PROSPECTUS	As filed pursuant to Rule 424(b)(4)
	Registration Number 333-160648

 

4,366,381 Shares 

 

 

 

CLEVELAND BIOLABS, INC.

Common Stock, $0.005 Par Value

 

This prospectus relates to up to 4,366,381 shares of our common stock that may be offered for sale from time to time by the selling stockholders named in this prospectus. This number represents shares of common stock issuable upon the conversion or exercise of Series D Convertible Preferred Stock, par value $0.005 per share (the “Series D Preferred”) and Common Stock Purchase Warrants (the “Series D Warrants”), which were issued in our private placement that closed on each of February 13, 2009, March 20, 2009, and March 27, 2009. Of these 4,366,381 shares of common stock:

·	3,863,848 shares are issuable upon conversion of the Series D Preferred (which number of shares is calculated based on the conversion price of the Series D Preferred of $1.23, which will be effective as of February 13, 2010); and

 

·	502,533 shares are issuable upon exercise of Series D Warrants.

All of these shares of common stock may be sold by the selling stockholders named in this prospectus, or their respective transferees, pledgees, donees or successors-in-interest. The selling stockholders will receive all proceeds from the sale of the shares of our common stock being offered in this prospectus. We are registering the offer and sale of the shares of common stock to satisfy registration rights that we have granted. The shares of common stock to which this prospectus relates may be offered and sold from time to time directly by the selling stockholders or alternatively through ordinary brokerage transactions directly to market makers of our shares or through any other means described in “Plan of Distribution” beginning on page 21. The shares of common stock may be sold in one or more transactions, at fixed prices, at prevailing market prices at the time of sale or at negotiated prices.

 

Our common stock is quoted on the Nasdaq Capital Market under the symbol “CBLI.” The last reported sales price of our common stock on the Nasdaq Capital Market on October 23, 2009 was $4.11 per share.

 

Investing in our common stock involves a high degree of risk. See “Risk Factors” on page 6 and other information included and incorporated by reference in this prospectus for a discussion of the factors you should carefully consider before deciding to buy shares of our common stock.

 

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

 

The date of this prospectus is October 26, 2009.

 

 

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The table below describes the value of payments made, or that could potentially be made, by the Company to selling stockholders, their affiliates and any persons with whom selling stockholders have a contractual relationship regarding the transaction. All of the payments made relate to compensation and expense reimbursement negotiated with the placement agent (and its designees)  in the transaction. The final category in the table below represents the maximum potential liquidated damages amount payable under certain provisions of the Registration Rights Agreements. This amount is not the only potential liquidated damages or penalty amount in connection with the Series D transaction, but is the only such amount that is currently ascertainable. A full discussion of the other potential liquidated damages and penalty amounts appears after the following table and the footnotes thereto.

PAYMENTS OR POTENTIAL PAYMENTS TO SELLING STOCKHOLDERS, AFFILIATES OF SELLING STOCKHOLDERS, OR ANY PERSON WITH WHOM SELLING STOCKHOLDERS HAVE A CONTRACTUAL RELATIONSHIP
Selling Stockholders, Affiliates of Selling Stockholders, or Any Person with Whom Selling Stockholders Have a Contractual Relationship		Cash Payments ($)				Value of Payments in Agent Warrants (1) ($)				Totals ($)
Garden State Securities, Inc. (2)			343,190.70				531,576.35				874,767.05
Wunderlich Securities Inc. (3)			207,500.00				315,572.10				523,072.10
Hallmark Investments (4)			38,400.00				64,021.05				102,421.05
Feldman, Weinstein & Smith Legal Fees for Counsel to Placement Agent			27,500.00			─					27,500.00
Maximum Liquidated Damages Payable Pursuant to Registration Rights Agreements (5)			814,246.07			─					814,246.07
TOTALS ($)			1,430,836.77				911,169.50				2,342,006.27

1.  Unless otherwise noted, the value of the Agent Warrants is calculated based on the closing price of our common stock on March 27, 2009 (the date of issuance of the Agent Warrants), as quoted on the Nasdaq Capital Market, of $2.35.

2.  In consideration for its services as placement agent, Garden State Securities, Inc. was entitled to receive Agent Warrants exercisable for common stock equal to 10% of the aggregate number of shares of common stock for which the Series D Preferred and Series D Warrants were convertible or exercisable in the transaction.  In addition to the Agent Warrants, Garden State Securities was entitled to cash compensation equal to 10% of the Company’s gross proceeds from the transaction. Garden State Securities was entitled to designate recipients of its Agent Warrants and to engage sub-placement agents who would receive an allocable portion of the Agent Warrants and cash compensation. As a result, after all these designations and allocations, Garden State Securities received $343,190.70 in cash payments (including $22,500 of expense reimbursement under the Agent Agreement) and Garden State and its designees received Agent Warrants exercisable for 226,207 shares of common stock (including an Agent Warrant exercisable for 10 shares of common stock that was issued on March 20, 2009, and which is thus valued at the closing price of our common stock on that date, as quoted on the Nasdaq Capital Market, of $1.34).

 

3.  In consideration for its services as sub-placement agent, Wunderlich Securities Inc. received $207,500.00 in cash payments and Wunderlich and its designees received Agent Warrants exercisable for 134,286 shares of common stock.

4.  In consideration for its services as sub-placement agent, Hallmark Investments received $38,400.00 in cash payments and Hallmark and its designees received Agent Warrants exercisable for 27,243 shares of common stock.

5.  The Registration Rights Agreements provide for liquidated damages in a monthly amount equal to 1% of the aggregate purchase price paid by a selling stockholder (up to a maximum of 15% of the aggregate subscription amount paid by such selling stockholder) for any unregistered shares of common stock (but not shares underlying the Series D Warrants) which are not registered by reason of any of the following events: (i) the initial registration statement is not first filed on or prior to its filing deadline, which was July 27, 2009; (ii) the Company fails to file a request for acceleration of effectiveness of a registration statement required under the Registration Rights Agreements (a "Required Registration Statement") within five trading days after the Company is advised by the SEC that the registration statement will not be reviewed or not be subject to further review; (iii) prior to effectiveness of any Required Registration Statement, the Company fails to file a pre-effective amendment or otherwise respond to comments by the SEC within 20 business days after receipt of comments from the SEC; (iv) a Required Registration Statement covering resale of the initial shares is not declared effective within 90 days of stockholder approval, which was received June 25, 2009, or 180 days of stockholder approval if the Required Registration Statement is reviewed by the SEC; (v) after the effective date of any Required Registration Statement, the Required Registration Statement ceases to be effective for more than 15 consecutive days or more than an aggregate of 30 days in any 12 month period; or (vi) the Company fails to remain in compliance with the public information requirements of Rule 144(c) of the Securities Act. The $814,246.07 presented in the table above is calculated as the aggregate subscription amounts paid by all selling stockholders ($5,428,307) multiplied by 15%.

 

In addition to the payments described above, we may from time to time deposit funds into a sinking fund account, which funds may be used to redeem the Series D Preferred on a pro rata basis. The Series D Certificate of Designation requires us to contribute funds to such an account if we receive any revenues from licensing certain intellectual property or if we receive awards from government agencies for certain purposes, or we can choose to voluntarily allocate funds to such account. After the later of (i) the six month anniversary of our initial contribution to the sinking fund, or (ii) the effectiveness of this registration statement, we are required to provide notice to the holders of the Series D Preferred no more than once every six months regarding the amount of cash, if any, in the sinking fund. Each holder of Series D Preferred then has the right to have us redeem the holder's shares of Series D Preferred on a pro rata basis, which redemption shall occur at 115% of the aggregated stated value of the shares of Series D Preferred prior to or on February 13, 2010, or at 120% of the aggregated stated value of the Series D Preferred thereafter.  At present time, we have not deposited any funds into the sinking fund account and have not been obligated to do so. We have the intention of making any payments from such sinking fund account in accordance with our obligation, and because these funds will be required to be set aside in the account, we have a reasonable basis to believe that we will have the financial ability to do so. Except as set forth above, we do not anticipate making any other payments to the selling stockholders or any of their affiliates in the first year following the sale of the Series D Preferred and the Series D Warrants.

Each of the Securities Purchase Agreements and the Registration Rights Agreements also contain provisions requiring the Company to pay liquidated damages to the selling stockholders if the Company fails to effectuate certain covenants within the prescribed period of time.  For example, the Securities Purchase Agreements provide that if a purchaser holds certificates for shares of common stock bearing a legend noting that such shares are subject to transfer restrictions under the Securities Act of 1933, and the rules and regulations promulgated thereunder, as amended (the "Securities Act")  and such shares become subject to an effective registration statement or can be sold pursuant to an exemption from registration, the selling stockholder may request that the Company remove the legends within three trading days after the purchaser has submitted all required documentation for the conversion.  If the shares are not so delivered by the Company, liquidated damages accrue at the rate of $10 per trading day (increasing to $20 per trading after five trading days) per $1,000 in common stock submitted for each trading day after the trading day on which the shares were to be delivered.  The Securities Purchase Agreements also impose liquidated damages in the amount of 1.5% of a selling stockholder's entire subscription amount should the Company fail to be in compliance with the public information requirements of Rule 144(c) of the Securities Act which failure results in a delay or a reduction in the ability of the purchaser to sell its securities. The liquidated damages provisions contained in the Registration Rights Agreements are discussed in footnote 5 to the table above.

 

 

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The table below describes the total possible profit the selling stockholders could realize as a result of the conversion/exercise discount for the shares of common stock underlying the Series D Preferred and the Series D Warrants/Agent Warrants as of each Closing Date.

 

POTENTIAL PROFITS ON CONVERSION OF SERIES D PREFERRED AND EXERCISE OF SERIES D WARRANTS/AGENT WARRANTS

 

Closing Date		Market Price Per Share of Common Stock on date of Issuance (1) ($)				Conversion Price of Series D Preferred (2) ($)				Exercise Price of Series D Warrants / Agent Warrants (3) ($)				Total Possible Shares of Common Stock Underlying Series D Preferred (4)				Total Possible Shares of Common Stock Underlying Series D Warrants / Agent Warrants				Combined Market Price of Total Possible Shares Underlying Series D Preferred and Series D Warrants / Agent Warrants ($)				Combined Conversion / Exercise Price of Total Possible Shares Underlying Series D Preferred and Series D Warrants / Agent Warrants ($)				Total Possible Profit the Selling Stockholders Could Realize from Conversion / Exercise Discount ($)
2/13/2009 (5)			2.95				1.40				1.60				2,050,364				1,215,543				9,634,425.65				4,815,378.40				4,819,047.25
3/20/2009 (6)			1.34				1.40				1.60				3,539,285				2,098,277				7,554,333.08				8,312,242.20				-757,909.12
3/27/2009 (7)			2.35				1.40				1.60				950,605				951,302				4,469,481.45				2,852,930.20				1,616,551.25
AGGREGATE TOTALS		─				─				─					6,540,254				4,265,122				21,658,240.18				15,980,550.80				5,677,689.38

 

 

1.  The market price per share of common stock underlying the Series D Preferred and the Series D Warrants/Agent Warrants is based on the closing prices of our common stock on February 13, 2009, March 20, 2009, and March 27, 2009, as quoted on the Nasdaq Capital Market, of $2.95, $1.34, and $2.35, respectively.

 

2.  The conversion price of the Series D Preferred is subject to adjustment for events such as dilutive issuances, stock splits, stock dividends, reclassifications, or similar events.  This could result in an increase in the number of shares of common stock underlying the Series D Preferred.  In addition, the conversion price of the Series D Preferred is subject to automatic adjustments as explained below in footnote 4.

 

3.  The exercise price of the Series D Warrants and the Agent Warrants is subject to adjustment for events such as dilutive issuances, stock splits, stock dividends, reclassifications or similar events.  In the case of stock splits or stock dividends, this could result in an increase in the number of shares of common stock underlying the Series D Warrants/Agent Warrants. In addition, the Series D Warrants and Agent Warrants may be exercised on a “cashless” basis if after the earlier of (i) the one year anniversary of the purchase date and (ii) the completion of the then applicable holding period required by Rule 144, an effective registration statement covering the shares of common stock underlying the Series D Warrants and Agent Warrants is not effective.

 

4.  The total possible shares of common stock underlying Series D Preferred is based on a conversion price of $0.83, as calculated in accordance with Section 6(b) of the Series D Certificate of Designation, which provides that (i) on the six month anniversary of the original issue date (i.e., August 13, 2009, or the “Initial Adjustment Date”), the conversion price reduced to equal 95% of the then conversion price (i.e., $1.40 * 0.95 = $1.33), and (ii) on each three month anniversary of the Initial Adjustment Date until maturity of the Series D Preferred, the then conversion price shall be reduced by the product of (a) the initial conversion price of the Series D Preferred ($1.85) and (b) 2.5%, thus equating to a reduction of $0.05 (i.e., $1.85 * .025) on each three month anniversary of the Initial Adjustment Date. The Series D Preferred mature on February 13, 2012, at which time the conversion price will be $0.83, barring any adjustments other than the automatic adjustments described in the foregoing sentence.

5.  The table above reflects a conversion price of the Series D Preferred of $1.40 and an exercise price of the Series D Warrants/Agent Warrants of $1.60 as of February 13, 2009. However, the actual conversion and exercise prices of these securities, as of the February 13, 2009 closing, were $1.85 and $2.60, respectively.  The prices were adjusted to $1.40 and $1.60 after the February 13, 2009 closing pursuant to certain amendment and waiver agreements entered into by the Company and the investors.  If the February 13, 2009 entry in the table above were prepared using the original conversion price of $1.85 for the Series D Preferred and the original exercise price of $2.60 for the Series D Warrants/Agent Warrants, the combined conversion/exercise price of total possible shares underlying the Series D Preferred and Series D Warrants/Agent Warrants would be $6,953,585.20 instead of $4,815,378.40, and the total possible profit the selling stockholders could realize from the conversion/exercise discount would be $2,680,840.45 instead of $4,819,047.25. On this basis, the aggregate total possible profit the selling stockholders could realize from the conversion/exercise discount would be $3,539,482.58 instead of $5,677,689.38.

 

6.  The March 20, 2009 entry for “Total Possible Shares of Common Stock Underlying Series D Warrants/Agent Warrants” includes 10 shares of common stock underlying an Agent Warrant with an exercise price of $1.60 per share and a market price of $1.34 per share, yielding a total possible profit of -$2.60. The holder of this Agent Warrant is not a selling stockholder on this registration statement.

7.  The March 27, 2009 entry for “Total Possible Shares of Common Stock Underlying Series D Warrants/Agent Warrants” includes 387,726 shares of common stock underlying Agent Warrants with an exercise price of $1.60 per share and a market price of $2.35 per share, yielding a total possible profit of $290,794.50. The holders of these Agent Warrants are not selling stockholders on this registration statement.

 

 

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The Company’s relationship and arrangements during the past three years with the selling stockholders, any affiliates of the selling stockholders, or any person with whom any selling stockholder has a contractual relationship are limited to (i) the Company’s entry into an Agent Agreement with GSS, pursuant to which GSS served as placement agent for the Series D transaction, and (ii) participation by certain selling stockholders in previous private placements. With regard to the latter, the following persons were participants in our sale of Series A Preferred Stock, consummated on March 15, 2005:  Robert Cohen, Bear Stearns Securities Corp. Custodian for Stuart Schapiro IRA (an affiliate of JPMCC FBO Stuart Schapiro JMPCC Master Defined Cont Money Purchase Pension Plan), F Berdon Co. LP (an affiliate of Berdon Ventures LLC), and Philip and Maxine Patt. In addition, the following persons were participants in our sale of Series B Preferred Stock, consummated on March 16, 2007:  J.S.A. Investments, LLC, TCMP3 Partners, Robert Cohen, F Berdon Co. LP (an affiliate of Berdon Ventures LLC), and Iroquois Master Fund Ltd. The tables below describe in further detail prior securities transactions between us and those selling stockholders.

 

SERIES A PARTICIPATING CONVERTIBLE PREFERRED STOCK ("SERIES A PREFERRED")

 

Date of Transaction		Shares of Common Stock Outstanding Prior to Transaction (1)				Shares of Common Stock Outstanding Prior to Transaction Held by Persons other than Selling Stockholders, Affiliates of the Company, and Affiliates of Selling Stockholders (2)				Shares Issued or Issuable to Selling Stockholders or Affiliates of Selling Stockholders in Connection with the Transaction (3)				Shares Issued or Issuable to Selling Stockholders or Affiliates of Selling Stockholders in Connection with the Transaction as a Percentage of Shares Outstanding Prior to the Transaction Held by Persons other than Selling Stockholders, Affiliates of the Company, and Affiliates of Selling Stockholders				Market Price per Share of Common Stock Prior to the Transaction (4)				Current Market Price per Share of Common Stock (5)
March 15, 2005			5,960,000				1,043,000				187,500				17.98	%		$	2.00			$	4.11

 

Shares Issued or Issuable to Each Selling Stockholder or Each Affiliate of Selling Stockholders in Connection with the Transaction:

 

Name		Shares Issued or Issuable in Connection with the Transaction				Shares Issued or Issuable in Connection with the Transaction as a Percentage of Shares Outstanding Prior to the Transaction Held by Persons other than Selling Stockholders, Affiliates of the Company, and Affiliates of Selling Stockholders
Robert Cohen			75,000				7.19	%
Bear Stearns Securities Corp. Custodian for Stuart Schapiro IRA			12,500				1.20	%
F Berdon Co. LP			75,000				7.19	%
Philip Patt and Maxine Patt			25,000				2.40	%
Total			187,500				17.98	%

 

1.  There were 5,960,000 shares of common stock outstanding prior to consummation of the sale of Series A Preferred.

 

2.  Excludes 4,917,000 shares held by executive officers of the Company and the Cleveland Clinic Foundation. At the time of the transaction, no shares were held by selling stockholders or affiliates of selling stockholders.

 

3.  Shares issued in the transaction were Series A Preferred, all of which converted into common stock automatically on a one-to-one basis upon the Company’s initial public offering.

 

4.  The Company was not a publicly traded company at the time of the Series A transaction.  The purchase price of the Series A Preferred was $2.00 per share.

 

5.  Based on the closing price of our common stock on October 23, 2009, as quoted on the Nasdaq Capital Market, of $4.11.

 

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SERIES B CONVERTIBLE PREFERRED STOCK ("SERIES B PREFERRED") AND SERIES B WARRANTS

 

Date of Transaction		Shares of Common Stock Outstanding Prior to Transaction (1)				Shares of Common Stock Outstanding Prior to Transaction Held by Persons other than Selling Stockholders, Affiliates of the Company, and Affiliates of Selling Stockholders (2)				Shares Issued or Issuable to Selling Stockholders or Affiliates of Selling Stockholders in Connection with the Transaction (3)				Shares Issued or Issuable to Selling Stockholders or Affiliates of Selling Stockholders in Connection with the Transaction as a Percentage of Shares Outstanding Prior to the Transaction Held by Persons other than Selling Stockholders, Affiliates of the Company, and Affiliates of Selling Stockholders				Market Price per Share of Common Stock Prior to the Transaction (4)				Current Market Price per Share of Common Stock (5)
March 16, 2007			11,889,099				6,873,149				878,142				12.78	%		$	10.45			$	4.11

 

Shares Issued or Issuable to Each Selling Stockholder or Each Affiliate of Selling Stockholders in Connection with the Transaction, as of the date of the transaction:

 

Name		Shares Issued or Issuable in Connection with the Transaction				Shares Issued or Issuable in Connection with the Transaction as a Percentage of Shares Outstanding Prior to the Transaction Held by Persons other than Selling Stockholders, Affiliates of the Company, and Affiliates of Selling Stockholders
J.S.A. Investments, LLC (6)			30,000				0.44	%
TCMP3 Partners (7)			303,000				4.41	%
Robert Cohen (8)			107,142				1.56	%
F Berdon Co. LP (9)			63,000				0.92	%
Iroquois Master Fund Ltd. (10)			375,000				5.46	%
Total			878,142				12.78	%

 

1.  There were 11,889,099 shares of common stock outstanding prior to consummation of the sale of Series B Preferred.

 

2.  Calculated as the 11,889,099 shares of common stock outstanding prior to the transaction less the following shares of common stock outstanding prior to the transaction:  (i) 4,917,000 shares held by executive officers of the Company and the Cleveland Clinic Foundation, (ii) 88,946 shares held by Robert Cohen, and (iii) 10,004 shares held by F Berdon Co. LP.

 

3.  Shares issued in the transaction were shares underlying Series B Preferred and Series B Warrants.

 

4.  Based on the closing price of our common stock on March 15, 2007, as quoted on the Nasdaq Capital Market, of $10.45.

 

5.  Based on the closing price of our common stock on October 23, 2009, as quoted on the Nasdaq Capital Market, of $4.11.

 

6.  Shares of common stock issued consists of 20,000 shares underlying Series B Preferred and 10,000 shares underlying a Series B Warrant.

 

7.  Shares of common stock issued consists of 202,000 shares underlying Series B Preferred and 101,000 shares underlying Series B Warrants.

 

8.  Shares of common stock issued consists of 71,428 shares underlying Series B Preferred and 35,714 shares underlying a Series B Warrant.

 

9.  Shares of common stock issued consists of 42,000 shares underlying Series B Preferred and 21,000 shares underlying a Series B Warrant.

 

10.  Shares of common stock issued consists of 250,000 shares underlying Series B Preferred and 125,000 shares underlying a Series B Warrant.

 

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Some of the selling stockholders participated in our private placement of Series B Preferred and Series B Warrants on March 16, 2007. The table below describes, as of the date of that transaction, the total possible profit those selling stockholders could realize as a result of the conversion/exercise discount for the shares of common stock underlying the Series B Warrants. All outstanding shares of Series B Preferred, by their own terms, were automatically converted into common stock on September 16, 2009. Thus, we no longer have any Series B Preferred outstanding.

 

POTENTIAL PROFITS FROM OTHER SECURITIES HELD BY THE SELLING STOCKHOLDERS

 

Name of Selling Stockholder		Market Price Per Share of Common Stock as of the Date of Sale (1) ($)				Applicable Conversion / Exercise Price as of the Date of Sale (2) ($)				Total Possible Shares of Common Stock Underlying Applicable Security as of the Date of Sale (3)				Combined Market Price of Total Possible Shares Underlying Applicable Security as of the Date of Sale ($)				Combined Conversion/Exercise Price of Total Possible Shares Underlying Applicable Security as of the Date of Sale ($)				Total Possible Profit the Selling Stockholders Could Realize from Conversion / Exercise Discount as of the Date of Sale ($)
Series B Warrants, issued March 16, 2007:
J.S.A. Investments, LLC			10.19				10.36				60,000				611,400.00				621,600.00				-10,200.00
TCMP3 Partners			10.19				10.36				101,000				1,029,190.00				1,046,360.00				-17,170.00
Robert Cohen			10.19				10.36				35,714				363,925.66				369,997.04				-6,071.38
F Berdon Co. LP			10.19				10.36				21,000				213,990.00				217,560.00				-3,570.00
Iroquois Master Fund Ltd.			10.19				10.36				125,000				1,273,750.00				1,295,000.00				-21,250.00
AGGREGATE TOTALS		─				─					342,714				3,492,255.66				3,550,517.04				-58,261.38

 

1.  The market price per share of common stock underlying the applicable securities is based on the closing price of our common stock on March 16, 2007, as quoted on the Nasdaq Capital Market, of $10.19.

 

2.  The exercise price of the Series B Warrants is subject to adjustment for events such as dilutive issuances, stock splits, stock dividends, reclassifications, or similar events.  This could result in an increase in the number of shares of common stock underlying the Series B Warrants.

 

3.  The shares in this column list the Series B Warrants currently held by the selling stockholders, and reflect acquisitions and dispositions of those securities by the selling stockholders after the Series B transaction.

 

 

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The table below compares each of (1) the payments made by us in connection with the Series D transaction, and (2) the total possible profit that the selling stockholders could realize as a result of the conversion/exercise discount of the Series D Preferred and Series D Warrants, as of the date of the Series D transaction, to the net proceeds we received from the Series D transaction.

 

COMPARISON OF ISSUER PROCEEDS TO POTENTIAL INVESTOR PROFIT
Gross Proceeds			5,428,307.10
Less Payments Made:
Placement Agent Fees in Agent Warrants			911,169.50
Placement Agent Fees in Cash			589,090.70
Feldman, Weinstein & Smith Legal Fees			27,500.00
Less Potential Other Ascertainable Payments:
Maximum Liquidated Damages Payable Pursuant to Registration Rights Agreements			814,246.07
Net Proceeds			3,086,300.83
Total Possible Profit to be Realized from Total Possible Discount to Market Price Upon Conversion of Series D Preferred and Exercise of Series D Warrants/Agent Warrants (1)			5,677,689.38
Total Possible Profit to be Realized from Other Securities Held by the Selling Stockholders			-58,261.38
Payments Made and Potential Other Ascertainable Payments as a Percentage of Net Proceeds (2)			75.88	%
Total Possible Profit to be Realized from Total Possible Discount to Market Price Upon Conversion of Series D Preferred and Exercise of Series D Warrants/Agent Warrants as a Percentage of Net Proceeds (3)			183.96	%

1.  The table above reflects a conversion price of the Series D Preferred of $1.40 and an exercise price of the Series D Warrants/Agent Warrants of $1.60 as of February 13, 2009. However, the actual conversion and exercise prices of these securities, as of the February 13, 2009 closing, were $1.85 and $2.60, respectively.  The prices were adjusted to $1.40 and $1.60 after the February 13, 2009 closing pursuant to certain amendment and waiver agreements entered into by the Company and the investors. If the calculation of total possible profit were prepared using the original conversion price of $1.85 for the Series D Preferred and the original exercise price of $2.60 for the Series D Warrants with respect to the February 13, 2009 closing, the aggregate total possible profit the selling stockholders could realize from the conversion/exercise discount would be $3,539,482.58 instead of $5,677,689.38. On that basis, the total possible profit to be realized from the total possible discount to market price upon conversion of Series D Preferred and exercise of Series D Warrants/Agent Warrants as a percentage of net proceeds would be 114.68% instead of 183.96%.

 

2. Averaged over the three-year term of the Series D Preferred, this percentage equals approximately 25.29% per year. Averaged over the seven-year term of the Series D Warrants, this percentage equals approximately 10.84% per year. Excluding potential other ascertainable payments from the calculation of net proceeds, and thus only including payments that have been made, this calculation would be 39.17% instead of 75.88%. On such basis, the average over the three-year term of the Series D Preferred would be 13.06% per year and the average over the seven-year term of the Series D Warrants would be 5.60% per year.

 

3.  Averaged over the three-year term of the Series D Preferred, this percentage equals approximately 61.32% per year. Averaged over the seven-year term of the Series D Warrants, this percentage equals approximately 26.28% per year. Excluding potential other ascertainable payments from the calculation of net proceeds, and thus only including payments that have been made, this calculation would be 145.56% instead of 183.96%. On such basis, the average over the three-year term of the Series D Preferred would be 48.52% per year and the average over the seven-year term of the Series D Warrants would be 20.79% per year.

 

In addition, as discussed in more detail above, the Company may be required, in certain instances, to make payments to the selling stockholders pursuant to the sinking fund provisions or the liquidated damages provisions of the Series D transaction documents.  To the extent any such payments are required of the Company, the payment amount set forth above would increase by a corresponding amount as would the payments made as a percentage of net proceeds.

 

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The table below compares the number of shares outstanding prior to the Series D transaction held by persons other than the selling stockholders, affiliates of the selling stockholders, and affiliates of the Company to the number of shares previously registered on behalf of selling stockholders and their affiliates and the status of these shares.

COMPARISON OF REGISTERED SHARES TO OUTSTANDING SHARES

 

Shares Outstanding Prior to Series D Transaction Held by Persons other than Selling Stockholders, Affiliates of the Company, and Affiliates of Selling Stockholders (1)		Shares Registered for Resale by Selling Stockholders or Affiliates of Selling Stockholders in Prior Registration Statements				Shares Registered for Resale by Selling Stockholders or Affiliates of Selling Stockholders that Continue to be Held by Selling Stockholders or Affiliates of Selling Stockholders				Shares Sold in Registered Resale Transactions by Selling Stockholders or Affiliates of Selling Stockholders				Shares Registered for Resale on Behalf of Selling Stockholders or Affiliates of Selling Stockholders in Series D Transaction
Aggregate Information:
8,524,850			1,100,504				554,899				545,605				4,366,381

 

Individual Information:
Name		Shares Registered for Resale by Selling Stockholders or Affiliates of Selling Stockholders in Prior Registration Statements				Shares Registered for Resale by Selling Stockholders or Affiliates of Selling Stockholders that Continue to be Held by Selling Stockholders or Affiliates of Selling Stockholders				Shares Sold in Registered Resale Transactions by Selling Stockholders or Affiliates of Selling Stockholders
Robert Cohen (2)			196,088				166,927				29,161
Bear Stearns Securities Corp. Custodian for Stuart Schapiro IRA (3)			14,822				7,000				7,822
F Berdon Co. LP (4)			151,946				21,000				130,946
Philip and Maxine Patt (5)			29,648				29,648				0
Iroquois Master Fund Ltd. (6)			375,000				125,000				250,000
J.S.A. Investments, LLC (7)			30,000				30,000				0
TCMP3 Partners (8)			303,000				175,324				127,676
Totals			1,100,504				554,899				545,605

1.  Calculated as the 13,850,805 shares of common stock outstanding prior to the transaction less the following shares of common stock outstanding prior to the transaction:  (i) 4,917,000 shares held by executive officers of the Company and the Cleveland Clinic Foundation, (ii) 100,000 shares held by Michael N. Emmerman, (iii) 81,968 shares held by Richard and Arline McGowan, (iv) 7,500 shares held by Martin H. Meyerson, (v) 10,000 shares held by Martin H. Meyerson IRA, (vi) 40,000 shares held by J.S.A. Investments, LLC, (vii) 10,000 shares held by J.A. Meyerson IRA, (viii) 7,000 shares held by Bear Stearns Securities Corp. Custodian for Stuart Schapiro IRA, (ix) 28,430 shares held by Zanett Opportunity Fund Ltd., (x) 12,300 shares held by Robert Brous, (xi) 22,324 shares held by TCMP3 Partners, (xii) 59,785 shares held by Robert H. Cohen, and (xiii) 29,648 shares held by Philip and Maxine Patt.

 

2.  Shares registered for resale include 88,946 shares of common stock registered in connection with the Series A transaction, 71,428 shares of common stock originally underlying Series B Preferred and 35,714 shares of common stock originally underlying a Series B Warrant.

 

3. Shares registered for resale include 14,822 shares of common stock registered in connection with the Series A transaction.

 

4. Shares registered for resale include 88,946 shares of common stock registered in connection with the Series A transaction, 42,000 shares of common stock originally underlying Series B Preferred and 21,000 shares of common stock originally underlying a Series B Warrant.

 

5. Shares registered for resale include 29,648 shares of common stock registered in connection with the Series A transaction.

 

6.  Shares registered for resale include 250,000 shares of common stock originally underlying Series B Preferred and 125,000 shares of common stock originally underlying a Series B Warrant.

 

7.  Shares registered for resale include 20,000 shares of common stock originally underlying Series B Preferred and 10,000 shares of common stock originally underlying a Series B Warrant.

 

8.  Shares registered for resale include 202,000 shares of common stock originally underlying Series B Preferred and 101,000 shares of common stock originally underlying Series B Warrants.

 

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In the Securities Purchase Agreements, each investor represented that it had not directly or indirectly engaged in any purchase or sale of securities of the Company, including any short sales, during the period commencing from the time that such investor first received a summary of terms (written or oral) from the Company or any other person setting forth the material terms of the Series D transaction. Each investor also agreed not to engage in such transactions prior to the filing of our report on Form 8-K describing the transactions contemplated by the Securities Purchase Agreements. In the Securities Purchase Agreements, each investor also acknowledged the positions of the SEC as set forth in Item 65, Section A, of the Manual of Publicly Available Telephone Interpretations, dated July 1997.

PLAN OF DISTRIBUTION

 

Each selling stockholder of the common stock and any of their pledgees, assignees and successors-in-interest may, from time to time, sell any or all of their shares of common stock covered hereby on the Nasdaq Capital Market or any other stock exchange, market or trading facility on which the shares are traded or in private transactions.  These sales may be at fixed or negotiated prices.  A selling stockholder may use any one or more of the following methods when selling shares:

 

·

ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers;

 

·

block trades in which the broker-dealer will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction;

 

·

purchases by a broker-dealer as principal and resale by the broker-dealer for its account;

 

·

an exchange distribution in accordance with the rules of the applicable exchange;

 

·

privately negotiated transactions;

 

·

settlement of short sales entered into after the effective date of the registration statement of which this prospectus is a part;

 

·

in transaction through broker-dealers that agree with the selling stockholders to sell a specified number of such shares at a stipulated price per share;

 

·

through the writing or settlement of options or other hedging transactions, whether through an options exchange or otherwise;

 

·

a combination of any such methods of sale; or

 

·

any other method permitted pursuant to applicable law.

 

The selling stockholders may also sell shares under Rule 144 under the Securities Act, if available, rather than under this prospectus.

 

Broker-dealers engaged by the selling stockholders may arrange for other brokers-dealers to participate in sales.  Broker-dealers may receive commissions or discounts from the selling stockholders (or, if any broker-dealer acts as agent for the purchaser of shares, from the purchaser) in amounts to be negotiated, but, except as set forth in a supplement to this Prospectus, in the case of an agency transaction, not in excess of a customary brokerage commission in compliance with FINRA NASD Rule 2440; and in the case of a principal transaction, a markup or markdown in compliance with NASD IM-2440.

 

In connection with the sale of the common stock or interests therein, the selling stockholders may enter into hedging transactions with broker-dealers or other financial institutions, which may in turn engage in short sales of the common stock in the course of hedging the positions they assume.  The selling stockholders may also sell shares of the common stock short after the effective date of the registration statement of which this prospectus is a part and deliver these securities to close out their short positions, or loan or pledge the common stock to broker-dealers that in turn may sell these securities.  The selling stockholders may also enter into option or other transactions with broker-dealers or other financial institutions or create one or more derivative securities which require the delivery to such broker-dealer or other financial institution of shares offered by this prospectus, which shares such broker-dealer or other financial institution may resell pursuant to this prospectus (as supplemented or amended to reflect such transaction).

 

The selling stockholders and any broker-dealers or agents that are involved in selling the shares may be deemed to be “underwriters” within the meaning of the Securities Act in connection with such sales.  In such event, any commissions received by such broker-dealers or agents and any profit on the resale of the shares purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act.  Each selling stockholder has informed the Company that it does not have any written or oral agreement or understanding, directly or indirectly, with any person to distribute the Common Stock. In no event shall any broker-dealer receive fees, commissions and markups which, in the aggregate, would exceed eight percent (8%).

 

The Company is required to pay certain fees and expenses incurred by the Company incident to the registration of the shares.  The Company has agreed to indemnify the selling stockholders against certain losses, claims, damages and liabilities, including liabilities under the Securities Act.

 

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Because selling stockholders may be deemed to be “underwriters” within the meaning of the Securities Act, they will be subject to the prospectus delivery requirements of the Securities Act including Rule 172 thereunder.  The selling stockholders have advised us that there is no underwriter or coordinating broker acting in connection with the proposed sale of the resale shares by the selling stockholders.

 

We agreed to keep this prospectus effective until the earlier of (i) the date on which the shares may be resold by the selling stockholders without registration and without regard to any volume or manner-of-sale limitations by reason of Rule 144, without the requirement for the Company to be in compliance with the current public information under Rule 144 under the Securities Act or any other rule of similar effect or (ii) all of the shares have been sold pursuant to this or another prospectus or Rule 144 under the Securities Act or any other rule of similar effect.  The resale shares will be sold only through registered or licensed brokers or dealers if required under applicable state securities laws. In addition, in certain states, the resale shares of common stock covered hereby may not be sold unless they have been registered or qualified for sale in the applicable state or an exemption from the registration or qualification requirement is available and is complied with.

 

Under applicable rules and regulations under the Exchange Act, any person engaged in the distribution of the resale shares may not simultaneously engage in market making activities with respect to the common stock for the applicable restricted period, as defined in Regulation M, prior to the commencement of the distribution.  In addition, the selling stockholders will be subject to applicable provisions of the Exchange Act and the rules and regulations thereunder, including Regulation M, which may limit the timing of purchases and sales of shares of the common stock by the selling stockholders or any other person.  We will make copies of this prospectus available to the selling stockholders and have informed them of the need to deliver a copy of this prospectus to each purchaser at or prior to the time of the sale (including by compliance with Rule 172 under the Securities Act).