able to maintain insurance coverage that will be adequate to satisfy any liability that may arise.
From time to time, Cleveland BioLabs may also become subject to litigation, such as stockholder derivative claims or securities fraud claims, including as a result of its pending merger with Cytocom, which could involve
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Cleveland BioLabs’ directors and officers as defendants. Cleveland BioLabs currently does not have director and officer insurance to cover such risk exposure for its directors and officers. Cleveland BioLabs’ certificate of incorporation and bylaws require Cleveland BioLabs to indemnify its current and past directors and officers from reasonable expenses related to the defense of any action arising from their service to Cleveland BioLabs to the fullest extent permitted by the Delaware General Corporation Law, including circumstances under which indemnification is otherwise discretionary. Cleveland BioLabs would be obligated to cover all such expenses for all directors and officers, which may be substantial. Such expenditure could have a material adverse effect on Cleveland BioLabs’ results of operation, financial condition, and liquidity.
Cleveland BioLabs’ former laboratories used, and its subtenants use, certain chemical and biological agents and compounds that may be deemed hazardous and it is subject to various safety and environmental laws and regulations. Cleveland BioLabs’ compliance with these laws and regulations may result in significant costs, which could materially reduce its ability to become profitable.
Until late 2013, Cleveland BioLabs operated laboratories that used hazardous materials, including chemicals and biological agents and compounds that could be dangerous to human health and safety or the environment and it currently subleases these laboratories for operation by other companies, which currently use hazardous materials. As appropriate, Cleveland BioLabs stored these materials and wastes resulting from their use at its laboratory facility pending their ultimate use or disposal and it currently requires that its laboratory sub-lessors do the same. Cleveland BioLabs contracted with a third party to properly dispose of these materials and wastes and its laboratory sub-lessors now manage such contracts. Cleveland BioLabs was and continues to be subject to a variety of federal, state and local laws and regulations governing the use, generation, manufacture, storage, handling and disposal of these materials and wastes. Cleveland BioLabs may incur significant costs if it unknowingly failed to comply with environmental laws and regulations.
Cleveland BioLabs relies significantly on information technology and any failure, inadequacy, interruption or security lapse of that technology, including any cybersecurity incidents, could harm its ability to operate its business effectively.
Despite the implementation of security measures, Cleveland BioLabs’ internal computer systems and those of third parties with which it contracts are vulnerable to damage from cyber-attacks, computer viruses, unauthorized access, natural disasters, terrorism, war and telecommunication and electrical failures. System failures, accidents or security breaches could cause interruptions in Cleveland BioLabs’ operations, and could result in a material disruption of its product development and clinical activities and business operations, in addition to possibly requiring substantial expenditures of resources to remedy. The loss of product development or clinical trial data could result in delays in Cleveland BioLabs’ regulatory approval efforts and significantly increase its costs to recover or reproduce the data. To the extent that any disruption or security breach were to result in a loss of, or damage to, Cleveland BioLabs’ data or applications, or inappropriate disclosure of confidential or proprietary information, Cleveland BioLabs could incur liability and its development programs and the development of its product candidates could be delayed.
Political or social factors may delay or impair Cleveland BioLabs’ ability to market its products.
Entolimod is being developed to treat ARS, which is a disease that may be caused by terrorist acts. The political and social responses to terrorism have been highly charged and unpredictable. Political or social pressures may delay or cause resistance to bringing Cleveland BioLabs’ products to market or limit pricing of its products, which would harm its business. Changes to favorable laws, such as the Project BioShield Act, could have a material adverse effect on Cleveland BioLabs’ ability to generate revenue and could require it to reduce the scope of or discontinue its operations.
Cleveland BioLabs announced in September 2015 that it received two awards from the DoD for the further development of entolimod. Cleveland BioLabs hopes to receive additional funding in the future from U.S. or foreign government agencies for the development of entolimod and its other products. Changes in government budgets and agendas, however, have previously resulted in termination of its contract negotiations and may, in the future, result in future funding being decreased and de-prioritized. In addition, government contracts contain provisions that permit cancellation in the event that funds are unavailable to the government agency. Furthermore, Cleveland BioLabs cannot be certain of the timing of any future funding and substantial delays or cancellations of funding could result from protests or challenges from third parties. If the U.S. government fails
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to continue to adequately fund R&D programs, Cleveland BioLabs may be unable to generate sufficient revenues to continue development of entolimod or continue its other operation. Similarly, if Cleveland BioLabs’ pre-EUA submission for entolimod is authorized by the FDA, but the U.S. government does not place sufficient orders for this product, its future business may be harmed.
Failure to comply with the U.S. Foreign Corrupt Practices Act and similar foreign laws could subject Cleveland BioLabs to penalties and other adverse consequences.
Cleveland BioLabs is required to comply with the U.S. Foreign Corrupt Practices Act (“FCPA”), which prohibits U.S. companies from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business. Foreign companies, including some that may compete with us, are not subject to these prohibitions. Furthermore, foreign jurisdictions in which Cleveland BioLabs operates may have laws that are similar to the FCPA to which Cleveland BioLabs is or may become subject. This may place Cleveland BioLabs at a significant competitive disadvantage. Corruption, extortion, bribery, pay-offs, theft, and other fraudulent practices may occur from time to time in the foreign markets where Cleveland BioLabs conducts business. Although Cleveland BioLabs informs its personnel that such practices are illegal, Cleveland BioLabs can make no assurance that its employees or other agents will not engage in illegal conduct for which Cleveland BioLabs might be held responsible. If Cleveland BioLabs’ employees or other agents are found to have engaged in such practices, it could suffer severe penalties and other consequences that may have a material adverse effect on its business, financial condition and results of operations.
The FCPA also obligates companies whose securities are listed in the U.S. to comply with certain accounting provisions requiring Cleveland BioLabs to maintain books and records that accurately and fairly reflect all transactions of the corporation, including international subsidiaries and to devise and maintain an adequate system of internal accounting controls for international operations.
Compliance with the FCPA and similar foreign anti-bribery laws is expensive and difficult, particularly in countries in which corruption is a recognized problem. In addition, such anti-bribery laws present particular challenges in the biotech or pharmaceutical industry, because, in many countries, hospitals are operated by the government and doctors and other hospital employees may be considered foreign officials.
Risks Related to Conducting Business in Russia
Political, economic and governmental instability in Russia could materially adversely affect Cleveland BioLabs’ operations and financial results.
Panacela Labs, LLC, which is the wholly-owned subsidiary of Panacela, conducts business, including clinical trials, in Russia through Russian legal entities. Also, Rusnano is a Russian joint-stock company created as a private equity and venture capital vehicle by the government of Russia. Panacela Labs, LLC owns the worldwide rights to Mobilan. Rusnano has certain shareholder rights which could block Cleveland BioLabs’ ability to execute strategic transactions such as an asset sale or licensing arrangement. All clinical development activity conducted by these Russian entities was funded by grants from MPT. As such, any political, economic, or governmental instability in Russia could impact future funding, if any, by MPT, Cleveland BioLabs’ access to trial data and its access to intellectual property for out-licensing purposes.
In addition to geopolitical events, other factors, including the steady fall in oil prices, the global strengthening of the U.S. dollar and the Russian Central Bank’s reduction of currency rate support, have negatively affected the value of the Russian ruble relative to the U.S. dollar. Fluctuations in the rates at which the U.S. dollar is exchanged into Russian rubles may result in both foreign currency transaction and translation losses. Cleveland BioLabs is subject to exchange rate fluctuations if it or one of its subsidiaries exchanges one currency into another, in order to conduct cross-border operations, and as Cleveland BioLabs translates ruble denominated assets and liabilities that fluctuate from period-to-period. The former results in a transaction gain/loss that is reflected in its operating results. The latter results in a translation gain/loss reflected in other comprehensive income/loss in equity. Additionally, translation of historical operating results at average exchange rates for respective periods of time will also generate foreign currency translation adjustments that are reflected in its operating results. Presently, Panacela conducts most of its activities in Russia. As such Cleveland BioLabs expects most of the foreign currency fluctuations to be related to accounting translations, versus transaction gains and losses.
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Even before the current events mentioned above, and since the early 1990s, Russia has sought to transform from a one-party state with a centrally planned economy to a democracy with a market economy. As a result of the sweeping nature of various reforms and the failure of some of them, the political system of Russia remains vulnerable to popular dissatisfaction, including demands for autonomy from particular regional and ethnic groups. Current and future changes in the Russian government, major policy shifts or lack of consensus between various branches of the government and powerful economic groups could disrupt or reverse economic and regulatory reforms. Furthermore, the Russian economy is vulnerable to market downturns and economic slowdowns elsewhere in the world, and has experienced periods of considerable instability. Although the Russian economy showed positive trends until 2008, including annual increases in the gross domestic product, a relatively stable currency, strong domestic demand, rising real wages and a reduced rate of inflation, these trends were interrupted by the global financial crisis in late 2008, in which Russia experienced adverse economic and financial effects including a substantial decrease in the growth rate of gross domestic product, depreciation of local currency and a decline in domestic and international demand for its products and services. Economic instability in Russia could materially adversely affect Cleveland BioLabs’ business, financial condition and results of operations.
The current geopolitical instability arising from U.S relations with Russia, and related sanctions by the U.S. government against certain Russian companies and individuals, may have an adverse effect on Cleveland BioLabs.
Political and economic relations between Russia and the U.S., two of the jurisdictions in which Cleveland BioLabs operates, are complex. Recent situations involving Ukraine, Crimea, Iran, Syria, and alleged cyberespionage by the Russian government against the U.S. Democratic National Committee and in connection with the 2016 U.S. presidential election, the cyberespionage effort effected through SolarWinds Inc. that has been alleged to have been perpetrated by Russian state actors, along with the response of the governments of Russia, the U.S., member states of the E.U., the E.U. itself and other nations, have the potential to materially adversely affect Cleveland BioLabs’ operations in Russia through a variety of situations. In particular, due to Russia’s recent military intervention in Ukraine, the United States, Canada and the E.U. have imposed sanctions against Russian officials, certain Russian companies and individuals. These sanctions were designed to affect various elements of Russia’s economy, with a particular focus on defense companies, individuals identified by the U.S. Department of State as being in the “inner circle” of the current Russian president, banks and energy companies. Russia has responded with certain countermeasures, including limiting the import of certain goods from the U.S. and other countries.
There can be no assurance that such sanctions will not be expanded more broadly to impact a greater variety of actors in the Russian economy. If the U.S. government significantly broadens the scope of sanctions against Russia to impose further political and economic costs, and/or the Russian government responds with further counteractions, the operation of Cleveland BioLabs’ direct and indirect Russian subsidiary Panacela Labs, LLC, which performs clinical development work under grants received from the MPT and have development or other intellectual property rights to certain of its drug candidates, may be materially and adversely affected. Furthermore, because the largest holder of Cleveland BioLabs’ outstanding common stock is an investor with ties to Russia, and several Russian citizens and residents serve on its board of directors, its ability to secure and maintain contracts with the U.S. Department of Defense and other U.S. government agencies or departments, from which Cleveland BioLabs received 81.2% and 64.5% of its revenues for the years ended December 31, 2020 and 2019, respectively, may become more difficult, which could cause a material adverse impact on its business, prospects, results of operation, and financial condition.
Emerging markets, such as Russia, are subject to greater risks than more developed markets and financial turmoil in Russia could disrupt Cleveland BioLabs’ business.
Investors in emerging markets, such as Russia, should be aware that these markets are subject to greater risks than more developed markets, including significant economic risks. For example, the Russian economy has periodically experienced high rates of inflation. According to The World Bank, the annual inflation rate in Russia, as measured by the consumer price index, was 7.1% in 2016, 3.7% in 2017, 2.9% in 2018, 4.47 in 2019, and 3.22% in 2020. Periods of higher inflation may slow economic growth. Inflation also is likely to increase some of Cleveland BioLabs’ costs and expenses including the costs for its Russian subsidiary to conduct business operations, including any outsourced product testing costs.
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Prospective investors in Cleveland BioLabs’ common stock should note that emerging markets are subject to rapid change and that the information set forth in its filings with the SEC about its operations in Russia may become outdated relatively quickly.
The legal system in Russia can create an uncertain environment for business activity, which could materially adversely affect Cleveland BioLabs’ business and operations in Russia.
The legal framework in Russia is still under development and large portions of this framework have only recently become operational. The relatively recent enactment of many laws and the lack of consensus about the aims, scope, content, and pace of economic and political reforms have resulted in ambiguities, inconsistencies, and anomalies in the Russian legal system. The enforceability and underlying constitutionality of more recently enacted laws are in doubt, and many new laws remain untested.
As a result, its legal system can be characterized by: inconsistencies between and among laws and governmental, ministerial, and local regulations, orders, decisions, resolutions, and other acts; gaps in the regulatory structure resulting from the delay in adoption or absence of implementing regulations; selective enforcement of laws or regulations, sometimes in ways that have been perceived as being motivated by political or financial considerations; limited judicial and administrative guidance on interpreting legislation; relatively limited experience of judges and courts in interpreting recent commercial legislation; a perceived lack of judicial and prosecutorial independence from political, social and commercial forces; inadequate court system resources; a high degree of discretion on the part of the judiciary and governmental authorities; and underdeveloped bankruptcy procedures that are subject to abuse.
In addition, as is true of civil law systems generally, judicial precedents generally have no binding effect on subsequent decisions. Not all legislation and court decisions in Russia are readily available to the public or organized in a manner that facilitates understanding. Enforcement of court orders can in practice be very difficult. All of these factors make judicial decisions difficult to predict and effective redress uncertain. Additionally, court claims and governmental prosecutions may be used in furtherance of what some perceive to be political or commercial aims.
The untested nature of much of recent legislation in Russia and the rapid evolution of its legal system may result in ambiguities, inconsistencies, and anomalies in the application and interpretation of laws and regulations. Any of these factors may affect Cleveland BioLabs’ ability to enforce its rights under its contracts or to defend itself against claims by others, or result in its being subject to unpredictable requirements. These uncertainties also extend to property rights and the expropriation or nationalization of any of its entities, their assets or portions thereof, potentially without adequate compensation, could materially adversely affect its business, financial condition and results of operations.
Judgments rendered by a court in any jurisdiction outside Russia are likely to be recognized by courts in Russia only if: (i) an international treaty providing for the recognition and enforcement of judgments in civil cases exists between Russia and the country where the judgment is rendered; and/or (ii) a federal law of Russia providing for the recognition and enforcement of foreign court judgments is adopted. No such federal law has been passed and no such treaty exists between the United States and Russia for the reciprocal enforcement of foreign courts’ judgments. In the absence of an applicable treaty or convention providing for the recognition and enforcement of judgments in civil and commercial matters between the United States and Russia, a judgment of a U.S. court may be recognized and enforced in Russia only on the grounds of reciprocity. In each case, reciprocity must be established and, in the absence of a developed court practice, it is difficult to predict whether a Russian court will be inclined to recognize and enforce a U.S. court judgment on the grounds of reciprocity in any particular instance.
Actions by the tax authorities in Russia may result in the sudden imposition of arbitrary or onerous taxes on Cleveland BioLabs’ operations in Russia.
BioLab 612 and Panacela Labs, LLC’s tax liabilities are subject to periodic tax inspections that may result in tax assessments, penalties and interest being claimed from such subsidiaries for prior tax periods. Generally, tax declarations of Russian subsidiaries remain open and subject to audit by tax and/or customs authorities for three calendar years immediately preceding the year in which the decision to conduct an audit is taken. However, the fact that a particular year has been reviewed by tax authorities does not preclude that year from further review or audit during the eligible three-year limitation period by a superior tax authority. Moreover, the Russian
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tax authorities are allowed to carry out repeat field tax audits in connection with the restructuring or liquidation of a taxpayer or if the taxpayer resubmits an adjusted tax return based on which the amount of tax is reduced. The limitation of the tax audit period corresponds to the statute of limitations on the commission of a tax offense, which is also limited to three years from the date on which a tax offense was committed or from the date following the end of the tax period during which the tax offense was committed depending on the nature of the tax offense. The Russian Tax Code provides for the extension of the three-year statute of limitations if the actions of the taxpayer created insurmountable obstacles for the tax audit.
As none of the relevant terms are defined, tax authorities may have broad discretion to argue that a taxpayer has “obstructed”, “hindered,” or “created insurmountable obstacles” with respect to an inspection and may ultimately seek to review and possibly to apply penalties beyond the three-year term. Further, there is no guarantee that the tax authorities will not review compliance with applicable tax law beyond the three-year limitation period. Tax audits may result in additional costs if the relevant authorities conclude that the BioLab 612, Panacela Labs, LLC, or both did not satisfy their tax obligations in any given year. The outcome of these audits may result in significant fines, penalties and enforcement measures which may have a material adverse effect on Cleveland BioLabs’ business, financial condition, results of operations, and prospects.
The tax system in Russia imposes additional burdens and costs on Cleveland BioLabs’ operations there and complicates its tax planning and related business decisions. For example, the tax environment in Russia has historically been complicated by contradictions in Russian tax law and ambiguity in areas such as the deductibility of certain expenses. This uncertainty could result in a greater than expected tax burden and potentially exposes Cleveland BioLabs to significant fines and penalties and enforcement measures, despite its best efforts at compliance. These factors raise the risk of a sudden imposition of arbitrary or onerous taxes on Cleveland BioLabs’ operations in Russia. This could materially adversely affect its financial condition and results of operations.
Selective or arbitrary government action may have an adverse effect on Cleveland BioLabs’ business.
Government authorities have a high degree of discretion in Russia and have at times exercised their discretion selectively or arbitrarily, without hearing or prior notice, and sometimes in a manner that is perceived to be influenced, or may be influenced, by political or commercial considerations. The government also has the power, in certain circumstances, to interfere with the performance of, nullify, or terminate contracts. Selective or arbitrary actions have included withdrawal of licenses, sudden and unexpected tax audits, criminal prosecutions and civil actions. Federal and local government entities have also used common defects in documentation as pretexts for court claims and other demands to invalidate and/or to void transactions, apparently for political purposes. Cleveland BioLabs cannot assure you that regulators, judicial authorities or third parties will not challenge its compliance with applicable laws, decrees and regulations in Russia. Selective or arbitrary government action could have a material adverse effect on Cleveland BioLabs’ business and on the value of its common stock.
Shareholder liability under Russian legislation could cause Cleveland BioLabs to become liable for the obligations of its subsidiaries.
Under Russian law, Cleveland BioLabs may become liable for the obligations of its Russian subsidiaries if it was determined that: (i) Cleveland BioLabs had the ability to make, or exert influence on, decisions for such subsidiaries as a result of its equity interest, the terms of a binding contract with such Russian subsidiary or in any other way; and (ii) the relevant Russian subsidiary concluded the transaction giving rise to the obligations pursuant to Cleveland BioLabs’ instructions or consent. In addition, Cleveland BioLabs may have secondary liability for the obligations of its Russian subsidiaries in a situation where the respective Russian subsidiary becomes insolvent or bankrupt and this was a result of, or was otherwise attributable to, actions of Cleveland BioLabs. This type of liability could result in significant losses, and could have a material adverse effect on Cleveland BioLabs’ business, results of operations or financial position.
Accordingly, in Cleveland BioLabs’ position as a parent of Russian subsidiaries, there is a risk that it could be held liable in certain limited circumstances for the debts of its effective subsidiaries. If this liability is significant, it could materially adversely affect Cleveland BioLabs’ business, financial condition or its results of operations.
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Cleveland BioLabs’ Russian operating entities can be forced into liquidation on the basis of formal noncompliance with certain legal requirements.
Panacela Labs, LLC was organized under the laws of Russia. Certain provisions of Russian law may allow a court to order the liquidation of a locally organized legal entity on the basis of its formal noncompliance with certain requirements during formation, reorganization, or during its operations. Additionally, Russian corporate law allows the government to liquidate a company if its net assets fall below a certain threshold. Similarly, there have also been cases in Russia in which formal deficiencies in the establishment process of a legal entity or noncompliance with provisions of law have been used by courts as a basis for liquidation of a legal entity. Weaknesses in the legal systems of Russia create an uncertain legal environment, which makes the decisions of a court or a governmental authority difficult, if not impossible, to predict. If involuntary liquidation of Panacela Labs, LLC were to occur, such liquidation could materially adversely affect Cleveland BioLabs’ financial condition and results of operations.
Crime and corruption could disrupt Cleveland BioLabs’ ability to conduct its business.
Political and economic changes in Russia in recent years have resulted in significant dislocations of authority. The local and international press has reported the existence of significant organized criminal activity, particularly in large metropolitan centers. In addition, the local and international press has reported high levels of corruption, including the bribing of officials for the purpose of initiating investigations by government agencies. Press reports have also described instances in which state officials have engaged in selective investigations and prosecutions to further the interests of the state and individual officials, as well as private businesses, including competitors and corporate raiders. Corruption in Russia is perceived to be pervasive and, in some cases, worsening. The government in Russia has recently pursued a campaign against corruption. However, there is no assurance that such laws or other laws enacted elsewhere will be applied with any effectiveness by the local authorities and the continuing effects of corruption, money laundering and other criminal activity could have a negative effect on the Russian economy and could materially adversely affect Cleveland BioLabs’ business in Russia.
Risks Relating to Cleveland BioLabs Securities
Cleveland BioLabs largest stockholder has the ability to control its business, which may be disadvantageous to other stockholders.
As of the date of March 31, 2021, Mr. David Davidovich, a venture capital investor, beneficially owns or controls approximately 42% of the voting power of Cleveland BioLabs’ outstanding common stock. As a result of his being the single largest holder of the voting power of Cleveland BioLabs’ outstanding common stock, Mr. Davidovich has the ability to substantially control all matters requiring approval by its stockholders, including the election and removal of directors, amendments to its certificate of incorporation and bylaws, any proposed merger, consolidation or sale of all or substantially all of its assets and other corporate transactions. Mr. Davidovich may have interests that are different from those of other stockholders and may vote in a way with which other stockholders disagree and that may be adverse to other stockholders’ interests. Moreover, this concentration of share ownership makes it extremely difficult for other stockholders to replace directors and management without the consent of Mr. Davidovich. In addition, this significant concentration of share ownership may adversely affect the price prospective buyers are willing to pay for Cleveland BioLabs’ common stock because investors may perceive disadvantages in owning stock in companies with controlling stockholders and may have the effect of delaying, preventing, or deterring a change of control of Cleveland BioLabs and could deprive its stockholders of an opportunity to receive a premium for their company stock as part of a sale of Cleveland BioLabs. Additionally, Cleveland BioLabs’ corporate structure, including the ownership of Mobilan in Panacela, and the licensing of certain of entolimod’s indications to GPI, may deter third parties from entering into collaboration and licensing arrangements with Cleveland BioLabs.
The price of Cleveland BioLabs common stock has been and could remain volatile, which may in turn expose it to securities litigation.
The market price of Cleveland BioLabs common stock has historically experienced and may continue to experience significant volatility. From January 1, 2019 through December 31, 2020, the market price of Cleveland BioLabs’ common stock, which is listed on the NASDAQ Capital Market, fluctuated from a high of $4.26 per share in the second quarter of 2020 to a low of $0.51 in the fourth quarter of 2019. The listing of its
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common stock on the NASDAQ Capital Market does not assure that a meaningful, consistent, and liquid trading market will exist, and in recent years, the market has experienced extreme price and volume fluctuations that have particularly affected the market prices of many smaller companies like Cleveland BioLabs. Cleveland BioLabs’ common stock is thus subject to this volatility in addition to volatility caused by the occurrence of industry and company specific events. Factors that could cause fluctuations include, but are not limited to, the following:
its progress in developing and commercializing its products;
price and volume fluctuations in the overall stock market from time to time;
fluctuations in stock market prices and trading volumes of similar companies;
actual or anticipated changes in its earnings or fluctuations in its operating results or in the expectations of securities analysts;
general economic conditions and trends;
major catastrophic events;
sales of large blocks of its stock;
departures of key personnel;
changes in the regulatory status of its product candidates, including results of its preclinical studies and clinical trials;
status of contract and funding negotiations relating to its product candidates;
events affecting its collaborators;
events affecting its competitors; announcements of new products or technologies, commercial relationships or other events by Cleveland BioLabs or its competitors;
the recent COVID-19 pandemic;
regulatory developments in the U.S. and other countries;
failure of its common stock to be listed or quoted on the NASDAQ Capital Market, another national market system, or any national stock exchange;
changes in accounting principles; and
discussion of Cleveland BioLabs or its stock price by the financial and scientific press and in online investor communities.
In addition, the stock market in general, and the stock price of companies listed on the NASDAQ, and biotechnology companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of these companies. Broad market and industry factors may negatively affect the market price of Cleveland BioLabs’ common stock, regardless of actual operating performance.
As a result of the volatility of its stock price, Cleveland BioLabs could be subject to securities litigation, which could result in substantial costs and divert management’s attention and company resources from its business.
Issuance of additional equity may adversely affect the market price of Cleveland BioLabs’ stock.
Cleveland BioLabs is currently authorized to issue 25,000,000 shares of common stock and 1,000,000 shares of preferred stock. As of this filing, 15,468,945 shares of its common stock were issued and outstanding, Cleveland BioLabs had outstanding warrants to purchase 299,519 shares of its common stock at an average exercise price of $5.62 per share, and options to purchase 67,901 shares of its common stock at an average exercise price of $13.37 per share. To the extent Cleveland BioLabs issues shares of common stock or its outstanding options and warrants are exercised, holders of its common stock will experience dilution.
In the event of any other future issuances of equity securities or securities convertible into or exchangeable for, common stock, holders of Cleveland BioLabs’ common stock may experience dilution. Furthermore, certain
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of Cleveland BioLabs’ outstanding warrants contain provisions that, in certain circumstances, could result in the number of shares of common stock issuable upon the exercise of such securities to increase and/or the exercise price of such warrants to decrease.
Moreover, Cleveland BioLabs’ board of directors is authorized to issue preferred stock without any action on the part of Cleveland BioLabs’ stockholders. Cleveland BioLabs’ board of directors also has the power, without stockholder approval, to set the terms of any such preferred stock that may be issued, including voting rights, conversion rights, dividend rights, preferences over its common stock with respect to dividends or if Cleveland BioLabs liquidates, dissolves, or winds up its business and other terms. If Cleveland BioLabs issues shares of preferred stock in the future that have preference over its common stock with respect to the payment of dividends or upon its liquidation, dissolution or winding up, or if it issues preferred stock with voting rights that dilute the voting power of its common stock, the market price of Cleveland BioLabs’ common stock could decrease. Additionally, the conversion of any preferred stock issued in the future into Cleveland BioLabs’ common stock could result in significant dilution to the holders of its common stock.
The eventual public resale by certain of Cleveland BioLabs’ significant stockholders could have a negative effect on the trading price of its common stock.
In July 2015, Cleveland BioLabs issued an aggregate of 6,716,163 shares of its common stock to Mr. Davidovich and Rusnano. The issuances of these shares were not registered under the Securities Act of 1933, and the shares are only able to be resold pursuant to a separate registration statement or an applicable exemption from registration (under both federal and state securities laws). Contractual restrictions prohibiting Mr. Davidovich from selling his shares have expired and pursuant to the terms of registration rights agreements entered into between Cleveland BioLabs and each of Mr. Davidovich and Rusnano, Cleveland BioLabs has filed a registration statement on Form S-3 with the SEC to register the public offer and resale of the shares held by these stockholders. The registration statement has been declared effective by the SEC and Mr. Davidovich and Rusnano are each able to freely sell some or all of their shares of Cleveland BioLabs’ common stock. If all or a substantial portion of these shares are resold into the public markets under such registration statement or otherwise, such transactions may cause a decline in the trading price of its common stock.
Cleveland BioLabs does not intend to pay dividends for the foreseeable future.
Cleveland BioLabs does not intend to declare or pay any cash dividends in the foreseeable future. Cleveland BioLabs anticipates that it will retain all of its future earnings for use in the development of its business and for general corporate purposes. Any determination to pay dividends in the future will be at the discretion of Cleveland BioLabs’ board of directors. Accordingly, investors must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investments.
Cleveland BioLabs also considers from time to time various strategic alternatives that could involve issuances of additional shares of common stock or shares of preferred stock, including but not limited to acquisitions and business combinations.
If securities or industry analysts do not publish research or reports about its business, or publish negative reports about its business, Cleveland BioLabs’ stock price and trading volume could decline.
The trading market for Cleveland BioLabs’ common stock depends in part on the research and reports that securities or industry analysts publish about Cleveland BioLabs or its business. Cleveland BioLabs does not have any control over these reports and it currently does not have any industry analysts covering Cleveland BioLabs. In the event Cleveland BioLabs does regain analyst coverage, there can be no assurance that analysts will provide favorable coverage. Cleveland BioLabs’ stock price may be adversely impacted by its current lack of analyst coverage as Cleveland BioLabs may have less visibility in the financial markets than other companies in its industry, which may cause declined trading volume and stock price.
Cleveland BioLabs has, in the past, failed to satisfy certain continued listing requirements of the Nasdaq Capital Market and could fail to satisfy those requirements again in the future, which could affect the market price of its common stock and liquidity and reduce its ability to raise capital.
Currently, Cleveland BioLabs’ common stock trades on the Nasdaq Capital Market. During 2019 and 2020, Cleveland BioLabs received notification from Nasdaq informing it of certain listing deficiencies related to the minimum required stockholders’ equity and minimum bid price listing requirements, which led to the issuance of
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delisting notices. Although Cleveland BioLabs has since cured these deficiencies and its common stock continues to trade on the Nasdaq Capital Market, it is possible that Cleveland BioLabs could fall out of compliance again in the future. If Cleveland BioLabs fails to maintain compliance with any Nasdaq listing requirements, its common stock could be delisted from the Nasdaq Capital Market. This could severely limit the liquidity of its common stock and your ability to sell its securities on the secondary market.
Cleveland BioLabs’ operations could be disrupted by natural or human causes beyond its control.
Cleveland BioLabs’ operations are subject to the risk of disruption by hurricanes, severe storms, floods and other forms of severe weather, earthquakes and other natural disasters, accidents, fire, power shortages, geopolitical unrest, war and other military action, terrorist attacks and other hostile acts, public health issues, epidemics or pandemics (including, for example, the recent novel coronavirus outbreak), and other events, such as raw material or supply scarcity, that are beyond its control and the control of the third parties on which it depends. Any of these catastrophic events, whether in the United States or abroad, may have a strong negative impact on the global economy, Cleveland BioLabs’ employees, facilities, suppliers, or potential customers and could materially adversely affect its business, financial condition or results of operations.
Risks Related to Cytocom’s Limited Operating History, Financial Position and Capital Requirements
Cytocom has a limited operating history, making it difficult for potential investors to evaluate the success of its business and assess its future viability.
Cytocom is a clinical-stage biopharmaceutical company with a limited operating history. Cytocom commenced operations in 2013, and its operations to date have been limited to organizing and staffing Cytocom, business planning, raising capital, conducting discovery and research activities, filing patent applications, identifying potential product candidates, undertaking preclinical studies and establishing arrangements with third parties for the manufacture of initial quantities of product candidates and component materials and initiating and conducting a Phase 1 clinical trial. Through its developmental Advanced Immunomodulating Multi-receptor System, or AIMS, platform, Cytocom is advancing, or intends to advance, at least six product candidates in its CYTO-200 and CYTO-400 AIMS programs evaluating noroxymorphone and proenkephalin analogs, respectively, for the treatment of certain cancer, inflammatory, autoimmune, and infectious diseases: CYTO-201, CYTO-202, CYTO-203, CYTO-205, CYTO-401 and CYTO-402. To date, Cytocom has not yet demonstrated the ability to successfully complete Phase 2 or Phase 3 clinical trials, submit a New Drug Application, or NDA, for a product candidate, obtain marketing approvals from the FDA, manufacture a commercial-scale product or arrange for a third party to do so on Cytocom’s behalf, or conduct sales, marketing and distribution activities necessary for successful product commercialization. Consequently, any predictions about Cytocom’s future success or viability may not be as accurate as they could be if Cytocom had a longer operating history.
In addition, as a clinical-stage company, Cytocom may continue to encounter unforeseen expenses, difficulties, complications or delays. Cytocom will need to transition at some point from a company with a research and development focus to a company capable of supporting commercial activities and it may never become successful in doing so.
Cytocom has a history of operating losses, anticipates that it will continue to incur significant losses for the foreseeable future and accordingly, Cytocom’s ability to continue as a going concern is in substantial doubt absent obtaining adequate new debt or equity financings.
Cytocom has incurred significant operating losses since its inception. Cytocom’s net losses were $12.1 million and $3.2 million for the years ended December 31, 2020 and 2019, respectively. Cytocom has incurred an accumulated deficit of approximately $27.6 million from its inception through December 31, 2020, and approximately $5.3 million and $0.6 million for the three months ended March 31, 2021 and 2020, respectively. Cytocom has incurred net losses of approximately $32.9 million from its inception through March 31, 2021. Substantially all of Cytocom’s operating losses have resulted from costs incurred in connection with Cytocom’s research and development programs and from general and administrative costs associated with Cytocom’s operations. Cytocom expects to continue to incur significant expenses and operating losses over the next several years as Cytocom intends to continue to conduct research and development, clinical testing, regulatory compliance activities, manufacturing activities, and, if any of Cytocom’s product candidates are approved, sales and marketing activities that, together with anticipated general and administrative expenses, will
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likely result in Cytocom incurring significant losses for the foreseeable future. Cytocom’s prior losses, combined with expected future losses, have had and will continue to have an adverse effect on Cytocom’s stockholders’ equity and working capital.
Cytocom’s management and auditors have concluded that substantial doubt exists about Cytocom’s ability to continue as a going concern for the next 12 months from the date of the financial statements included in this proxy statement/prospectus. Management intends to fund future operations through additional private or public debt or equity offerings, and may seek additional capital through arrangements with strategic partners or from other sources. Cytocom’s capital resources as of March 31, 2021 are not sufficient to support its planned operations for the next 12 months from the date of the financial statements included in this proxy statement/prospectus.
There can be no assurance that Cytocom will be able to raise sufficient additional capital on acceptable terms or at all. If such additional financing is not available on satisfactory terms, or is not available in sufficient amounts, Cytocom may be required to delay, limit or eliminate the development of business opportunities and its ability to achieve its business objectives and its competitiveness, business, financial condition and results of operations will be materially adversely affected. In addition, the impact of the COVID-19 pandemic on the global financial markets may reduce Cytocom’s ability to access capital, which could negatively affect its liquidity and ability to continue as a going concern. In addition, the perception that Cytocom will not be able to continue as a going concern may cause others to choose not to deal with Cytocom due to concerns about its ability to meet our contractual obligations.
Cytocom currently does not generate revenue from product sales and may never become profitable, or, if Cytocom achieves profitability, it may not be able to sustain it.
To become and remain profitable, Cytocom must succeed in developing and eventually commercializing products that generate significant revenue, including its product candidates for which it has received approval in certain foreign jurisdictions. This will require Cytocom to be successful in a range of challenging activities, including completing clinical trials of its product candidates, obtaining regulatory approval for such product candidates and manufacturing, marketing and selling any products for which Cytocom may obtain regulatory approval. Cytocom is currently only in the preliminary stages of most of these activities and has not initiated a Phase 3 trial for any of its product candidates in the United States.
Even if Cytocom receives regulatory approval of products in its CYTO-200 or CYTO-400 AIMS programs or any other product candidates, there can be no guarantee that Cytocom will generate revenue from such products. Cytocom’s ability to generate revenue from sales of its product candidates depends on a number of factors, including its ability to:
complete research regarding, and nonclinical and clinical development of, Cytocom’s proprietary product candidates;
formulate appropriate dosing protocols and drug preparation methods;
obtain regulatory approvals and marketing authorizations for product candidates for which Cytocom completes clinical trials;
develop sustainable and scalable manufacturing processes, including establishing and maintaining commercially viable supply relationships with third parties;
compliantly launch and commercialize product candidates for which Cytocom obtains regulatory approvals and marketing authorizations, either directly or with a collaborator or distributor;
obtain market acceptance of Cytocom’s product candidates and their routes of administration as viable treatment options;
identify, assess, acquire and/or develop new product candidates;
address any competing technological and market developments;
negotiate and maintain favorable terms in any collaboration, licensing or other arrangements into which Cytocom may enter;
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maintain, protect and expand Cytocom’s portfolio of intellectual property rights, including patents, trade secrets and know-how; and
attract, hire and retain qualified personnel.
In addition, Cytocom has not yet demonstrated an ability to successfully overcome many of the risks and uncertainties frequently encountered by companies in new and rapidly evolving fields, particularly in the biopharmaceutical industry. Because of the numerous risks and uncertainties associated with biopharmaceutical product development, Cytocom is unable to accurately predict the timing or amount of increased expenses or when, or if, it will be able to achieve profitability. Even if Cytocom does achieve profitability, it may not be able to sustain or increase profitability on a quarterly or annual basis. Its failure to become and remain profitable would depress the value of the combined company and could impair the combined company’s ability to raise capital, expand its business, maintain research and development efforts, diversify product candidates or even continue operations.
Cytocom will require substantial additional funding before it can expect to become profitable from any potential future sales of its product candidates. This additional financing may not be available on acceptable terms or at all. Failure to obtain this necessary capital when needed may force Cytocom to delay, limit or terminate its product development efforts or other operations.
The CYTO-200 and CYTO-400 AIMS programs and Cytocom’s other programs of product candidates will require the completion of clinical trials, regulatory review, significant sales and marketing efforts and substantial investment before they can provide Cytocom with any product sales revenue. Cytocom’s operations have consumed substantial amounts of cash since inception. The net cash used for its operating activities was $9.9 million and $240,370 for the years ended December 31, 2020 and 2019, respectively. Cytocom expects its expenses to increase in connection with ongoing activities, particularly as it conducts planned clinical trials for its CYTO-200 and CYTO-400 AIMS programs, continues research and development and initiates clinical trials of other development programs and seeks regulatory approval for current product candidates and any future product candidates Cytocom may develop.
In addition, as Cytocom’s product candidates progress through development and toward commercialization, it will need to make milestone payments to the licensors and other third parties from whom it has in-licensed or acquired its product candidates. Furthermore, if and to the extent Cytocom seeks to acquire or in-license additional product candidates in the future, it may be required to make significant upfront payments, milestone payments, and/or licensing payments.
Cytocom expects to incur significant commercialization expenses related to product manufacturing, marketing, sales and distribution of its product candidates for which it has received regulatory approval in foreign jurisdictions, and for any additional product candidates which it receives regulatory approval. Because the outcome of any clinical trial or preclinical study is highly uncertain, Cytocom cannot reasonably estimate the actual amounts necessary to successfully complete the development and commercialization of its product candidates. Additional capital might not be available when Cytocom needs it and Cytocom’s actual cash requirements might be greater than anticipated. If Cytocom requires additional capital at a time when investment in its industry or in the marketplace in general is limited, Cytocom might not be able to raise funding on favorable terms, if at all. If Cytocom is not able to obtain financing when needed or on terms favorable to Cytocom, Cytocom may need to delay, reduce or eliminate certain research and development programs or other operations, sell some or all of Cytocom’s assets or merge with another entity. Cytocom’s future capital requirements will depend on many factors, including:
the type, scope, progress, expansions, results, costs and timing of, Cytocom’s clinical trials of its product candidates which Cytocom is pursuing or may choose to pursue in the future;
the costs and timing of manufacturing for Cytocom’s product candidates, including commercial manufacturing if any of Cytocom’s product candidates is approved;
the costs, timing and outcome of regulatory review of Cytocom’s product candidates, including the possibility that applicable regulators may require that Cytocom perform more studies than those that are currently expected;
the costs of obtaining, maintaining and enforcing patents and other intellectual property rights;
the number and characteristics of product candidates that Cytocom may in-license and develop;
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the costs associated with hiring additional personnel and consultants as clinical activities increase;
the timing and amount of the milestone or other payments Cytocom must make to the licensors and other third parties from whom it has in-licensed its acquired product candidates;
the costs and timing of establishing or securing sales and marketing capabilities if any product candidate is approved;
Cytocom’s ability to achieve sufficient market acceptance, coverage and adequate reimbursement from third-party payors and adequate market share and revenue for any approved products;
the terms and timing of establishing and maintaining collaborations, licenses and other similar arrangements;
cash requirements of any future acquisitions and/or the development of other product candidates; and
the time and cost necessary to respond to technological and market developments.
Based upon Cytocom’s current operating plan, Cytocom believes that its existing cash and cash equivalents as of December 31, 2020, along with the net cash held by Cleveland BioLabs upon consummation of the merger, will enable the combined company to fund its operating expenses and capital expenditure requirements through to July 2021. Cytocom has based these estimates on assumptions that may prove to be wrong, and Cytocom could use all of its capital resources sooner than currently expected. Cytocom’s forecast of the period of time through which its financial resources will be adequate to support its operations is a forward-looking statement and involves risks and uncertainties, and actual results could vary as a result of a number of factors, including the factors discussed elsewhere in this “Risk Factors” section.
A pandemic, epidemic, or outbreak of an infectious disease, such as the COVID-19 pandemic, may materially and adversely affect Cytocom’s business.
Cytocom is subject to risks related to public health crises such as the COVID-19 pandemic. The COVID-19 pandemic originated in Wuhan, China, in December 2019 and has since spread to multiple countries, including the U.S. and most European countries. The pandemic and government measures taken in response have also had a significant impact, both direct and indirect, on businesses and commerce, as worker shortages have occurred, supply chains have been disrupted, facilities and production have been suspended, and demand for certain goods and services, such as medical services and supplies, has spiked, while demand for other goods and services, such as travel, has fallen. In response to the COVID-19 pandemic, Cytocom has taken precautionary measures intended to help minimize the risk of the virus to its employees, including suspending all non-essential travel worldwide for its employees and prohibiting in-person employee attendance at industry events and in-person work-related meetings, which could negatively affect Cytocom’s business. The extent to which the COVID-19 pandemic may impact Cytocom’s preclinical studies or clinical trial operations, as well as its supply chain, will depend on future developments, which are highly uncertain and cannot be predicted with confidence, such as the duration of the pandemic and the severity of the COVID-19 pandemic.
The COVID-19 pandemic may also affect the operations of Cytocom’s contract manufacturing organizations, or CMOs. This could result in delays in the manufacture of drug supply for clinical trials. The COVID-19 pandemic may also affect employees of third-party CROs located in affected geographies upon which Cytocom relies to carry out its clinical trials. As COVID-19 continues to spread around the U.S. and the globe, Cytocom may experience additional disruptions that could severely impact its business and clinical trials, including:
delays or difficulties in enrolling patients in its planned clinical trials;
delays or difficulties in clinical site initiation or authorizations, including difficulties in recruiting clinical site investigators and clinical site staff;
diversion of healthcare resources away from the conduct of clinical trials, including the diversion of hospitals serving as clinical trial sites and hospital staff supporting the conduct of Cytocom’s clinical trials or absenteeism due to the COVID-19 pandemic that reduces site resources;
interruption of key clinical trial activities, such as clinical trial site monitoring, due to limitations on travel imposed or recommended by federal or state governments, employers and others or interruption of clinical trial subject visits and study procedures, the occurrence of which could affect the integrity of clinical trial data;
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risk that participants enrolled in Cytocom’s clinical trials will acquire COVID-19 while the clinical trial is ongoing, which could impact the results of the clinical trial, including by increasing the number of observed adverse events or patient withdrawals from trials;
limitations in employee resources that would otherwise be focused on conducting clinical trials, including because of sickness of employees or their families or the desire of employees to avoid contact with large groups of people;
delays in clinical sites receiving the supplies and materials needed to conduct clinical trials;
interruption in global shipping that may affect the transport of clinical trial materials, such as investigational drug product used in clinical trials;
changes in local regulations as part of a response to the COVID-19 coronavirus pandemic which may require Cytocom to change the ways in which clinical trials are conducted, which may result in unexpected costs, or to discontinue the clinical trials altogether;
interruptions or delays in preclinical studies due to restricted or limited operations at research and development laboratory facilities;
delays in necessary interactions with local regulators, ethics committees and other important agencies and contractors due to limitations in employee resources or forced furlough of government employees; and
refusal of the FDA to accept data from clinical trials in affected geographies outside the U.S.
Any negative impact COVID-19 has on patient enrollment or treatment or the development of the product candidates in the CYTO-200 and CYTO-400 AIMS programs and Cytocom’s other product candidates could cause costly delays to clinical trial activities, which could adversely affect Cytocom’s ability to obtain regulatory approval for and, if approved, to commercialize the product candidates in its CYTO-200 and CYTO-400 AIMS programs or Cytocom’s other product candidates, increase Cytocom’s operating expenses, and have a material adverse effect on Cytocom’s financial results. The COVID-19 pandemic has also caused significant volatility in public equity markets and disruptions to the U.S. and global economies. This increased volatility and economic dislocation may make it more difficult for Cytocom to raise capital on favorable terms, or at all. Although Cytocom has experienced some impact of the COVID-19 pandemic on its business and operations, it cannot currently predict the scope and severity of any potential business shutdowns or disruptions. To the extent the COVID-19 pandemic adversely affects Cytocom’s business and financial results, it may also heighten many of the other risks described in this “Risk Factors” section, such as those relating to the timing and completion of Cytocom’s clinical trials and its ability to obtain future financing.
Risks Related to the ImQuest Merger
If the proposed acquisition of ImQuest Life Sciences, Inc. is not consummated, Cytocom’s business could suffer.
Cytocom has signed an agreement to acquire the ImQuest Life Sciences, Inc., or ImQuest, which is expected to be completed prior to the Merger. ImQuest is a preclinical CRO that provides services to evaluate the potential of new and novel pharmaceutical products for the treatment and prevention of viruses, bacteria, cancer and inflammatory diseases. The merger agreement has been signed, but the transaction has not closed and may not be completed prior to the closing date of the merger. While Cytocom is currently planning to close the acquisition during the second or third quarter of 2021, the closing may in fact be delayed to some future date or the acquisition may not be completed at all. If the proposed acquisition is not consummated, Cytocom may be subject to a number of material risks, and its business could be materially and adversely affected, as follows:
Cytocom has incurred and expects to continue to incur significant expenses related to the proposed acquisition even if the acquisition is not consummated;
Cytocom’s CROs, CMOs, partners and other investors in general may view the failure to consummate the acquisition as a poor reflection on its business or prospects;
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some of Cytocom’s CROs, CMOs and other business partners may seek to change or terminate their relationships with Cytocom as a result of the proposed acquisition; and
Cytocom’s management team may be distracted from day to day operations as a result of the proposed acquisition.
In addition, if the acquisition is not consummated and Cytocom determines to seek another business combination, it may not be able to find a third party target that is equivalent or more attractive than ImQuest, which could adversely impact Cytocom’s business and operations.
If the conditions to the proposed acquisition are not met, the proposed acquisition may not occur.
Specified conditions must be satisfied or waived to consummate the proposed acquisition of ImQuest. These conditions are set forth in the merger agreement. We cannot assure you that all of the conditions will be satisfied or waived. If the conditions are not satisfied or waived, the proposed acquisition may not occur or will be delayed, and Cytocom may lose some or all of the intended benefits of such acquisition.
Cytocom may encounter difficulties in fully integrating ImQuest into its business and may not fully achieve, or achieve within a reasonable time frame, expected strategic objectives and other expected benefits of the acquisition.
If the acquisition of ImQuest by Cytocom is consummated, the success of the acquisition will depend, in part, on Cytocom’s ability to realize the anticipated growth opportunities and potential synergies and cost savings from the integration of ImQuest with its existing business. There may be substantial difficulties, costs and delays involved in the integration of the ImQuest business with Cytocom’s business, including distracting management from day-to-day operations, potential incompatibility of corporate cultures, and costs and delays in implementing common systems and procedures. In addition, the process of integrating the operations of ImQuest could cause an interruption of, or loss of momentum in, the activities of one or more of the combined businesses and the possible loss of key personnel or business partners. Any one or all of these factors may increase Cytocom’s operating costs or lower Cytocom’s anticipated financial performance. Also, many of these factors are outside of Cytocom’s control. Achieving the anticipated growth opportunities and potential synergies and cost savings of the acquisition will depend on successful integration of the businesses. Cytocom’s failure to fully integrate ImQuest and achieve the expected benefits of the acquisition within a reasonable time frame or at all could have a material adverse effect on Cytocom’s financial condition and results of operations.
If Cytocom successfully acquires ImQuest, the acquired business may underperform relative to expectation.
Following completion of the acquisition of ImQuest, Cytocom may not be able to maintain the levels of revenue, earnings or operating efficiency that ImQuest has achieved or might achieve separately. ImQuest’s business and financial performance are subject to certain risks and uncertainties, including a loss of customers due to those customers competing with Cytocom. Cytocom may be unable to achieve the same growth, revenues and profitability that ImQuest has achieved in the past. Cytocom’s failure to do so could have a material adverse effect on Cytocom’s financial condition and results of operations.
Risks Related to the Development and Regulatory Approval of Cytocom’s Product Candidates
Cytocom is currently pursuing three clinical stage development product candidates, and its business is dependent on the success of all or any of such product candidates.
Cytocom currently has no products that are approved for commercial sale in the U.S. and may never be able to develop marketable products. Cytocom is actively pursuing three clinical stage developmental product candidates in its CYTO-200 and CYTO-400 AIMS programs: CYTO-201, CYTO-205 and CYTO-401, and intends to pursue additional product candidates in the future, including CYTO-202, CYTO-203 and CYTO-204. Cytocom’s most advanced drug candidate, CYTO-201, is focused on the restoration of mucosal healing and intestinal barrier function as an adjunct to the standard of care in pediatric Crohn’s Disease. Subject to discussions with the FDA, Cytocom is currently preparing to initiate a Phase 3, multicenter, randomized, double blind, placebo controlled, parallel group clinical trial to evaluate the efficacy and safety of CYTO-201 in pediatric subjects with active Crohn’s disease in the second half of 2021. Cytocom’s other drug candidates include CYTO-401, an injectable pentapeptide that Cytocom plans to develop as an adjunct to the standard of care therapy to extend the duration of disease remission in patients with pancreatic cancer. Subject to discussions
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with the FDA, Cytocom is pursuing a phase 2 development program for CYTO-401 and plans to initiate a clinical trial in the second half of 2021. Cytocom is in the process of developing CYTO-203 to prevent disease progression in patients with MS. Subject to discussions with the FDA and submission and acceptance of an IND, Cytocom is planning to initiate a phase 2 clinical trial for CYTO-203 in 2022. Cytocom is additionally in the process of developing CYTO-202, a selective immunomodulatory, to reduce the pain associated with fibromyalgia. Subject to discussions with the FDA and submission and acceptance of an IND, Cytocom intends to progress towards phase 2 or 3 clinical development, in the management of fibromyalgia in the second half of 2022. Lastly, Cytocom has received authorization from the FDA to commence a Phase 2 study using CYTO-205 to prevent the advancement of SARS-CoV-2 infected patients from mild to severe disease. We anticipate initiating enrollment of patients in this clinical trial this year.
Cytocom expects that a substantial portion of its efforts and expenditures over the next several years will be devoted to developing the product candidates in the CYTO-200 and CYTO-400 AIMS programs. Accordingly, Cytocom’s business depends heavily on the successful development, regulatory approval, and commercialization the product candidates in the CYTO-200 and CYTO-400 AIMS programs. Cytocom can provide no assurance that these product candidates will receive regulatory approval or be successfully commercialized even if such candidates received regulatory approval. If Cytocom discontinues development of the product candidates in the CYTO-200 and CYTO-400 AIMS programs, or these candidates fail to achieve significant market acceptance, Cytocom may never achieve profitability.
The research, testing, manufacturing, safety, efficacy, recordkeeping, labeling, approval, licensure, sale, marketing, advertising, promotion and distribution of the product candidates in the CYTO-200 and CYTO-400 AIMS programs is, and will remain, subject to comprehensive regulation by the FDA and foreign regulatory authorities. Failure to obtain regulatory approval for the product candidates in the CYTO-200 and CYTO-400 AIMS programs in the U.S. and other major markets around the world will prevent Cytocom from commercializing and marketing these product candidates in such jurisdictions.
Even if Cytocom successfully obtains approval from the FDA and foreign regulatory authorities for the product candidates in the CYTO-200 and CYTO-400 AIMS programs, any approval might contain significant limitations related to use as well as warnings, precautions or contraindications, or requirement for a risk evaluation and mitigation strategy, or REMS. Any such limitations or restrictions could similarly impact any supplemental marketing approvals Cytocom may obtain for the product candidates in the CYTO-200 and CYTO-400 AIMS programs. Furthermore, even if Cytocom obtains regulatory approval for the product candidates in the CYTO-200 and CYTO-400 AIMS programs, it will still need to develop a commercial infrastructure or develop relationships with collaborators to commercialize, establish a commercially viable pricing structure and obtain coverage and adequate reimbursement from third-party payors, including government healthcare programs. If Cytocom, or any future collaborators, are unable to successfully commercialize the product candidates in the CYTO-200 and CYTO-400 AIMS programs, Cytocom may not be able to generate sufficient revenue to continue its business.
Cytocom will not be able to commercialize its current or future product candidates if preclinical studies do not produce successful results or clinical trials do not demonstrate the safety and efficacy of such product candidates.
Before obtaining marketing approval from regulatory authorities for the sale of product candidates in the CYTO-200 and CYTO-400 AIMS programs, or any other product candidates, Cytocom must conduct extensive clinical studies to demonstrate the safety and efficacy of the product candidates in humans. FDA may not accept results from pre-clinical or clinical studies conducted by other parties to support development for Cytocom’s product candidates. If FDA does not accept such results, additional studies may be needed, which could delay further development and approval of Cytocom’s product candidates. In addition, before Cytocom can initiate any clinical trial of preclinical product candidates, it must submit the results of preclinical studies to the FDA along with other information, including information about product candidate chemistry, manufacturing and controls and its proposed clinical trial protocol, as part of an IND application. Cytocom will have to follow the same procedure for each preclinical product candidates which it plans to advance to clinical development, and it may also be required to submit regulatory filings to foreign regulatory authorities to the extent it initiates clinical trials outside of the U.S.
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Cytocom may also experience numerous unforeseen events during, or as a result of, clinical trials that could delay or prevent its ability to receive marketing approval or commercialize Cytocom’s product candidates, including that:
Cytocom may fail to reach an agreement with regulators or IRBs regarding the scope, design, or implementation of clinical trials;
the FDA, comparable foreign regulators or IRBs may not authorize Cytocom to commence a clinical trial, to conduct a clinical trial at a prospective trial site or to amend trial protocols, or such regulators or IRBs may require that Cytocom modify or amend its clinical trial protocols in ways that make further clinical trials impractical or not financially prudent;
Cytocom may experience delays in reaching, or fail to reach, agreement on acceptable clinical trial contracts or clinical trial protocols with prospective trial sites or CROs;
Cytocom may be unable to initiate or complete preclinical studies or clinical trials on time or at all due to the impacts of the COVID-19 pandemic, and the spread of COVID-19 may affect the operations of research sites, CROs, IRBs, or key governmental agencies, such as the FDA, which may delay the development of Cytocom’s current or future product candidates;
the supply or quality of raw materials or manufactured product candidates (whether provided by Cytocom or third parties) or other materials necessary to conduct clinical trials of Cytocom’s product candidates may be insufficient, inadequate or not available at an acceptable cost, or in a timely manner, or Cytocom may experience interruptions in supply;
the number of patients required for clinical trials of Cytocom’s current and future product candidates may be larger than Cytocom anticipates, enrollment in these clinical trials may be slower than Cytocom anticipates or participants may drop out of these clinical trials or be lost to follow-up at a higher rate than Cytocom anticipates;
patients that enroll in Cytocom’s studies may misrepresent their eligibility or may otherwise not comply with the clinical trial protocol, resulting in the need to drop the patients from the study or clinical trial, increase the needed enrollment size for the clinical trial or extend its duration;
clinical trial participants may elect to participate in alternative clinical trials sponsored by Cytocom’s competitors with product candidates that treat the same indications as Cytocom’s product candidates;
Cytocom’s third-party contractors may fail to comply with regulatory requirements or the clinical trial protocol, or meet their contractual obligations to Cytocom in a timely manner, or at all, and Cytocom may be required to engage in additional clinical trial site monitoring to review Cytocom’s contractors’ performance;
Cytocom, regulators, or IRBs may require that Cytocom or its investigators suspend or terminate clinical trials for various reasons, including noncompliance with regulatory requirements or a finding that the participants are being exposed to unacceptable health risks, undesirable side effects, or other unexpected characteristics of the product candidate, or if such undesirable effects are found to be caused by a chemically or mechanistically similar therapeutic or therapeutic candidate;
clinical trials of Cytocom’s current and future product candidates may produce negative or inconclusive results, or Cytocom’s studies may fail to reach the necessary level of statistical significance, and Cytocom may decide, or regulators may require it, to conduct additional clinical trials, analyses, reports, data, or preclinical trials or abandon product development programs;
regulators may revise the requirements for approving Cytocom’s product candidates, or such requirements may not be as Cytocom expects or statutes, regulations clinical trial or site policies could be amended or new ones could be adopted;
the cost of clinical trials of Cytocom’s current and future product candidates may be greater than anticipated or Cytocom may have insufficient funds or resources to pursue or complete certain aspects of its clinical trial program or to do so within the timeframes planned;
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Cytocom may have delays in adding new investigators or clinical trial sites, or it may experience a withdrawal of clinical trial sites;
there may be regulatory questions or disagreements regarding interpretations of data and results, or new information may emerge regarding Cytocom’s current and future product candidates;
the FDA or comparable foreign regulatory authorities may not accept data from studies with clinical trial sites in foreign countries;
the FDA or comparable foreign regulatory authorities may disagree with Cytocom’s proposed indications, fail to approve or subsequently find fault with the manufacturing processes or Cytocom’s manufacturing facilities for clinical and future commercial supplies, and may take longer than Cytocom anticipates to review any regulatory submissions it may make for its current or any future product candidates;
Cytocom may not be able to demonstrate that a product candidate provides an advantage over current standards of care or current or future competitive therapies in development; and
regarding trials managed by Cytocom’s existing or any future collaborators, Cytocom’s collaborators may face any of the above issues, and may conduct clinical trials in ways they view as advantageous to them but potentially suboptimal for Cytocom.
In addition, disruptions caused by the COVID-19 pandemic may increase the likelihood that Cytocom encounters such difficulties or delays in initiating, enrolling, conducting or completing its planned clinical trials. Cytocom could also encounter delays if a clinical trial is suspended or terminated by Cytocom, by the IRBs of the institutions in which such trials are being conducted, by a Data Safety Monitoring Board for such trial or by the FDA or comparable foreign regulatory authorities. Such authorities may impose such a suspension or termination due to a number of factors, including failure to conduct the clinical trial in accordance with regulatory requirements or Cytocom’s clinical protocols, inspection of the clinical trial operations or trial site by the FDA or comparable foreign regulatory authorities resulting in the imposition of a clinical hold, unforeseen safety issues or adverse side effects, failure to demonstrate a benefit from using a drug, changes in governmental regulations or administrative actions or lack of adequate funding to continue the clinical trial. In addition, changes in regulatory requirements and policies may occur, and Cytocom may need to amend clinical trial protocols to comply with these changes. Amendments may require Cytocom to resubmit its clinical trial protocols to IRBs for reexamination, which may impact the costs, timing or successful completion of a clinical trial.
If Cytocom experiences delays in the completion of, or termination of, any clinical trial of its product candidates, the commercial prospects of Cytocom’s product candidates will be harmed, and Cytocom’s ability to generate product revenues from any of these product candidates will be delayed. Moreover, any delays in completing its clinical trials will increase Cytocom’s costs, slow down its product candidate development and approval process and jeopardize Cytocom’s ability to commence product sales and generate revenues.
Clinical drug development involves a lengthy and expensive process with an uncertain outcome, and the results of preclinical studies and early clinical trials are not necessarily predictive of future results. Cytocom’s product candidates may not have favorable results in its planned late-stage clinical trials or receive regulatory approval on a timely basis, if at all.
Clinical drug development is expensive and can take many years to complete, and its outcome is inherently uncertain. Cytocom cannot guarantee that any clinical trials will be conducted as planned or completed on schedule, if at all, and failure can occur at any time during the clinical trial process. Despite promising preclinical or clinical results, any product candidate can unexpectedly fail at any stage of clinical development. The historical failure rate for product candidates in the biopharmaceutical industry is high.
The results from preclinical studies or clinical trials of a product candidate may not predict the results of later clinical trials of the product candidate, and interim results of a clinical trial are not necessarily indicative of final results. Product candidates in later stages of clinical trials may fail to show the desired safety and efficacy traits despite having progressed through preclinical studies and initial clinical trials. In some instances, there can be significant variability in safety and/or efficacy results between different trials of the same product candidate due to numerous factors, including changes in trial procedures set forth in protocols, differences in the size and type of the patient populations, including genetic differences, patient adherence to the dosing regimen and other trial protocols and the rate of dropout among clinical trial participants. Additionally, any future preclinical and
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clinical data may be susceptible to varying interpretations and analyses. A number of companies in the pharmaceutical and biotechnology industries have suffered significant setbacks in advanced clinical trials due to lack of efficacy or adverse safety profiles, notwithstanding promising results in earlier trials.
For the foregoing reasons, Cytocom cannot be certain that its planned clinical trials and preclinical studies will be successful. Any safety concerns observed in any one of Cytocom’s clinical trials could limit the prospects for regulatory approval of its product candidates in those and other indications, which could have a material adverse effect on Cytocom’s business, financial condition and results of operations.
Cytocom may be unable to find safe and effective doses and dose ratios for its product candidates without extensive clinical trials and substantial additional costs, if at all.
Cytocom must select the doses, including the amount, frequency and duration, of each of the active pharmaceutical ingredients included in its product candidates, and the relative amounts, or dose ratio, of these doses. Cytocom’s clinical trials in humans may show that the doses or dose ratios selected based on high throughput screening, animal testing or early clinical trials do not achieve the desired therapeutic effect in humans, or achieve this effect only in a small part of the population. Even if the doses or dose ratios selected show efficacy in humans, the resulting doses or dose ratios of active pharmaceutical ingredients may not have acceptable safety profiles for targeted indications. Furthermore, even if Cytocom believes that its preclinical and clinical studies adequately demonstrate that the doses or dose ratios selected for product candidates are safe and effective in humans, the FDA or other regulatory agencies in the U.S. and foreign jurisdictions may determine that Cytocom’s clinical trials do not support such conclusions. Cytocom may be required to conduct additional long-term clinical studies and provide more evidence substantiating the safety and effectiveness of the doses or dose ratios Cytocom selects in a significant patient population. If Cytocom needs to adjust the doses or dose ratios, it may need to conduct new clinical trials. Cytocom may also be required to make different doses or dose ratios available for different types of patients. All of this may result in significant delays and additional costs or prevent commercialization of Cytocom’s product candidates.
Interim, top-line and preliminary data from Cytocom’s clinical trials that Cytocom announces or publishes from time to time may change as more patient data becomes available and is subject to audit and verification procedures that could result in material changes in the final data.
From time to time, Cytocom may publicly disclose preliminary or topline data from its clinical studies, which is based on a preliminary analysis of then-available data, and the results and related findings and conclusions are subject to change following a more comprehensive review of the data related to the particular study or trial. Cytocom also makes assumptions, estimations, calculations and conclusions as part of its analyses of data, and it may not have received or had the opportunity to fully and carefully evaluate all data. As a result, the preliminary or topline results reported may differ from future results of the same studies, or different conclusions or considerations may qualify such results, once additional data has been received and fully evaluated. Topline data also remains subject to audit and verification procedures that may result in the final data being materially different from the preliminary data Cytocom previously published. As a result, topline data should be viewed with caution until the final data are available.
From time to time, Cytocom may also disclose interim data from its clinical studies. Interim data from clinical trials that Cytocom completes is subject to the risk that one or more of the clinical outcomes may materially change as patient enrollment continues and more patient data become available. Adverse differences between preliminary or interim data and final data could significantly harm Cytocom’s business prospects. Further, disclosure of interim data by Cytocom or by its competitors could result in volatility in the price of the combined company’s common stock following the merger.
Further, others, including regulatory agencies, may not accept or agree with Cytocom’s assumptions, estimates, calculations, conclusions or analyses or may interpret or weigh the importance of data differently, which could impact the value of the particular program, the approvability or commercialization of the particular product candidate or product and Cytocom in general. In addition, the information Cytocom chooses to publicly disclose regarding a particular study or clinical trial is based on what is typically extensive information, and you or others may not agree with what it determines is the material or otherwise appropriate information to include in its disclosure, and any information it determines not to disclose may ultimately be deemed significant with respect to future decisions, conclusions, views, activities or otherwise regarding a particular product, product candidate or Cytocom’s business.
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Enrollment and retention of patients in clinical trials is an expensive and time-consuming process and could be made more difficult or rendered impossible by multiple factors outside of Cytocom’s control.
Identifying and qualifying patients to participate in clinical studies of Cytocom’s product candidates is critical to its success. The timing of completion of clinical trials depends in part on the speed at which Cytocom can recruit patients to participate in testing such product candidates, and Cytocom may experience delays in its clinical trials if it encounters difficulties in enrollment or retention. Patient enrollment and retention in clinical trials depends on many factors, including the size of the patient population, the nature of the trial protocol, the effectiveness of patient recruitment efforts, delays in enrollment due to travel or quarantine policies, or other factors, related to the COVID-19 pandemic, the existing body of safety and efficacy data with respect to the study candidate, the number and nature of competing existing treatments for Cytocom’s target indications, the number and nature of ongoing trials for other product candidates in development for Cytocom’s target indications, patients with pre-existing conditions that preclude their participation in any trial, the proximity of patients to clinical sites and the eligibility criteria for the study. Furthermore, any other negative results Cytocom may report in clinical trials of any of Cytocom’s product candidates in the future may make it difficult or impossible to recruit and retain patients in other clinical trials of those product candidates. Similarly, negative results reported by Cytocom’s competitors about their product candidates may negatively affect patient recruitment in Cytocom’s clinical trials. Delays or failures in planned patient enrollment or retention may result in increased costs, program delays or both, which could have a harmful effect on Cytocom’s ability to develop Cytocom’s product candidates or could render further development impossible.
Use of Cytocom’s product candidates could be associated with side effects, adverse events or other properties or safety risks.
As is the case with pharmaceuticals generally, it is likely that there may be side effects and adverse events associated with Cytocom’s product candidates’ use. Results of Cytocom’s clinical trials could reveal a high and unacceptable severity and prevalence of side effects or unexpected characteristics. Undesirable side effects caused by Cytocom’s product candidates could cause Cytocom or regulatory authorities to interrupt, delay or halt clinical trials and could result in a more restrictive label or the delay or denial of regulatory approval by the FDA or comparable foreign regulatory authorities. The drug-related side effects could affect patient recruitment or the ability of enrolled patients to complete the trial or result in potential product liability claims. Any of these occurrences may harm Cytocom’s business, financial condition, results of operations and prospects significantly.
Moreover, if Cytocom’s product candidates are associated with undesirable side effects in clinical trials or have characteristics that are unexpected, Cytocom may elect to abandon their development or limit their development to more narrow uses or subpopulations in which the undesirable side effects or other characteristics are less prevalent, less severe or more acceptable from a risk-benefit perspective, which may limit the commercial expectations for the product candidate if approved. Cytocom may also be required to modify its study plans based on findings in its future clinical trials.
It is possible that as Cytocom tests its product candidates in larger, longer and more extensive clinical trials, or as the use of these product candidates becomes more widespread if they receive regulatory approval, illnesses, injuries, discomforts and other adverse events that were observed in earlier trials, as well as conditions that did not occur or went undetected in previous trials, will be reported by subjects. If such side effects become known later in development or upon approval, if any, such findings may harm Cytocom’s business, financial condition, results of operations and prospects significantly.
In addition, if one or more of Cytocom’s product candidates receives marketing approval, and Cytocom or others later identify undesirable side effects caused by such products, a number of potentially significant negative consequences could result, including:
regulatory authorities may withdraw, suspend or limit approvals of such product;
Cytocom may be required to recall a product or change the way such product is administered to patients;
regulatory authorities may require additional warnings on the label, such as a “black box” warning or a contraindication;
Cytocom may be required to implement a Risk Evaluation and Mitigation Strategy, or REMS, or create a medication guide outlining the risks of such side effects for distribution to patients;
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Cytocom may be required to change the way a product is distributed or administered, conduct additional clinical trials or change the labeling of a product or be required to conduct additional post-marketing studies or surveillance;
Cytocom could be sued and held liable for harm caused to patients;
sales of the product may decrease significantly or the product could become less competitive;
Cytocom may decide to remove the product from the marketplace; and
Cytocom’s reputation may suffer.
Any of these events could prevent Cytocom from achieving or maintaining market acceptance of the particular product candidate, if approved, and could significantly harm Cytocom’s business, results of operations, financial condition and prospects.
Compensatory arrangements with Cytocom’s scientific advisors or consultants could result in increased regulatory scrutiny and ultimately lead to the delay or denial of marketing approval for Cytocom’s product candidates.
Principal investigators for Cytocom’s clinical trials may serve as scientific advisors or consultants to Cytocom from time to time and receive compensation in connection with such services. Under certain circumstances, Cytocom may be required to report some of these relationships to the FDA or comparable foreign regulatory authorities. The FDA or comparable foreign regulatory authority may conclude that a financial relationship between Cytocom and a principal investigator has created a conflict of interest or otherwise affected interpretation of the study. The FDA or comparable foreign regulatory authority may therefore question the integrity of the data generated at the applicable clinical trial site and the utility of the clinical trial itself may be jeopardized. This could result in a delay in approval, or rejection, of Cytocom’s marketing applications by the FDA or comparable foreign regulatory authority, as the case may be, and may ultimately lead to the denial of marketing approval of one or more of Cytocom’s product candidates.
Disruptions at the FDA, the SEC and other government agencies caused by funding shortages or global health concerns could hinder their ability to hire and retain key leadership and other personnel, or otherwise prevent new or modified products from being developed, approved or commercialized in a timely manner or at all, or otherwise prevent those agencies from performing normal business functions on which the operation of Cytocom’s business may rely, which could negatively impact Cytocom’s business.
The ability of the FDA to review and approve new products can be affected by a variety of factors, including government budget and funding levels, ability to hire and retain key personnel and accept the payment of user fees, and statutory, regulatory, and policy changes, and other events that may otherwise affect the FDA’s ability to perform routine functions. Average review times at the FDA have fluctuated in recent years as a result. In addition, government funding of the Securities and Exchange Commission, or the SEC, and other government agencies on which Cytocom’s operations may rely, including those that fund research and development activities is subject to the political process, which is inherently fluid and unpredictable.
Disruptions at the FDA and other agencies may also slow the time necessary for new drugs to be reviewed and/or approved by necessary government agencies, which would adversely affect Cytocom’s business. For example, in recent years, including in 2018 and 2019, the U.S. government shut down several times and certain regulatory agencies, such as the FDA and the SEC, had to furlough critical employees and stop critical activities. Separately, in response to the COVID-19 pandemic, on March 10, 2020 the FDA announced its intention to postpone most inspections of foreign manufacturing facilities and products, on March 18, 2020, the FDA temporarily postponed routine surveillance inspections of domestic manufacturing facilities. The FDA intends to use this risk-based assessment system to identify the categories of regulatory activity that can occur within a given geographic area, ranging from mission critical inspections to resumption of all regulatory activities. Regulatory authorities outside the U.S. may adopt similar restrictions or other policy measures in response to the COVID-19 pandemic. If a prolonged government shutdown occurs, or if global health concerns continue to prevent the FDA or other regulatory authorities from conducting their regular inspections, reviews, or other regulatory activities, it could significantly impact the ability of the FDA to timely review and process Cytocom’s regulatory submissions, which could have a material adverse effect on Cytocom’s business.
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Risks Related to Government Regulation
Cytocom’s product candidates are subject to extensive regulation and compliance, which is costly and time consuming, and such regulation may cause unanticipated delays or prevent the receipt of the required approvals to commercialize such product candidates.
The clinical development, manufacturing, labeling, storage, record-keeping, advertising, promotion, import, export, marketing and distribution of Cytocom’s product candidates are subject to extensive regulation by the FDA in the U.S. and by comparable foreign regulatory authorities in foreign markets. In the U.S., Cytocom is not permitted to market its product candidates until it receives regulatory approval from the FDA. The process of obtaining regulatory approval is expensive, often takes many years following the commencement of clinical trials and can vary substantially based upon the type, complexity and novelty of the product candidates involved, as well as the target indications and patient population. Approval policies or regulations may change, and the FDA has substantial discretion in the drug approval process, including the ability to delay, limit or deny approval of a product candidate for many reasons. Despite the time and expense invested in clinical development of product candidates, regulatory approval is never guaranteed.
Prior to obtaining approval to commercialize a product candidate in the U.S. or abroad, Cytocom must demonstrate with substantial evidence from adequate and well-controlled clinical trials, and to the satisfaction of the FDA or comparable foreign regulatory authorities, that such product candidates are safe and effective for their intended uses. Results from nonclinical studies and clinical trials can be interpreted in different ways. Even if Cytocom believes the nonclinical or clinical data for product candidates is promising, such data may not be sufficient to support approval by the FDA and comparable foreign regulatory authorities. The FDA or comparable foreign regulatory authorities, as the case may be, may also require Cytocom to conduct additional preclinical studies or clinical trials for Cytocom’s product candidates either prior to or post-approval, or may object to elements of Cytocom’s clinical development program.
The FDA or comparable foreign regulatory authorities can delay, limit or deny approval of a product candidate for many reasons, including:
such authorities may disagree with the scope, design or implementation of Cytocom’s clinical trials;
negative or ambiguous results from Cytocom’s clinical trials or results may not meet the level of statistical significance required by the FDA or comparable foreign regulatory agencies for approval;
serious and unexpected drug-related side effects may be experienced by participants in Cytocom’s clinical trials or by individuals using drugs similar to Cytocom’s product candidates;
the population studied in the clinical trial may not be sufficiently broad or representative to assure safety in the full population for which Cytocom seeks approval;
such authorities may not accept clinical data from trials which are conducted at clinical facilities or in countries where the standard of care is potentially different from that of the U.S.;
Cytocom may be unable to demonstrate that a product candidate’s clinical and other benefits outweigh its safety risks;
such authorities may disagree with Cytocom’s interpretation of data from preclinical studies or clinical trials;
such authorities may have regulatory questions regarding interpretations of data and results and the emergence of new information regarding Cytocom’s product candidates or other products;
such authorities may make requests for additional analyses, reports, data, non-clinical and preclinical studies and clinical trials;
such authorities may not agree that the data collected from clinical trials of Cytocom’s product candidates are acceptable or sufficient to support the submission of an NDA or other submission or to obtain regulatory approval in the U.S. or elsewhere, and such authorities may impose requirements for additional preclinical studies or clinical trials;
such authorities may disagree regarding the formulation, labeling and/or the specifications of Cytocom’s product candidates;
approval may be granted only for indications that are significantly more limited than what Cytocom applies for and/or with other significant restrictions on distribution and use;
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such authorities may find deficiencies in the manufacturing processes or facilities of Cytocom’s third-party manufacturers with which Cytocom contracts for clinical and commercial supplies; or the approval policies;
regulations of such authorities may significantly change in a manner rendering Cytocom or any of Cytocom’s potential future collaborators’ clinical data insufficient for approval; or
such authorities may not accept a submission due to, among other reasons, the content or formatting of the submission.
With respect to foreign markets, approval procedures vary among countries and, in addition to the foregoing risks, may involve additional product testing, administrative review periods and agreements with pricing authorities. In addition, events raising questions about the safety of certain marketed pharmaceuticals may result in increased cautiousness by the FDA and comparable foreign regulatory authorities in reviewing new drugs based on safety, efficacy or other regulatory considerations and may result in significant delays in obtaining regulatory approvals. Any delay in obtaining, or inability to obtain, applicable regulatory approvals would prevent Cytocom or any of Cytocom’s potential future collaborators from commercializing its product candidates.
Of the large number of drugs in development, only a small percentage successfully complete the FDA or foreign regulatory approval processes and are commercialized. The lengthy approval process as well as the unpredictability of future clinical trial results may result in Cytocom’s failing to obtain regulatory approval to market Cytocom’s product candidates, which would significantly harm its business, financial condition, results of operations and prospects.
Even if Cytocom eventually completes clinical trials and receives approval of an NDA or foreign marketing application for Cytocom’s product candidates, the FDA or comparable foreign regulatory authority may grant approval contingent on the performance of costly additional clinical trials, including Phase 4 clinical trials, and/or the implementation of a REMS, which may be required to ensure safe use of the drug after approval. Any delay in obtaining, or inability to obtain, applicable regulatory approval would delay or prevent commercialization of that product candidate and would materially adversely impact Cytocom’s business and prospects.
A Fast Track Designation by the FDA, even if granted for Cytocom’s product candidates, may not lead to a faster development or regulatory review or approval process, and does not increase the likelihood that Cytocom’s product candidates will receive marketing approval.
Cytocom may seek Fast Track Designation for certain of its other product candidates. If a drug is intended for the treatment of a serious or life-threatening condition and the drug demonstrates the potential to address unmet medical needs for this condition, the drug sponsor may apply to the FDA for Fast Track Designation. The FDA has broad discretion whether to grant this designation. Even if Cytocom believes a particular product candidate is eligible for this designation, Cytocom cannot assure you that the FDA would decide to grant it. The FDA may also withdraw Fast Track Designation if it believes that the designation is no longer supported by data from Cytocom’s clinical development program. Even if Cytocom does receive Fast Track Designation for any of its product candidates, such product candidates may not experience faster development, review or approval processes compared to conventional FDA procedures. Many drugs that have received Fast Track Designation have failed to obtain approval.
Cytocom may seek Breakthrough Therapy Designation for some of its product candidates. The designation may not be granted and, even if granted by the FDA, such designation may not lead to a faster development of any product candidate or approval process for any product candidate.
Cytocom may seek a Breakthrough Therapy Designation for some of its product candidates. A breakthrough therapy is defined as a drug that is intended, alone or in combination with one or more other drugs, to treat a serious condition, and preliminary clinical evidence indicates that the drug may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints, such as substantial treatment effects observed early in clinical development. For drugs and biologics that have been designated as breakthrough therapies, interaction and communication between the FDA and the sponsor of the trial can help to identify the most efficient path for clinical development while minimizing the number of patients placed in ineffective control regimens. Drugs designated as breakthrough therapies by the FDA may also be eligible for priority review if supported by clinical data at the time the NDA is submitted to the FDA.
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Designation as a breakthrough therapy is within the discretion of the FDA. Accordingly, even if Cytocom believes that one of Cytocom’s product candidates meets the criteria for designation as a breakthrough therapy, the FDA may disagree and instead determine not to make such designation. Even if Cytocom receives breakthrough therapy designation, the receipt of such designation for a product candidate may not result in a faster development of any product candidate or approval process for product candidate. In addition, even if one or more of Cytocom’s product candidates qualify as breakthrough therapies, the FDA may later decide that the product candidates no longer meet the conditions for qualification or decide that the time period for FDA review or approval will not be shortened.
If the FDA does not conclude that certain of our product candidates satisfy the requirements for the Section 505(b)(2) regulatory approval pathway, or if the requirements for such product candidates under Section 505(b)(2) are not as we expect, the approval pathway for those product candidates will likely take significantly longer, cost significantly more and entail significantly greater complications and risks than anticipated, and in either case may not be successful.
We plan to seek FDA approval through the Section 505(b)(2) regulatory pathway for several of our product candidates. The Drug Price Competition and Patent Term Restoration Act of 1984, also known as the Hatch-Waxman Act, added Section 505(b)(2) to the FDCA. Section 505(b)(2) permits the filing of an NDA where at least some of the information required for approval comes from studies that were not conducted by or for the applicant and for which the applicant has not obtained a right of reference. Section 505(b)(2), if applicable to us under the FDCA, would allow an NDA we submit to the FDA to rely in part on data in the public domain or the FDA’s prior conclusions regarding the safety and effectiveness of approved compounds, which could expedite the development program for our product candidates by potentially decreasing the amount of clinical data that we would need to generate in order to obtain FDA approval. If the FDA does not allow us to pursue the Section 505(b)(2) regulatory pathway as anticipated, we may need to conduct additional clinical trials, provide additional data and information, and meet additional standards for regulatory approval. If this were to occur, the time and financial resources required to obtain FDA approval for these product candidates, and complications and risks associated with these product candidates, would likely substantially increase. We may need to obtain additional funding, which could result in significant dilution to the ownership interests of our then existing stockholders to the extent we issue equity securities or convertible debt. We cannot assure you that we would be able to obtain such additional financing on terms acceptable to us, if at all. Moreover, inability to pursue the Section 505(b)(2) regulatory pathway would likely result in new competitive products reaching the market more quickly than our product candidates, which would likely materially adversely impact our competitive position and prospects. Even if we are allowed to pursue the Section 505(b)(2) regulatory pathway, we cannot assure you that our product candidates will receive the requisite approvals for commercialization.
In addition, notwithstanding the approval of a number of products by the FDA under Section 505(b)(2) over the last few years, certain brand-name pharmaceutical companies and others have objected to the FDA’s interpretation of Section 505(b)(2). If the FDA’s interpretation of Section 505(b)(2) is successfully challenged, the FDA may change its Section 505(b)(2) policies and practices, which could delay or even prevent the FDA from approving any NDA that we submit under Section 505(b)(2). In addition, the pharmaceutical industry is highly competitive, and Section 505(b)(2) NDAs are subject to special requirements designed to protect the patent rights of sponsors of previously approved drugs that are referenced in a Section 505(b)(2) NDA. These requirements may give rise to patent litigation and mandatory delays in approval of our NDAs for up to 30 months or longer depending on the outcome of any litigation. It is not uncommon for a manufacturer of an approved product to file a citizen petition with the FDA seeking to delay approval of, or impose additional approval requirements for, pending competing products. If successful, such petitions can significantly delay, or even prevent, the approval of the new product. However, even if the FDA ultimately denies such a petition, the FDA may substantially delay approval while it considers and responds to the petition. In addition, even if we are able to utilize the Section 505(b)(2) regulatory pathway, there is no guarantee this would ultimately lead to faster product development or earlier approval.
Moreover, even if our product candidates are approved under Section 505(b)(2), the approval may be subject to limitations on the indicated uses for which the products may be marketed or to other conditions of approval, or may contain requirements for costly post-marketing testing and surveillance to monitor the safety or efficacy of the products.
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Recently enacted legislation, future legislation and healthcare reform measures may increase the difficulty and cost for Cytocom to obtain marketing approval for and commercialize its product candidates and may affect the prices Cytocom may set for such products.
In the U.S. and some foreign jurisdictions, there have been a number of adopted and proposed legislative and regulatory changes regarding the healthcare system that could prevent or delay regulatory approval of the product candidates in the CYTO-200 and CYTO-400 AIMS programs or any of Cytocom’s other product candidates, restrict or regulate post-marketing activities and affect Cytocom’s ability to profitably sell any of Cytocom’s product candidates for which it obtains regulatory approval.
In the U.S., the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, or MMA, changed the way Medicare covers and pays for pharmaceutical products. Cost reduction initiatives and other changes to provisions of this legislation could limit the coverage and reimbursement rate that Cytocom receives for any of Cytocom’s approved products. While the MMA only applies to drug benefits for Medicare beneficiaries, private payors often follow Medicare coverage policy and payment limitations in setting their own reimbursement rates. Therefore, any reduction in reimbursement that results from the MMA may result in a similar reduction in payments from private payors.
In March 2010, the Patient Protection and Affordable Care Act, as amended, or, collectively, the ACA, was enacted. The ACA was intended to broaden access to health insurance, reduce or constrain the growth of healthcare spending, enhance remedies against healthcare fraud and abuse, add new transparency requirements for healthcare and health insurance industries, impose new taxes and fees on the health industry and impose additional health policy reforms. The ACA increased manufacturers’ rebate liability under the Medicaid Drug Rebate Program by increasing the minimum rebate amount for both branded and generic drugs and revised the definition of “average manufacturer price,” which may also increase the amount of Medicaid drug rebates manufacturers are required to pay to states. The legislation also expanded Medicaid drug rebates and created an alternative rebate formula for certain new formulations of certain existing products that is intended to increase the rebates due on those drugs. The Centers for Medicare & Medicaid Services, which administers the Medicaid Drug Rebate Program, also has proposed to expand Medicaid rebates to the utilization that occurs in the territories of the U.S., such as Puerto Rico and the Virgin Islands. Further, beginning in 2011, the ACA imposed a significant annual fee on companies that manufacture or import branded prescription drug products and required manufacturers to provide a 50% discount off the negotiated price of prescriptions filled by beneficiaries in the Medicare Part D coverage gap, referred to as the “donut hole.” Legislative and regulatory proposals have been introduced at both the state and federal level to expand post-approval requirements and restrict sales and promotional activities for pharmaceutical products.
There have been significant ongoing judicial, administrative, executive and legislative efforts to modify or eliminate the ACA. For example, the Tax Cuts and Jobs Act of 2017 enacted on December 22, 2017, repealed the shared responsibility payment for individuals who fail to maintain minimum essential coverage under section 5000A of the Internal Revenue Code, commonly referred to as the individual mandate. During his Administration, President Trump issued executive orders which sought to reduce burdens associated with the ACA and modified how it was implemented; President Biden revoked those orders on January 28, 2021. The ACA has been subject to challenges in the courts as well. On December 14, 2018, a Texas U.S. District Court Judge ruled that the ACA is unconstitutional in its entirety because the “individual mandate” was repealed by Congress. On December 18, 2019, the Fifth Circuit U.S. Court of Appeals held that the individual mandate is unconstitutional and remanded the case to the Texas District Court to reconsider its earlier invalidation of the entire ACA. An appeal was taken to the U.S. Supreme Court which heard oral arguments in the case on November 10, 2020. A ruling is expected in 2021.
Other legislative changes have been proposed and adopted since passage of the ACA. The Budget Control Act of 2011, among other things, created the Joint Select Committee on Deficit Reduction to recommend proposals in spending reductions to Congress. The Joint Select Committee did not achieve its targeted deficit reduction of an amount greater than $1.2 trillion for the fiscal years 2012 through 2021, triggering the legislation’s automatic reductions to several government programs. These reductions included aggregate reductions to Medicare payments to healthcare providers of up to 2.0% per fiscal year, which went into effect in April 2013. Subsequent litigation extended the 2% reduction, on average, to 2030 unless additional Congressional action is taken. However, pursuant to the Coronavirus Aid, Relief and Economic Security Act, or CARES Act, the 2% Medicare sequester reductions have been suspended from May 1, 2020 through March 31, 2021 due to
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the COVID-19 pandemic. On January 2, 2013, the American Taxpayer Relief Act was signed into law, which, among other things, reduced Medicare payments to several types of providers, including hospitals, imaging centers and cancer treatment centers, and increased the statute of limitations period for the government to recover overpayments to providers from three to five years.
Further changes to and under the ACA remain possible even as President Biden has signaled plans to build on the ACA and expand the number of people who are eligible for subsidies under it. It is unknown what form any such changes or any law proposed to replace the ACA would take, and how or whether it may affect Cytocom’s business in the future. Cytocom expects that changes to the ACA, the Medicare and Medicaid programs, changes allowing the federal government to directly negotiate drug prices and changes stemming from other healthcare reform measures, especially with regard to healthcare access, financing or other legislation in individual states, could have a material adverse effect on the healthcare industry.
Cytocom expects that the ACA, as well as other healthcare reform measures that have and may be adopted in the future, may result in more rigorous coverage criteria and in additional downward pressure on the price that Cytocom receives for its product candidates and could seriously harm its future revenues. Any reduction in reimbursement from Medicare, Medicaid, or other government programs may result in a similar reduction in payments from private payers. The implementation of cost containment measures or other healthcare reforms may prevent Cytocom from being able to generate revenue, attain profitability or successfully commercialize its product candidates.
Cytocom is not sure whether additional legislative changes will be enacted, or whether the FDA regulations, guidance or interpretations will be changed, or what the impact of such changes on the marketing approvals of Cytocom’s product candidates, if any, may be. In addition, increased scrutiny by the U.S. Congress of the FDA’s approval process may significantly delay or prevent marketing approval, as well as subject Cytocom to more stringent product labeling and post-marketing approval testing and other requirements.
In Europe, the United Kingdom withdrew from the European Union on January 31, 2020. A significant portion of the regulatory framework in the United Kingdom is derived from the regulations of the European Union, and European Union pharmaceutical law remains applicable to the United Kingdom until December 31, 2020. Cytocom cannot predict what consequences the withdrawal of the United Kingdom from the European Union might have on the regulatory frameworks of the United Kingdom or the European Union, or on Cytocom’s future operations, if any, in these jurisdictions.
There have been, and likely will continue to be, legislative and regulatory proposals at the foreign, federal and state levels directed at containing or lowering the cost of healthcare. Cytocom cannot predict the initiatives that may be adopted in the future. The continuing efforts of the government, insurance companies, managed care organizations and other payors of healthcare services to contain or reduce costs of healthcare and/or impose price controls may adversely affect:
the demand for Cytocom’s product candidates, if they obtain regulatory approval;
Cytocom’s ability to receive or set a price that it believes is fair for its products;
Cytocom’s ability to generate revenue and achieve or maintain profitability;
the level of taxes that Cytocom is required to pay; and
the availability of capital.
If adopted, these and other healthcare reform measures may result in additional reductions in Medicare and other healthcare funding, more rigorous coverage criteria, lower reimbursement, and new payment methodologies. This could lower the price that Cytocom receives for any approved product. Any denial in coverage or reduction in reimbursement from Medicare or other government-funded programs may result in a similar denial or reduction in payments from private payors, which may prevent Cytocom from being able to generate sufficient revenue, attain profitability or commercialize its product candidates, if approved.
Cytocom is subject to various foreign, federal, and state healthcare and privacy laws and regulations, and its failure to comply with these laws and regulations could harm its results of operations and financial condition.
Cytocom’s business operations and current and future arrangements with investigators, healthcare professionals, consultants, third-party payors and customers expose Cytocom to broadly applicable foreign,
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federal and state fraud and abuse and other healthcare and privacy laws and regulations. These laws may constrain the business or financial arrangements and relationships through which Cytocom conducts its operations, including how it researches, markets, sells and distributes any products for which Cytocom obtains marketing approval. Such laws include:
the federal Anti-Kickback Statute, which prohibits, among other things, persons or entities from knowingly and willfully soliciting, offering, receiving or providing any remuneration (including any kickback, bribe or certain rebates), directly or indirectly, overtly or covertly, in cash or in kind, in return for, either the referral of an individual or the purchase, lease, or order, or arranging for or recommending the purchase, lease, or order of any good, facility, item or service, for which payment may be made, in whole or in part, under a federal healthcare program such as Medicare and Medicaid. A person or entity does not need to have actual knowledge of the federal Anti-Kickback Statute or specific intent to violate it in order to have committed a violation. In addition, the government may assert that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the civil False Claims Act;
the federal false claims and civil monetary penalties laws, including the civil False Claims Act, which prohibits, among other things, individuals or entities from knowingly presenting, or causing to be presented, to the federal government, claims for payment or approval that are false or fraudulent, knowingly making, using or causing to be made or used, a false record or statement material to a false or fraudulent claim, or from knowingly making or causing to be made a false statement to avoid, decrease or conceal an obligation to pay money to the federal government;
the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, which imposes criminal and civil liability for, among other things, knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program, or knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false statement, in connection with the delivery of, or payment for, healthcare benefits, items or services. Similar to the federal Anti-Kickback Statute, a person or entity does not need to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation;
HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act of 2009, or HITECH, and their implementing regulations, also impose obligations, including mandatory contractual terms, with respect to safeguarding the privacy, security and transmission of individually identifiable health information without appropriate authorization by covered entities subject to the rule, such as health plans, healthcare clearinghouses and certain healthcare providers as well as their business associates that perform certain services for or on their behalf involving the use or disclosure of individually identifiable health information;