UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549







Form 10-Q







(Mark
One)


x
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934For
      the quarterly period ended June 30, 2010Oro
            TRANSITION
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
      OF 1934




Commission
File Number:  001-32587







PHARMATHENE,
INC.


(Exact
name of registrant as specified in its charter)




Delaware
            
            20-2726770(State
      or other jurisdiction of incorporation or
              organization)
            
            (I.R.S.
      Employer Identification No.)One
      Park Place, Suite 450, Annapolis, MD
            
            21401(Address
      of principal executive offices)
            
            (Zip
      Code)




(410)
269-2600


(Registrant’s
telephone number, including area code)







Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x  No o




Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data file required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405
of this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes o  No o




Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See the definitions of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.




Large
      Accelerated Filer o
            
            Accelerated
      Filer oNon-Accelerated
      Filer o
            
            Smaller
      Reporting Company x(Do
      not check if a smaller reporting company)




Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act). Yes o  No x




Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date:    The number of shares
of the registrant’s Common Stock, par value $0.0001 per share, outstanding as
of  August 9, 2010 was 32,769,904.










PHARMATHENE, INC.




TABLE
OF CONTENTS





PagePART I—FINANCIAL
      INFORMATIONItem 1. Financial
      Statements
            
            
            3Item 2. Management’s Discussion and Analysis of
      Financial Condition and Results of Operations
            
            
            17Item 3. Quantitative and
      Qualitative Disclosures about Market Risk
            
            
            26Item 4. Controls and
      Procedures
            
            
            26PART II—OTHER
      INFORMATIONItem 1. Legal
      Proceedings
            
            
            27Item 1A. Risk
      Factors
            
            
            28Item 6.
      Exhibits
            
            
            34Certifications




2




PART I — FINANCIAL INFORMATION




Item 1.  Financial Statements




PHARMATHENE,
      INC.CONSOLIDATED
      BALANCE SHEETS




UnauditedJune
      30
              2010
            
            
            December
      31
              2009ASSETSCurrent
      assets:Cash
      and cash equivalents
            
            $
            682,001
            
            
            $
            2,673,567Restricted
      Cash
            
            
            100,000
            
            
            
            -Short-term
      investments
            
            
            -
            
            
            
            3,137,071Accounts
      receivable, net
            
            
            8,630,362
            
            
            
            8,866,346Other
      receivables (including unbilled receivables)
            
            
            4,303,312
            
            
            
            8,566,425Prepaid
      expenses and other current assets
            
            
            660,476
            
            
            
            973,214Total
      current assets
            
            $
            14,376,151
            
            
            $
            24,216,623Property
      and equipment, net
            
            
            6,182,007
            
            
            
            6,262,388Patents,
      net
            
            
            855,417
            
            
            
            928,577Other
      long-term assets and deferred costs
            
            
            102,244
            
            
            
            308,973Goodwill
            
            
            2,348,453
            
            
            
            2,348,453Total
      assets
            
            $
            23,864,272
            
            
            $
            34,065,014LIABILITIES
      AND STOCKHOLDERS' EQUITY (DEFICIT)Current
      liabilities:Accounts
      payable
            
            $
            8,402,535
            
            
            $
            1,934,119Accrued
      expenses and other liabilities
            
            
            4,288,188
            
            
            
            11,532,101Total
      current liabilities
            
            $
            12,690,723
            
            
            $
            13,466,220Other
      long-term liabilities
            
            $
            459,850
            
            
            $
            452,618Derivative
      instruments
            
            
            1,150,134
            
            
            
            835,299Long-term
      debt
            
            
            19,160,935
            
            
            
            17,426,513Total
      liabilities
            
            $
            33,461,642
            
            
            $
            32,180,650Stockholders'
      equity (deficit):Common
      stock, $0.0001 par value; 100,000,000 shares authorized; 29,857,288 and
      28,130,284 shares issued and outstanding at June 30, 2010 and December 31,
      2009, respectively
            
            $
            2,986
            
            
            $
            2,813Additional
      paid-in-capital
            
            
            159,998,323
            
            
            
            157,004,037Accumulated
      other comprehensive income
            
            
            1,048,924
            
            
            
            1,188,156Accumulated
      deficit
            
            
            (170,647,603
            )
            
            
            (156,310,642
            )Total
      stockholders' equity (deficit)
            
            $
            (9,597,370
            )
            
            $
            1,884,364Total
      liabilities and stockholders' equity (deficit)
            
            $
            23,864,272
            
            
            $
            34,065,014


See the
accompanying notes to the unaudited consolidated financial
statements.
  3





PHARMATHENE,
      INC.UNAUDITED
      CONSOLIDATED STATEMENTS OF
OPERATIONS




Three
      months ended
              June
      30,
            
            
            Six
      months ended
              June
      30,2010
            
            
            2009
            
            
            2010
            
            
            2009Contract
      revenue
            
            $
            4,779,591
            
            
            $
            8,071,211
            
            
            $
            7,896,144
            
            
            $
            13,593,1144,779,591
            
            
            
            8,071,211
            
            
            
            7,896,144
            
            
            
            13,593,114Operating
      expenses:Research
      and development
            
            
            5,940,360
            
            
            
            10,225,349
            
            
            
            10,892,753
            
            
            
            16,044,516General
      and administrative
            
            
            4,121,822
            
            
            
            4,416,248
            
            
            
            9,447,244
            
            
            
            9,562,247Depreciation
      and amortization
            
            
            254,440
            
            
            
            199,699
            
            
            
            499,698
            
            
            
            392,177Total
      operating expenses
            
            
            10,316,622
            
            
            
            14,841,296
            
            
            
            20,839,695
            
            
            
            25,998,940Loss
      from operations
            
            
            (5,537,031
            )
            
            
            (6,770,085
            )
            
            
            (12,943,551
            )
            
            
            (12,405,826
            )Other
      income (expenses):Interest
      income
            
            
            2,582
            
            
            
            92,853
            
            
            
            6,065
            
            
            
            197,098Interest
      expense
            
            
            (921,465
            )
            
            
            (598,395
            )
            
            
            (1,869,615
            )
            
            
            (1,200,510
            )Loss
      on early extinguishment of debtOther
      income (expense)
            
            
            29,752
            
            
            
            -
            
            
            
            169,174
            
            
            
            -Change
      in market value of derivative instruments
            
            
            33,470
            
            
            
            643,702
            
            
            
            300,966
            
            
            
            764,291Total
      other income (expenses)
            
            
            (855,661
            )
            
            
            138,160
            
            
            
            (1,393,410
            )
            
            
            (239,121
            )Net
      loss
            
            
            (6,392,692
            )
            
            
            (6,631,925
            )
            
            
            (14,336,961
            )
            
            
            (12,644,947
            )Basic
      and diluted net loss per share
            
            
            (0.22
            )
            
            
            (0.24
            )
            
            
            (0.50
            )
            
            
            (0.47
            )Weighted
      average shares used in calculation of basic and diluted net loss per
      share
            
            
            29,619,193
            
            
            
            28,056,824
            
            
            
            28,900,882
            
            
            
            27,038,761




See the
accompanying notes to the unaudited consolidated financial
statements.
 4




PHARMATHENE,
      INC.UNAUDITED
      CONSOLIDATED STATEMENTS OF CASH FLOWS




Six
      Months Ended
              June
      30,2010
            
            
            2009Operating
      activitiesNet
      loss
            
            $
            (14,336,961
            )
            
            $
            (12,644,947
            )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Change
      in market value of derivative instruments
            
            
            (300,966
            )
            
            
            (764,291
            )Bad
      Debt Expense
            
            
            1,609,826
            
            
            
            -Depreciation
      and amortization
            
            
            499,698
            
            
            
            392,177Change
      in Avecia purchase accounting
            
            
            -
            
            
            
            154,457Compensatory
      option expense
            
            
            1,400,358
            
            
            
            1,739,575Non
      cash interest expense on debt
            
            
            1,809,697
            
            
            
            950,159Changes
      in operating assets and liabilities:Accounts
      receivable
            
            
            (1,373,080
            )
            
            
            6,451,662Prepaid
      expenses and other current assets
            
            
            4,706,030
            
            
            
            (11,899,824
            )Accounts
      payable
            
            
            6,629,583
            
            
            
            (1,297,418
            )Accrued
      expenses and other liabilities
            
            
            (7,229,659
            )
            
            
            3,500,823Net
      cash used in operating activities
            
            
            (6,585,474
            )
            
            
            (13,417,627
            )Investing
      activitiesPurchases
      of property and equipment
            
            
            (335,414
            )
            
            
            (970,896
            )Purchases
      of short term investments
            
            
            -
            
            
            
            (6,800,566
            )Proceeds
      from sales of short term investments
            
            
            3,130,588
            
            
            
            3,800,000Payments
      for Avecia Acquisition
            
            
            -
            
            
            
            (7,000,000
            )Net
      cash provided by (used in) investing activities
            
            
            2,795,174
            
            
            
            (10,971,462
            )Financing
      activitiesPayments
      of debt obligations
            
            
            -
            
            
            
            (2,000,000
            )Change
      in restricted cash requirements
            
            
            (100,000
            )
            
            
            11,750,000Net
      proceeds from issuance of common stock and warrants
            
            
            2,209,902
            
            
            
            4,924,270Net
      cash provided by financing activities
            
            
            2,109,902
            
            
            
            14,674,270Effects
      of exchange rates on cash
            
            
            (311,168
            )
            
            
            (764,782
            )Decreases
      in cash and cash equivalents
            
            
            (1,991,566
            )
            
            
            (10,479,601
            )Cash
      and cash equivalents, at beginning of year
            
            
            2,673,567
            
            
            
            19,752,404Cash
      and cash equivalents, at end of quarter
            
            $
            682,001
            
            
            $
            9,272,803Supplemental
      disclosure of cash flow informationCash
      paid for interest
            
            $
            9,776
            
            
            $
            250,351Cash
      paid for income taxes
            
            
            0
            
            
            
            184,226





See the
accompanying notes to the unaudited consolidated financial
statements.




5




PHARMATHENE,
INC.




Notes
to Unaudited Consolidated Financial Statements


June
30, 2010





Note
1 - Organization and Business




PharmAthene,
Inc. (“PharmAthene” or the “Company”) was incorporated under the laws of the
State of Delaware as Healthcare Acquisition Corp. (“HAQ”) in 2005, a special
purchase acquisition corporation formed solely to acquire a then unidentified
business.  In 2007, HAQ acquired a Delaware corporation which at the
time was known as “PharmAthene, Inc.” (the “Merger”); as a result of the Merger,
HAQ changed its name to “PharmAthene, Inc.”




In March
2008, PharmAthene Inc., through its wholly-owned subsidiary PharmAthene UK
Limited, acquired substantially all the assets and liabilities related to the
biodefense vaccines business (the “Avecia Acquisition”) of Avecia Biologics
Limited (along with its affiliates, “Avecia”).





We
are a biopharmaceutical company focused on developing biodefense countermeasure
applications.  We are subject to those risks associated with any
biopharmaceutical company that has substantial expenditures for research and
development.  There can be no assurance that our research and
development projects will be successful, that products developed will obtain
necessary regulatory approval, or that any approved product will be commercially
viable.  In addition, we operate in an environment of rapid
technological change and are largely dependent on the services and expertise of
our employees, consultants and other third parties.




Historically,
we have performed under government contracts and grants and raised funds from
investors (including additional debt and equity issued in 2009, and equity
issued in April and July 2010) to sustain our operations.  Based on
the operating cash requirements and capital expenditures expected through the
end of 2010, and expected receipts from our government contracts and grants, we
currently do not anticipate requiring additional funding to continue our current
level of operations through the end of 2010.  We may elect to raise
additional capital in 2010 through the issuance of debt and/or equity to expand
our business and/or strengthen our financial position or, if our current
expectations and estimates about future operating costs prove to be incorrect,
we may need to raise additional capital in 2010.   Further, we
may need to raise additional capital to fund our operations beyond
2010.




Note
2 - Summary of Significant Accounting Policies





Basis
of Presentation




Our
consolidated financial statements include the accounts of PharmAthene, Inc. and
its wholly-owned subsidiaries, PharmAthene U.S. Corporation (which was merged
with and into PharmAthene, Inc. in the first quarter 2009), PharmAthene Canada,
Inc., and PharmAthene UK Limited, collectively referred to herein as
“PharmAthene”, “we”, “us”, “our” or the “Company”.  All significant
intercompany transactions and balances have been eliminated in
consolidation.  Our consolidated financial statements have been
prepared in accordance with generally accepted accounting principles in the
United States.  In the opinion of management, the accompanying
unaudited condensed consolidated financial statements include all adjustments,
consisting of normal recurring adjustments, which are necessary to present
fairly our financial position, results of operations and cash flows. The
condensed consolidated balance sheet at December 31, 2009 has been derived from
audited consolidated financial statements at that date. The interim results of
operations are not necessarily indicative of the results that may occur for the
full fiscal year. These statements should be read in conjunction with the
Consolidated Financial Statements and Notes included in our Annual Report on
Form 10-K for the year ended December 31, 2009 filed with the Securities and
Exchange Commission. We currently operate in one business
segment.  Certain prior year amounts
in the consolidated financial statements have been reclassified to conform to
the current year presentation.




6




Use
of Estimates




The
preparation of financial statements in conformity with generally accepted
accounting principles in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period.  Actual results could differ from those
estimates.




Foreign
Currency Translation




The
functional currency of our wholly owned foreign subsidiaries located in Canada
and the United Kingdom is their local currency.  Assets and
liabilities of our foreign subsidiaries are translated into United States
dollars based on exchange rates at the end of the reporting
period.  Income and expense items are translated at the weighted
average exchange rates prevailing during the reporting
period.  Translation adjustments are accumulated in a separate
component of stockholders’ equity.  Transaction gains or losses are
included in the determination of net loss.




Comprehensive
Loss




Comprehensive
loss includes the total of our net loss and all other changes in equity other
than transactions with owners, including (i) changes in equity for cumulative
translation adjustments resulting from the consolidation of foreign subsidiaries
whose financial statements are prepared for using the local currency as the
functional currency, and (ii) unrealized gains and losses on short term
available-for-sale investments. Comprehensive loss for the three month periods
ended June 30, 2010 and 2009 was approximately $6.7 million and $6.7 million,
respectively.  Comprehensive loss for the six month periods ended June 30,
2010 and 2009 was approximately $14.5 million and $13.4 million,
respectively.





Cash
and Cash Equivalents




Cash and
cash equivalents, are stated at cost which approximates market
value.  We consider all highly liquid investments with original
maturities of three months or less to be cash
equivalents.




Short-Term
Investments




Short-term
investments consist of investment grade government agency and corporate debt
securities due within one year.  All investments are classified as
available-for-sale and are recorded at market value.  Unrealized gains and
losses are reflected in other comprehensive income (loss).  The estimated
fair value of the available-for-sale securities is determined based on quoted
market prices or rates for similar instruments.  Management reviews the
Company’s investment portfolio on a regular basis and seeks guidance from
its professional portfolio manager related to U.S. and global market
conditions.  We assess the risk of impairment related to securities held in
our investment portfolio on a regular basis. There were no short-term
investments as of June 30, 2010.




Significant
Customers and Accounts Receivable




Our
primary customers are the U.S. Department of Defense (the “DoD”), the National
Institute of Allergy and Infectious Diseases (“NIAID”), the Biomedical Advanced
Research and Development Authority (“BARDA”), and the National Institutes of
Health (“NIH”).





As of
June 30, 2010 and December 31, 2009, the Company’s trade receivable balances
were comprised solely of receivables from these customers.  Unbilled
accounts receivable, a component of “Other receivables,” totaled approximated
$3.8 and $8.1 million as of June 30, 2010 and December 31, 2009, respectively,
and also related  to the contracts with these same
customers.




7





Concentration
of Credit Risk




Financial
instruments that potentially subject us to concentrations of credit risk are
primarily cash and cash equivalents, investments and billed and unbilled
accounts receivable.  We maintain our cash and cash equivalents and
investment balances in the form of money market accounts, corporate and
government debt securities and overnight deposits with financial institutions
that we believe are creditworthy.




Fair
Value of Financial Instruments




Our
financial instruments primarily include cash and cash equivalents, accounts
receivable, short-term investments and other current assets, accounts payable,
accrued and other liabilities, convertible notes and long-term
debt.  Due to the short-term nature of the cash and cash equivalents,
accounts receivable, short-term investments and other current assets, accounts
payable and accrued and other liabilities (including derivative instruments),
the carrying amounts of these assets and liabilities approximate their fair
value.  The carrying values of our convertible notes and other long
term debt approximate their fair values, based on our current incremental
borrowing rates.




Short-term
investments consist of investment grade government agency and corporate debt
securities due within one year.  All investments are classified as
available-for-sale and are recorded at market value.  Unrealized gains
and losses are reflected in other comprehensive income (loss).  The
estimated fair value of our available-for-sale securities is determined based on
quoted market prices or rates for similar instruments.  We review our
investment portfolio on a regular basis and seek guidance from our professional
portfolio manager related to U.S. and global market conditions.  We
assess the risk of impairment related to securities held in our investment
portfolio on a regular basis and identified no permanent or
“other-than-temporary” impairment as of June 30, 2010 or December 31,
2009.




Intangible
Assets




Patents
are carried at cost less accumulated amortization which is calculated on a
straight line basis over the estimated useful lives of the patents, currently
estimated to be 11 years.





Goodwill
represents the excess of purchase price over the fair value of net identifiable
assets associated with the Avecia Acquisition.  We review the carrying
value of our intangible assets for impairment annually during the fourth quarter
of every year, or more frequently if impairment indicators
exist.  Evaluating for impairment requires judgment, including the
estimation of future cash flows, future growth rates and profitability and the
expected life over which cash flows will occur.  Changes in the
Company’s business strategy or adverse changes in market conditions could impact
impairment analyses and require the recognition of an impairment charge equal to
the excess of the carrying value of the intangible asset over its estimated fair
value.  In accordance with ASC Section 360-10-35, "Impairment or
Disposal of Long-Lived Assets" we review assets for impairment. If
impairment is indicated, we measure the amount of such impairment by comparing
the carrying value of the assets to the present value of the expected future
cash flows associated with the use of the asset.  As of the last
evaluation date, the Company determined that there was no impairment of
goodwill.





Accrued
Expenses




Management
is required to estimate accrued expenses as part of the process of preparing
financial statements.  The estimation of accrued expenses involves
identifying services that have been performed on the Company’s behalf, and
estimating the level of services performed and the associated costs
incurred for such services as of each balance sheet date in the financial
statements.  Accrued expenses include professional service fees, such as
fees paid to lawyers and accountants, contract service fees, such as those under
contracts with clinical research organizations and investigators in conjunction
with clinical trials, and fees to contract manufacturers in conjunction with the
production of clinical materials.  Pursuant to management’s assessment of
the services that have been performed on clinical trials and other contracts,
the Company recognizes these expenses as the services are provided. 
Management assessments include, but are not limited to:  (1) an
evaluation by the project manager of the work that has been completed during the
period, (2) measurement of progress prepared internally and/or provided by
the third-party service provider, (3) analyses of data that justify the
progress, and (4) management’s judgment.




8





Revenue
Recognition




We
generate our revenue from two different types of contractual arrangements:
cost-plus-fee contracts and cost reimbursable grants.  Costs consist
primarily of actual internal labor charges and external subcontractor costs
incurred plus an allocation of applied fringe benefits, overhead and general and
administrative expenses as defined in the contract.





Revenues
on cost-plus-fee contracts are recognized in an amount equal to the costs
incurred during the period plus an estimate of the applicable fee
earned.  The estimate of the applicable fee earned is determined by
reference to the contract:  if the contract defines the fee in terms
of risk-based milestones and specifies the fees to be earned upon the completion
of each milestone, then the fee is recognized when the related milestones are
earned.  Otherwise, we compute fee income earned in a given period by
using a proportional performance method based on costs incurred during the
period as compared to total estimated project costs and application of the
resulting fraction to the total project fee specified in the
contract.





We
analyze each cost reimbursable grant to determine whether we should report such
reimbursements as revenue or as an offset to our expenses
incurred.  For the three months ended June 30, 2010 and 2009, we
recorded approximately $0.9 million and $0.8 million, respectively, of costs
reimbursed by the government as an offset to research and development
expenses.  For the six months ended June 30, 2010 and 2009, we
recorded approximately $1.7 million and $1.2 million, respectively, of costs
reimbursed by the government as an offset to research and development
expenses.





Our
revenue-generating contracts may include multiple elements, including one or
more of up-front license fees, research payments, and milestone
payments.  In these situations, we allocate the total contract price
to the multiple elements based on their relative fair values and recognize
revenue for each element according to its characteristics.  As revenue
is recognized in accordance with the terms of the contracts, related amounts are
recorded as unbilled accounts receivable,,the primary component of “Other
receivables (including unbilled receivables)” in our consolidated balance
sheets.  As specific contract invoices are generated and sent to our
customers, invoiced amounts are transferred out of unbilled accounts receivable
and into billed accounts receivable.  Invoicing frequency and payment
terms for cost-plus-fee contracts with our customers are defined within each
contract, but are typically monthly invoicing with 30-60 day payment
cycles.





At June
30, 2010, “Other receivables (including unbilled receivables)” were
approximately $4.3 million, of which approximately $3.8 million were unbilled
accounts receivable.





Collaborative
Arrangements





Even
though most of our products are being developed in conjunction with support by
the U.S. Government, we are an active participant in that development, with
exposure to significant risks and rewards of commercialization relating to the
development of these pipeline products.  In collaborations where we
are deemed to be the principal participant of the collaboration, we recognize
costs and revenues generated from third parties using the gross basis of
accounting; otherwise, we use the net basis of accounting.




Research
and Development




Research
and development costs are expensed as incurred; pre-payments are deferred and
expensed as performance occurs.  Research and development costs
include salaries, facilities expense, overhead expenses, material and supplies,
pre-clinical expense, clinical trials and related clinical manufacturing
expenses, stock-based compensation expense, contract services and other outside
services.





9





Share-Based
Compensation




We
expense the estimated fair value of share-based awards granted to employees
under our stock compensation plans.  The fair value of restricted
stock grants is determined based on the quoted market price of our common
stock.  Share-based compensation cost for stock options is determined
at the grant date using an option pricing model.  We have estimated
the fair value of each award using the Black-Scholes option pricing
model.  The Black-Scholes model considers, among other factors, the
expected life of the award and the expected volatility of the Company’s stock
price. The value of the award that is ultimately expected to vest is recognized
as expense on a straight line basis over the employee’s requisite service
period.





Employee
share-based compensation expense recognized in the three and six months ended
June 30, 2010 and 2009 was calculated based on awards ultimately expected to
vest and has been reduced for estimated forfeitures at a rate of approximately
12% for both stock options and restricted shares for 2010 and approximately 17%
for 2009, based on historical forfeitures.





Share-based
compensation expense for the three months ended June 30, 2010 and 2009,
was:




Three
      months ended
              June 30,2010
            
            
            2009Research
      and development
            
            $
            340,394
            
            
            $
            207,149General
      and administrative
            
            
            364,935
            
            
            
            580,866Total
      share-based compensation expense
            
            $
            705,329
            
            
            $
            788,015




Share-based
compensation expense for the six months ended June 30, 2010 and 2009,
was:




Six
      months ended
              June 30,2010
            
            
            2009Research
      and development
            
            $
            523,821
            
            
            $
            466,469General
      and administrative
            
            
            876,537
            
            
            
            1,273,106Total
      share-based compensation expense
            
            $
            1,400,358
            
            
            $
            1,739,575




During
the six months ended June 30, 2010, we granted options to purchase an aggregate
of 1,434,500 shares of common stock to employees and non-employee directors, and
made no restricted stock grants.  At June 30, 2010, we had total
unrecognized stock based compensation expense related to unvested awards of
approximately $3.5 million that we expect to recognize as expense over the next
three years.




Income
Taxes




We
account for income taxes using the asset and liability method.  Under
this method, deferred tax assets and liabilities are recorded for the estimated
future tax consequences attributable to differences between the financial
statement carrying amounts of assets and liabilities and their respective tax
bases.  Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled.  The
effect of a tax rate change on deferred tax assets and liabilities is recognized
in income in the period that includes the enactment date.  We record
valuation allowances to reduce net deferred tax assets to the amount considered
more likely than not to be realized.  Changes in estimates of future
taxable income can materially change the amount of such valuation
allowances.  As of June 30, 2010, we had recognized a valuation
allowance to the full extent of our net deferred tax assets since the likelihood
of realization of the benefit does not meet the more likely than not
threshold.




10





We file a
U.S. federal income tax return as well as returns for various state and foreign
jurisdictions.  Our income taxes have not been examined by any tax
jurisdiction since our inception.  Uncertain tax positions taken on
our tax returns are accounted for as liabilities for unrecognized tax
benefits.  We recognize interest and penalties, if any, related to
unrecognized tax benefits in other income (expense) in the consolidated
statements of operations.





Basic
and Diluted Net Loss Per Share




Basic
loss per share is computed by dividing consolidated net loss by the weighted
average number of shares of common stock outstanding during the year, excluding
unvested restricted stock.




For
periods of net income when the effects are not anti-dilutive, diluted earnings
per share is computed by dividing our net income allocable to common
shareholders by the weighted average number of shares outstanding and the impact
of all dilutive potential shares of common stock, consisting primarily of
stock options and the shares of common stock underlying our convertible notes
and stock purchase warrants.  The dilutive impact of our dilutive
potential shares of common stock resulting from stock options and stock purchase
warrants is determined by applying the treasury stock method.  The
dilutive impact of our dilutive potential shares of common stock resulting from
our convertible notes is determined by applying the “if converted”
method.




For the
periods of net loss, diluted loss per share is calculated similarly to basic
loss per share because the impact of all dilutive potential shares of common
stock is anti-dilutive due to the net losses.  A total of
approximately 18 million and 20 million potential dilutive shares have been
excluded in the calculation of diluted net loss per share at June 30, 2010 and
2009, respectively, because their inclusion would be anti-dilutive.





Recent
Accounting Pronouncements




There are
several new accounting and disclosure requirements that we will be required to
adopt in the future, primarily with respect to revenue recognition
practices.  Effective January 1, 2011 we will be required to adopt ASU
2009-13 which deals with new revenue recognition practices relating to revenue
arrangements that include multiple elements.  We will also be adopting
ASU 2010-17 which deals with revenue recognition for arrangements with
milestones.  Our government contracts and grants, and any future
modifications to those contracts and grants, may be affected by the new
accounting and disclosure requirements. We are currently evaluating any
potential impact these new requirements may have on our consolidated financial
statements.





Note 3–Contemplated Exit
Activities





In the
second quarter 2009, our existing research and development contract for SparVaxTM
was transferred from NIAID to BARDA.  In the third quarter 2009 BARDA
and PharmAthene modified the existing statement of work to include, among other
things, the completion of on-going stability studies and development of potency
assays along with certain manufacturing scale-up and technology transfer
activities to a U.S.-based manufacturer for the bulk drug substance for
SparVaxTM.  We then entered into a corresponding subcontract with our
U.S.-based manufacturer.  As a result of the transfer of the contract
and modification of the statement of work, we have transitioned development and
manufacturing activities as well as other general and administrative functions
from the UK to the U.S.  In connection with this transition, we
completed the relocation of our UK operations, including terminating
substantially all of our UK workforce, by June 30, 2010.  In the third
quarter of 2009, we recorded a reserve for these exit activities, of which
$30,000 remained in accrued expense at June 30, 2010.  Additionally we
have accrued approximately $90,000 for final property close-out
expenses.




11




Note
4 - Fair Value Measurements




We define
fair value as the exchange price that would be received for an asset or paid to
transfer a liability (an exit price) in the principal or most advantageous
market for the asset or liability in an orderly transaction between market
participants at the measurement date.  We report assets and
liabilities that are measured at fair value using a three-level fair value
hierarchy that prioritizes the inputs used to measure fair
value.  This hierarchy maximizes the use of observable inputs and
minimizes the use of unobservable inputs.  The three levels of inputs
used to measure fair value are as follows:




·      Level
1 — Quoted prices in active markets for identical assets or
liabilities.




·      Level
2 — Observable inputs other than quoted prices included in Level 1, such as
quoted prices for similar assets and liabilities in active markets; quoted
prices for identical or similar assets and liabilities in markets that are not
active; or other inputs that are observable or can be corroborated by observable
market data.




·      Level
3 — Unobservable inputs that are supported by little or no market activity and
that are significant to the fair value of the assets or
liabilities.  This includes certain pricing models, discounted cash
flow methodologies and similar techniques that use significant unobservable
inputs.




An
asset’s or liability’s level within the fair value hierarchy is based on the
lowest level of any input that is significant to the fair value
measurement.  At each reporting period, we perform a detailed analysis
of our assets and liabilities that are measured at fair value.  All
assets and liabilities for which the fair value measurement is based on
significant unobservable inputs or instruments which trade infrequently and
therefore have little or no price transparency are classified as Level
3.




We have
segregated our financial assets and liabilities that are measured at fair value
into the most appropriate level within the fair value hierarchy based on the
inputs used to determine the fair value at the measurement date in the table
below.  We have no non-financial assets and liabilities that are
measured at fair value. As of June 30, 2010 and 2009 we had level 3 derivative
liabilities of approximately $1.2 million and $1.1 million,
respectively.




The
following table sets forth a summary of changes in the fair value of our Level 3
liabilities for the six months ended June 30, 2010:




Description
            
            Balance as of
              December
              31, 2009
            
            
            New Liabilities
      in 2010
            
            
            Unrealized
              (Gains)
            
            
            Balance as of
              June
      30, 2010Stock
      purchase warrants
            
            $
            835,299
            
            
            $
            615,801
            
            
            $
            (300,966
            )
            
            $
            1,150,134





The
following table sets forth a summary of changes in the fair value of the
Company’s Level 3 liabilities for the six months ended June 30,
2009:





Description
            
            Balance as of
              December
              31, 2008
            
            
            Cumulative
      Effect of Adoption of New Accounting Guidance
            
            
            New Liabilities
      in 2009
            
            
            Unrealized
              (Gains)
            
            
            Balance as of
              June
      30, 2009Conversion
      option
            
            $
            6,405
            
            
            $
            -
            
            
            $
            -
            
            
            $
            (6,405
            )
            
            $
            -Stock
      purchase warrants
            
            $
            -
            
            
            $
            636,609
            
            
            $
            1,236,067
            
            
            $
            (757,885
            )
            
            $
            1,114,791




12




The gains
on the derivative instruments are classified in Other income (expenses) as the
change in market value of derivative instruments in our consolidated statements
of operations.  The fair value of our stock purchase warrants and
conversion option is determined based on the Black-Scholes option pricing
model.  Use of the Black-Scholes option-pricing model requires the use
of unobservable inputs such as the expected term, anticipated volatility and
expected dividends.




Note
5 - Short-Term Investments – Available for Sale Securities





At June
30, 2010 we had no available-for-sale investments.





During
the six months ended June 30, 2010, we realized net gains of approximately
$5,000 on sales of available-for-sale securities.  The gains and
losses on available-for-sale securities are based on the specific identification
method.





Note
6 - Debt




Convertible
Notes




Our 8%
senior unsecured convertible notes accrued interest at a rate of 8% per annum
and were to mature on August 3, 2009 (the “Old Notes”).  The principal
amount of the Old Notes and any accrued interest were convertible into shares of
PharmAthene common stock at the option of the holder at any time based upon a
conversion rate of $10.00 per share.  In July 2009, we cancelled a
portion of the Old Notes, and issued new convertible notes and stock purchase
warrants to certain holders of the Old Notes as well as to certain new note
investors in a private placement (the “July 2009 Private
Placement”).   In connection with the July 2009 Private Placement,
among other things we:





·      exchanged
a portion of the Old Notes in the aggregate principal amount plus accrued
interest totaling $8.8 million for new two-year 10% unsecured senior convertible
notes, convertible into shares of common stock at a conversion price of
approximately $2.54 per share (the “New Convertible Notes”) and cancelled the
corresponding Old Notes; and




·      issued
additional New Convertible Notes in the aggregate principal amount of $10.5
million to new note investors.





The New
Convertible Notes accrue interest at 10% per annum and mature on July 28,
2011.  The note holders may convert their principal and related
accrued interest into shares of the Company’s common stock at a conversion price
of $2.54 per share.  The conversion price is subject to adjustment for
specified dilutive events, as defined in the note.  Starting on July
28, 2010, the Company has the right to redeem all or a portion of the New
Convertible Notes.  Upon a change in control or default, as defined in
the note, the note holders may require the Company to redeem their
notes.





We have
determined that certain provisions contained in the notes are considered
embedded derivates that require bifurcation from the debt host contract. At the
date of issuance and as of June 30, 2010, we have determined that the value of
these derivatives is not significant. We evaluate the estimates and assumptions
used in determining such value each reporting period and make revisions should
facts and circumstances warrant a change.





Note
7 - Commitments and Contingencies





SIGA
Litigation




In
December 2006, we filed a complaint against Siga Technologies, Inc. (“SIGA”) in
the Delaware Court of Chancery.  The complaint alleges, among other
things, that we have the right to license exclusively development and marketing
rights for SIGA’s drug candidate, ST-246, pursuant to a merger agreement between
the parties (the “Merger Agreement”) that was terminated in October
2006.  The complaint also alleges that SIGA failed to negotiate in
good faith the terms of such a license pursuant to the terminated merger
agreement.




13




We are
seeking alternatively a judgment requiring SIGA to enter into an exclusive
license agreement with the Company for ST-246 in accordance with the terms of
the term sheet attached to the merger agreement or monetary
damages.  In January 2008, the Delaware Court of Chancery issued a
ruling denying a motion by SIGA to dismiss the complaint.  SIGA has
filed a counterclaim against the Company alleging that we breached our duty to
engage in good-faith negotiations by, among other things, presenting SIGA with a
bad-faith initial proposal for a license agreement that did not contain all
necessary terms, demanding SIGA prepare a complete draft of a partnership
agreement and then unreasonably rejecting that agreement, and unreasonably
refusing to consider economic terms that differed from those set forth in the
license agreement term sheet attached to the Merger Agreement.  SIGA
is seeking recovery of its reliance damages from this alleged
breach.





Discovery
in the case closed in February 2010.  In March 2010 SIGA filed a
motion for summary judgment, and subsequently we filed an answering brief in
April 2010 and SIGA filed its reply brief.  Oral argument on SIGA’s motion
for summary judgment was held in the Delaware Court of Chancery in July
2010.  The court has reserved it final decision on SIGA’s motion but has
also set a date for trial to commence on January 3, 2011.





An
accrual for a loss contingency has not been made because the unfavorable
resolution of this contingency is not probable.




Government
Contracting




Payments
to the Company on cost-plus-fee contracts are provisional and are subject to
adjustment upon audit by the Defense Contract Audit Agency. In our opinion,
adjustments that may result from audits are not expected to have a material
effect on the Company’s financial position, results of operations, or cash
flows.





Registration
Rights Agreements




We
entered into a Registration Rights Agreement with the investors who participated
in the July 2009 Private Placement.  We subsequently filed a
registration statement on Form S-3 with the Securities and Exchange Commission
to register a portion of the shares underlying the New Convertible Notes and
related warrants, which registration statement was declared effective in the
fourth quarter 2009.  We are obligated to maintain the registration
statement effective until the date when all shares underlying the New
Convertible Notes and related warrants (and any other securities issued or
issuable with respect to in exchange for such shares) have been
sold.




We have
separate registration rights agreements with investors that we executed in
connection with the initial public offering, the Merger and a subsequent equity
financing, under which we have obligations to keep the corresponding
registration statements effective until the registrable securities (as defined
in each such agreement) have been sold, and under which we may have separate
obligations to file registration statements in the future on either a demand or
“piggy-back” basis or both.




Under the
terms of the New Convertible Notes, if the registration statement is not
declared effective as specified in such notes (“Effectiveness Failure”), or
after the effective date of the registration statement, after the 2nd
consecutive business day (other than during an allowable blackout period) on
which sales of all of the securities required to be included on the registration
statement cannot be made pursuant to the registration statement (a “Maintenance
Failure”), we will be required to pay to each selling stockholder a one-time
payment of 1.0% of the aggregate principal amount of the New Convertible Notes
relating to the affected shares on: (i) the day of an Effectiveness Failure and
(ii) the initial day of a Maintenance Failure. Our total maximum obligation
under this provision would be approximately $193,000.




14




Following
an Effectiveness Failure or Maintenance Failure, we will also be required to
make to each selling stockholder monthly payments of 1.0% of the aggregate
principal amount of the New Convertible Notes relating to the affected shares on
each of the following dates:  (i) on every 30th day after the initial
day of an Effectiveness Failure and (ii) on every 30th day after the initial day
of a Maintenance Failure, in each case prorated for shorter periods and until
the failure is cured. Our total maximum obligation under this provision would
approximate $193,000 for each month until the failure is cured.  The
payments above assume that we otherwise comply with the terms of the New
Convertible Notes.





Furthermore,
under the terms of the sale and purchase agreement, as amended (the “Avecia
Purchase Agreement”) we entered into in connection with the Avecia Acquisition,
we are required to pay Avecia $5 million within 90 days of entering into a
multi-year funded development contract that was to be issued by BARDA under
solicitation number RFP-BARDA-08-15 (or any substitution or replacement thereof)
for the further development of SparVaxTM.  RFP-BARDA-08-15
was cancelled by BARDA in December 2009.  Accordingly, our obligation
to pay Avecia the $5 million payment would mature only upon our receipt of a
substitution or replacement thereof.  We have received funds from
BARDA and other U.S. government agencies under various development agreements
between us and BARDA.  Any development contract deemed to be a
substitute or replacement of RFP-BARDA-08-15 could trigger our obligation to
make the $5 million payment under the Avecia Purchase Agreement.





Note
8 - Stockholders’ Equity (Deficit)




Common
Stock




In April
2010, we completed a public sale of 1,666,668 shares of our common stock at
$1.50 per share and warrants to purchase an aggregate of 500,000 shares of our
common stock at an exercise price of $1.89 per share, generating gross proceeds
of approximately $2.5 million. The warrants become exercisable on October 13,
2010 and expire on October 13, 2015. Placement fees of approximately $175,000
and legal and other fees of approximately $100,000 were incurred in connection
with this transaction.





In July
2010,we completed
a public sale of 2,785,714 shares of our common stock at $1.40 per share and
warrants to purchase an aggregate of 1,323,214 shares of our common stock at an
exercise price of $1.63 per share, generating gross proceeds of approximately
$3.9 million. The warrants become exercisable on January 23, 2011 and expire on
January 23, 2017. Placement fees of approximately $256,000 and legal and other
fees of approximately $100,000 were incurred in connection with this
transaction.




Long-Term
Incentive Plan




Prior to
2007, share-based awards were granted pursuant to our 2002 Long-Term Incentive
Plan (the “2002 Plan”).  In connection with the Merger, we assumed all
outstanding awards that had been initially granted under the 2002
Plan.  No further grants are being made under the 2002
Plan.  On August 3, 2007, the Company’s stockholders approved the 2007
Long Term Incentive Plan (the “2007 Plan”) which provides for the granting of
incentive and non-qualified stock options, stock appreciation rights,
performance units, restricted common awards and performance bonuses
(collectively “awards”) to Company officers and
employees.  Additionally, the 2007 Plan authorizes the granting of
non-qualified stock options and restricted stock awards to Company directors and
to independent consultants.





At that
time, we reserved 3,500,000 shares of common stock in connection with awards to
be granted under the 2007 Plan, including those awards that had originally been
made under the 2002 Plan.  In 2008, our shareholders approved
amendments to the 2007 Plan, increasing from 3,500,000 shares to 4,600,000
shares the maximum number of shares authorized for issuance under the plan and
adding an evergreen provision pursuant to which the number of shares authorized
for issuance under the plan will increase automatically in each year, beginning
in 2009 and continuing through 2015, according to certain limits set forth in
the 2007 Plan.  The Board of Directors in conjunction with management
determines who receives awards, the vesting conditions, which are generally four
years, and the exercise price.  Options may have a maximum term
of ten years.




15





Warrants




In
connection with the March 27, 2009 public offering of approximately 2.1 million
shares, we issued warrants to purchase an aggregate of 705,354 shares of our
common stock at an exercise price of $3.00 per share.  The warrants
became exercisable on September 27, 2009 and will expire on September 27,
2014.  These warrants are a derivative liability and as such reflect
the liability at fair value in the consolidated balance sheets.  The
fair value of this derivative liability will be re-measured at the end of every
reporting period and the change in fair value will be reported in the
consolidated statement of operations as other income (expense).





In
connection with the July 2009 Private Placement, we issued warrants to purchase
an aggregate of 2,572,775 shares of the company’s common stock at an exercise
price of $2.50 per share. The warrants will expire on January 28, 2015 and are
classified in equity.





In April
2010, we completed a public sale of 1,666,668 shares of our common stock at
$1.50 per share and warrants to purchase an aggregate of 500,000 shares of our
common stock at an exercise price of $1.89 per share, generating gross proceeds
of approximately $2.5 million.  The warrants become exercisable on
October 13, 2010 and expire on October 13, 2015. Placement fees of approximately
$175,000 and legal and other fees of approximately $100,000 were incurred in
connection with this transaction. These warrants are a derivative liability and
as such reflect the liability at fair value in the consolidated balance
sheets.   The fair value of this derivative liability will be
re-measured at the end of every reporting period and the change in fair value
will be reported in the consolidated statement of operations as other income
(expense).





Note
9 - Subsequent Events




In July
2010,we completed
a public sale of 2,785,714 shares of our common stock at $1.40 per share and
warrants to purchase an aggregate of 1,323,214 shares of our common stock at an
exercise price of $1.63 per share, generating gross proceeds of approximately
$3.9 million. The warrants become exercisable on January 23, 2011 and expire on
January 23, 2017.  Placement fees of approximately $256,000 and legal
and other fees of approximately $100,000 were incurred in connection with this
transaction.





In July
2010, the NYSE Amex LLC (the “Exchange”) sent a letter to us advising that we
were not in compliance with continued listing standards, specifically
Sections 1003(a)(i), (ii) and (iii) of the Exchange’s Company Guide, because our
we did not meet the following criteria: stockholders’ equity of at least (i)
$2.0 million, (ii) $4.0 million or (iii) $6.0 million, with corresponding losses
from continuing operations and/or net losses in (i) two of our three most
recent fiscal years, (ii) three of our four most recent fiscal years, or (iii)
our five most recent fiscal years, respectively.





We will
shortly submit a plan to the Exchange, stating how we intend to regain
compliance with the continued listing standards by January 26,
2012.  If the Exchange accepts the plan, we will be able to continue
our listing during such time, subject to continued periodic review by Exchange
staff.  If the Exchange does not accept the plan, it accepts the plan
but we do not make progress consistent with the plan during the plan period, or
we do not meet the plan by the end of the plan period, the Exchange could
initiate delisting proceedings.  We may appeal any delisting
determination before a listing qualifications panel of the Exchange and in turn
request a review of the decision of such panel by the Exchange’s Committee on
Securities.





16





Item
2.  Management’s Discussion and Analysis of Financial Condition and Results
of Operations.




This Quarterly Report on
Form 10-Q contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E
of the Securities Exchange Act of 1934, as amended.  This information may
involve known and unknown risks, uncertainties and other factors that are
difficult to predict and may cause our actual results, performance or
achievements to be materially different from future results, performance or
achievements expressed or implied by any forward-looking statements.  These
risks, uncertainties and other factors include, but are not limited to, risk
associated with the reliability of the results of the studies relating to human
safety and possible adverse effects resulting from the administration of the
Company’s product candidates, unexpected funding delays and/or reductions or
elimination of U.S. government funding for one or more of the Company’s
development programs, the award of government contracts to our competitors,
unforeseen safety issues, challenges related to the development, technology
transfer, scale-up, and/or process validation of manufacturing processes for our
product candidates, unexpected determinations that these product candidates
prove not to be effective and/or capable of being marketed as products,
challenges related to the submission or implementation of our NYSE Amex
compliance plan, as well as risks detailed from time to time in PharmAthene’s
Forms 10-K and 10-Q under the caption “Risk Factors” and in its other reports
filed with the U.S. Securities and Exchange Commission (the “SEC”). 
Forward-looking statements describe management’s current expectations regarding
our future plans, strategies and objectives and are generally identifiable by
use of the words “may,” “will,” “should,” “expect,” “anticipate,” “estimate,”
“believe,” “intend,”  “project,” “potential” or “plan” or the negative of
these words or other variations on these words or comparable terminology. 
Such statements include, but are not limited to, statements about potential
future government contract or grant awards, potential payments under government
contracts or grants, potential regulatory approvals, future product
advancements, anticipated financial or operational results and expected benefits
from our acquisition of Avecia’s biodefense vaccines business. 
Forward-looking statements are based on assumptions that may be incorrect, and
we cannot assure you that the projections included in the forward-looking
statements will come to pass.




We
have based the forward-looking statements included in this Quarterly Report on
Form 10-Q on information available to us on the date of this Quarterly
Report, and we assume no obligation to update any such forward-looking
statements, other than as required by law.  Although we undertake no
obligation to revise or update any forward-looking statements, whether as a
result of new information, future events or otherwise, you are advised to
consult any additional disclosures that we may make directly to you or through
reports that we, in the future, may file with the SEC, including Annual Reports
on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on
Form 8-K.




The
following discussion should be read in conjunction with our condensed
consolidated financial statements which present our results of operations for
the three and six months ended June 30, 2010 and 2009 as well as our financial
positions at June 30, 2010 and December 31, 2009, contained elsewhere in
this Quarterly Report on Form 10-Q.  The following discussion should
also be read in conjunction with the Annual Report on Form 10-K for the
year ended December 31, 2009 filed on March 26, 2010 and as amended on
April 30, 2010, including the consolidated financial statements contained
therein.




Overview




We are a
biodefense company engaged in the development and commercialization of medical
countermeasures against biological and chemical weapons.  Our current lead
product candidates are:




·
            SparVaxTM,
      a second generation recombinant protective antigen (“rPA”) anthrax
      vaccine,




·
            Valortim®,
      a fully human monoclonal antibody (an identical population of highly
      specific antibodies produced from a single clone) for the prevention and
      treatment of anthrax infection, and




17




·
            Protexia®,
      a recombinant enzyme (butyrylcholinesterase), which mimics a natural
      bioscavenger for the prevention or treatment of nerve agent poisoning by
      organophosphate compounds, including nerve gases and
      pesticides.





Recent
Events





In July
2010,we completed
a public sale of 2,785,714 shares of our common stock at $1.40 per share and
warrants to purchase an aggregate of 1,323,214 shares of our common stock at an
exercise price of $1.63 per share, generating gross proceeds of approximately
$3.9 million. The warrants become exercisable on January 23, 2011 and expire on
January 23, 2017. Placement fees of approximately $256,000 and legal and other
fees of approximately $100,000 were incurred in connection with this
transaction.





In July
2010, the NYSE Amex LLC (the “Exchange”) sent a letter to us advising that we
were not in compliance with continued listing standards, specifically
Sections 1003(a)(i), (ii) and (iii) of the Exchange’s Company Guide,
because  we did not meet the following criteria: stockholders’ equity
of at least (i) $2.0 million, (ii) $4.0 million or (iii) $6.0 million, with
corresponding losses from continuing operations and/or net losses in (i)
two of our three most recent fiscal years, (ii) three of our four most recent
fiscal years, or (iii) our five most recent fiscal years,
respectively.





We will
shortly submit a plan to the Exchange, stating how we intend to regain
compliance with the continued listing standards by January 26,
2012.  If the Exchange accepts the plan, we will be able to continue
our listing during such time, subject to continued periodic review by Exchange
staff.  If the Exchange does not accept the plan, it accepts the plan
but we do not make progress consistent with the plan during the plan period, or
we do not meet the plan by the end of the plan period, the Exchange could
initiate delisting proceedings.  We may appeal any delisting
determination before a listing qualifications panel of the Exchange and in turn
request a review of the decision of such panel by the Exchange’s Committee on
Securities.





Critical
Accounting Policies




The
preparation of financial statements in conformity with generally accepted
accounting principles in the U.S. requires us to make estimates and assumptions
that affect the reported amounts of assets and liabilities, disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period. 
We base our estimates and assumptions on historical experience and various other
factors that are believed to be reasonable under the circumstances.  Actual
results could differ from our estimates and assumptions.  We believe
the following are our critical accounting policies, i.e., they affect our more
significant estimates and assumptions and require the use of difficult,
subjective and complex judgment in their application.





Revenue
Recognition




We
generate our revenue from two different types of contractual arrangements:
cost-plus-fee contracts and cost reimbursable grants.  Costs consist
primarily of actual internal labor charges and external sub-contractor costs
incurred plus an allocation of applied fringe benefits, overhead and general and
administrative expenses as defined in the contract.





Revenues
on cost-plus-fee contracts are recognized in an amount equal to the costs
incurred during the period plus an estimate of the applicable fee
earned.  The estimate of the applicable fee earned is determined by
reference to the contract:  if the contract defines the fee in terms
of risk-based milestones and specifies the fees to be earned upon the completion
of each milestone, then the fee is recognized when the related milestones are
earned.  Otherwise, we compute fee income earned in a given
periodby using a
proportional performance method based on costs incurred during the period as
compared to total estimated project costs and application of the resulting
fraction to the total project fee specified in the contract.




We
analyze each cost reimbursable grant to determine whether we should report such
reimbursements as revenue or as an offset to our expenses
incurred.  For the three months ended June 30, 2010 and 2009, we
recorded approximately $0.9 million and $0.8 million, respectively, of costs
reimbursed by the government as an offset to research and development
expenses.  For the six months ended June 30, 2010 and 2009, we
recorded approximately $1.7 million and $1.2 million, respectively, of costs
reimbursed by the government as an offset to research and development
expenses.




18




Our
revenue-generating contracts may include multiple elements, including one or
more of up-front license fees, research payments, and milestone
payments.  In these situations, we allocate the total contract price
to the multiple elements based on their relative fair values and recognize
revenue for each element according to its characteristics.  As revenue
is recognized in accordance with the terms of the contracts, related amounts are
recorded as unbilled accounts receivable, the primary component of “Other
receivables (including unbilled receivables)” in our consolidated balance
sheets.  As specific contract invoices are generated and sent to our
customers, invoiced amounts are transferred out of unbilled accounts receivable
and into billed accounts receivable.  Invoicing frequency and payment
terms for cost-plus-fee contracts with our customers are defined within each
contract, but are typically monthly invoicing with 30-60 day payment
cycles.





At June
30, 2010, “Other receivables (including unbilled receivables)” were
approximately $ 4.3 million, of which approximately $3.8 million were unbilled
accounts receivables.





Research
and Development Expenses




Research
and development costs are expensed as incurred; pre-payments are deferred and
expensed as performance occurs.  Research and development costs include
salaries, facilities expense, overhead expenses, material and supplies,
pre-clinical expense, clinical trials and related clinical manufacturing
expenses, stock-based compensation expense, contract services and other outside
services.




Share-Based
Payments




We
expense all share-based awards to employees, including grants of employee stock
options, based on their estimated fair value at date of grant.  Costs of
all share-based payments are recognized over the requisite service period that
an employee must provide to earn the award (i.e. usually the vesting period) and
charged to the functional operating expense associated with that
employee.




Intangible
Assets




Because
of the nature of pharmaceutical research, and particularly because of the
difficulties associated with efficacy studies in humans related to the
bioterrorist products with which we work and the government’s related funding
provisions, factors that affect the estimate of the life of an asset are often
more uncertain than with respect to other non-bioterrorist pharmaceutical
research.  We review the carrying value of our intangible assets for
impairment annually during the fourth quarter of every year, or more frequently
if impairment indicators exist, in accordance with ASC Section 360-10-35,
"Impairment or Disposal of Long-Lived Assets."  Evaluating for impairment
requires judgment, including the estimation of future cash flows, future growth
rates and profitability and the expected life over which cash flows will
occur.  Changes in the Company’s business strategy or adverse changes
in market conditions could impact impairment analyses and require the
recognition of an impairment charge equal to the excess of the carrying value of
the intangible asset over its estimated fair value.   If
impairment is indicated, we measure the amount of such impairment by comparing
the carrying value of the assets to the present value of the expected future
cash flows associated with the use of the asset.




Results
of Operations




Revenue




We
recognized revenue of $4.8 million and $8.1 million during the three months
ended June 30, 2010 and 2009, respectively.  For the six months ended
June 30, 2010 and 2009, we recognized revenue of $7.9 million and $13.6 million,
respectively.




19





Our
revenue consisted primarily of contract funding from the U.S. government for the
development of Protexia®,
SparVaxTM and Valortim®.  Our revenue in the three and six months ended June
30, 2010 changed from the comparable periods of 2009 primarily due to the
following:





·
            Under
      the September 2006 contract with the DoD for the advanced development
      of Protexia®,
      we recognized $1.9 million and $3.0 million of revenue for the three
      months ended June 30, 2010 and 2009, respectively, and $1.8 million and
      $5.3 million for the six months ended June 30, 2010 and 2009,
      respectively.  The significant decline in revenue in the 2010
      periods as compared to 2009 is primarily attributable to the completion in
      the third quarter of 2009 of the first phase of this
      contract.  The Company is awaiting the decision of the DoD
      regarding the funding for the next phase of the program.It remains unclear
      at this point when the DoD will make a decision regarding funding for the
      next phase.  In May 2010, the DoD approved a contract
      modification to provide PharmAthene with limited incremental funding to
      support certain on-going costs of this program.  Until a
      longer-term funding decision is made on the next phase of the program, we
      do not expect to recognize significant additional revenues under this
      contract.




·
            Under
      our contract for the development of SparVaxTM, we recognized approximately
      $2.1 million and $2.9 million of revenue for the three months ended June
      30, 2010 and 2009, respectively, and approximately $4.1 million and $4.9
      million for the six months ended June 30, 2010 and 2009, respectively. The
      decrease in revenue in 2010 as compared to 2009 was primarily attributable
      to one-time costs (and thus corresponding revenue) related to our
      settlement agreement with Avecia recognized in the three months ended June
      30, 2009, partially offset by revenues in the 2010 periods related to
      increased development and technology transfer efforts under the
      program.




·
            Under
      the September 2007 contract for the advanced development of
      Valortim®,
      we recognized $0.8 million and $1.6 million of revenue for the three
      months ended June 30, 2010 and 2009, respectively.  We recognized
      $1.6 million and $2.2 million of revenue for the six months ended June 30,
      2010 and 2009, respectively.   Revenue in all periods was
      largely attributable to reimbursement of costs related to non-clinical
      studies.  In addition, work in the three and six months ended
      June 30, 2009 included other development work as we prepared for
      additional human clinical trials, while work in the three and six months
      ended June 30, 2010 included work in connection with the on-going
      investigation related to adverse reactions seen in the Valortim®/ciprofloxacin
      clinical trial and certain manufacturing-related
    activities.





Research
and Development Expenses





Our
research and development expenses were $5.9 million and $10.2 million for the
three months ended June 30, 2010 and 2009, respectively. Our research and
development expenses were $10.9 million and $16.0 million for the six months
ended June 30, 2010 and 2009, respectively.  These expenses resulted
from research and development activities related to our Valortim® and
Protexia® programs
as well as from activities related to the SparVaxTM, RypVaxTM and third
generation anthrax vaccine programs.  We incurred both direct expenses,
which included salaries and other costs of personnel, raw materials and
supplies, and an allocation of indirect expenses.  We also incurred
third-party costs, such as contract research, consulting and clinical
development costs for individual projects.  In the second quarter 2010 we
completed the wind down of all activities for our RypVaxTM plague vaccine
program and entered into a modification to our existing contract with the
National Institute of Allergy and Infectious Diseases (“NIAID”) for development
work on the Company’s third-generation anthrax vaccine candidate.  The
modification closed out this contract as part of a no-cost settlement between
the Company and NIAID.   Research and development expenses for
the three months ended June 30, 2010 and 2009 were net of cost reimbursements
under certain of our government grants of $0.9 million and $0.8 million,
respectively.  Research and development expenses for the six month
period ended June 30, 2010 and 2009 were net of cost reimbursements under
certain of our government grants of $1.7 million and $1.2 million,
respectively.




20




Research
and development expenses for the three and six months ended June 30, 2010 and
2009 were attributable to research programs as follows:





Three
      Months ended($ in millions)
            
            June
      30,
              2010
            
            
            June
      30,
              2009Anthrax
      therapeutic and vaccines
            
            $
            3.9
            
            
            $
            7.6Chemical
      nerve agent protectants
            
            
            1.8
            
            
            
            2.0Recombinant
      dual antigen plague vaccine
            
            
            0.0
            
            
            
            0.6Internal
      research and development
            
            
            0.2
            
            
            
            0.0Total
      research and development expenses
            
            $
            5.9
            
            
            $
            10.2







Six
      Months ended($ in millions)
            
            June
      30,
              2010
            
            
            June
      30,
              2009Anthrax
      therapeutic and vaccines
            
            $
            7.2
            
            
            $
            10.3Chemical
      nerve agent protectants
            
            
            3.3
            
            
            
            4.5Recombinant
      dual antigen plague vaccine
            
            
            0.0
            
            
            
            1.0Internal
      research and development
            
            
            0.4
            
            
            
            0.2Total
      research and development expenses
            
            $
            10.9
            
            
            $
            16.0





For the
three and six months ended June 30, 2010, research and development expenses
decreased $4.3 million and $5.1 million, respectively, from the prior year
periods.  This was primarily due to the $3.0 million one-time
termination fee to Avecia incurred in the second quarter of 2009.





The
decrease in development expenses related to the clinical nerve agents protectant
program resulted from reduced process development and manufacturing activities
as the program completed the development stage by the end of 2009.  While
certain limited costs in 2010 will be covered under the interim funding approved
by the DoD, until such time as the DoD decides to fund the next phase of work
over the longer term, costs incurred under our chemical nerve agents protectant
program in future periods may not be covered, either in whole or in part, by
corresponding revenues under our contract with the DoD.  If the DoD
does consent to further work under this program, we anticipate that costs under
our chemical nerve agents protectant program will increase in future periods as
that program progresses through additional human clinical trials. We and the
U.S. government agreed to a reduction to the scope of work related to the
development of our plague vaccine, and costs (and related revenue) under that
contract have declined during the wind down period that ended in the second
quarter 2010.





General and
Administrative Expenses




General
and administrative functions include executive management, finance and
administration, government affairs and regulations, corporate development, human
resources, legal, and compliance.  For each function, we may incur expenses
such as salaries, supplies and third-party consulting and other external costs
and non-cash expenditures such as expense related to stock option and restricted
share awards.  An allocation of indirect costs such as facilities,
utilities and other administrative overhead is also included in general and
administrative expenses.




Expenses
associated with general and administrative functions were $4.1 and $4.4 million
for both the three months ended June 30, 2010 and 2009,
respectively.  Expenses associated with general and administrative
functions were $9.4 million and $9.6 million for the six months ended June 30,
2010 and 2009, respectively.




21




General
and administrative expenses decreased $0.3 million for the three months ended
June 30, 2010, as compared to the prior year period. During the three months
ended June 30, 2010, we recorded bad debt expense of approximately $1.1 million,
primarily associated with an invoice to our government customer related to rPA
anthrax vaccine development work performed at Avecia prior to the transfer of
development activities to a U.S.-based manufacturer and the novation of the
Company’s government contract for the advanced development of its rPA anthrax
vaccine candidate from NIH to BARDA. These expenses were more than offset by
reduced accruals for bonuses, salaries, stock compensation, recruiting,
relocation, and travel expenses.





General
and administrative expenses decreased $0.1 million for the six months ended June
30, 2010, as compared to the prior year period, largely due to the recording of
bad debt expense of approximately $1.6 million which again was primarily
associated with the invoice to our government customer for the Avecia work and
the novation referenced above as well as with the wind down of the
third-generation anthrax vaccine program. These expenses were more than offset
by reduced bonuses, salaries, stock compensation, recruiting and relocation and
travel expenses.





Depreciation
and Intangible Amortization




Depreciation
and amortization expenses were $0.3 million and $0.2 million for the three
months ended June 30, 2010 and 2009, respectively.  Depreciation and
amortization expenses were $0.5 million and $0.4 million for the six months
ended June 30, 2010 and 2009, respectively.  These expenses relate
primarily to the depreciation and amortization of farm building improvements,
leasehold improvements and laboratory equipment, and patents acquired as part of
a 2005 business combination.




Other
Income and Expenses




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




We
incurred interest expense of $0.9 million and $0.6 million for the three months
ended June 30, 2010 and 2009, respectively. We incurred interest expense of $1.9
million and $1.2 million for the six months ended June 30, 2010 and 2009,
respectively.  Interest expense for all periods relates primarily to
interest on our outstanding convertible notes.  For the three and six
months ended June 30, 2010, interest expense includes the amortization of the
debt discount arising from the allocation of fair value to the stock
purchase warrants issued in connection with the July 2009 convertible
debt.  Interest expense for the three and six months ended June 30,
2009 relates primarily to our old notes and  our then outstanding
secured credit facility, which was repaid in full during the third quarter
2009.




The
change in the fair value of our derivative instruments (Common Stock Purchase
Warrants) were approximately $0.0 million for the three months ended June 30,
2010 compared to $0.6 million for the three months ended June 30,
2009.  The change in the fair value of our derivative instruments was
$0.3 million for the six months ended June 30, 2010 compared to $0.8 million for
the three months ended June 30, 2009.  The fair value of these
derivative instruments is estimated using the Black-Scholes option pricing
model.





22




Liquidity
and Capital Resources




Overview




Our
primary cash requirements through the end of 2010 are to fund our operations
(including our research and development programs) and support our general and
administrative activities.  Our future capital requirements will depend on
many factors, including, but not limited to, the progress of our research and
development programs; the progress of pre-clinical and clinical testing; the
time and cost involved in obtaining regulatory approval; the cost of filing,
prosecuting, defending and enforcing any patent claims and other intellectual
property rights; changes in our existing research relationships, competing
technological and marketing developments; our ability to establish collaborative
arrangements and to enter into licensing agreements and contractual arrangements
with others; and any future change in our business strategy.  These cash
requirements could change materially as a result of shifts in our business and
strategy.




Since our
inception, we have not generated positive cash flows from operations.  To
bridge the gap between payments made to us under our government contracts and
grants and our operating and capital needs, we have had to rely on a variety of
financing sources, including the issuance of equity securities and convertible
notes, proceeds from loans and other borrowings, and the trust funds obtained in
the Merger.  For the foreseeable future, we will continue to need these
types of financing vehicles and potentially others to help fund our future
operating and capital requirements.





At June
30, 2010, accounts receivables and other receivables (including unbilled
receivables) totaled approximately $12.9 million primarily due to delays in
billing for services related to the SparVaxTM second generation anthrax vaccine
program.  Although we are now current with our billing of our second
generation anthrax vaccine program, a significant portion of these submitted
invoices are still undergoing the review and approval process prior to being
paid.  In addition, the bid protest filed by a third party with the
GAO in March 2010, challenging the decision by the HHS to enter into the
modification to our research and development contract with BARDA for the
development of SparVaxTM, and resulting “stop-work” order, caused delays in our
work under that modification. The bid protest was ultimately denied, and the
related stop work-order canceled in June 2010.  Nevertheless, the
protest, along with the accumulated billing and collection delays, have reduced
revenues and our available cash and cash equivalents during the first six months
of 2010.   The combination of these two developments reduced our
operating cash flows, which resulted in a need for additional financing to fund
our working capital needs.





In July
2010, we generated net proceeds of approximately $3.5 million from a registered
direct public offering.  We currently believe that, based on the
operating cash requirements and capital expenditures expected through the end of
2010, and expected receipts from our government contracts and grants, we will
not require additional funding to continue our current level of operations
through the end of 2010.  We may elect to raise additional capital in
2010 or beyond to expand our business and/or strengthen our financial position
or, if our current expectations and estimates about future operating costs prove
to be incorrect, we may need to raise additional capital in 2010 or
beyond.





In April
2010, we completed a public sale of 1,666,668 shares of common stock at $1.50
per share and warrants to purchase an aggregate of 500,000 shares of our common
stock at an exercise price of $1.89 per share, generating gross proceeds of $2.5
million.  The warrants become exercisable on October 13, 2010 and
expire on October 13, 2015. Placement fees of approximately $175,000 and legal
and other fees of approximately $100,000 were incurred in connection with this
transaction. These warrants are a derivative liability and as such reflect the
liability at fair value in the consolidated balance sheets.   The
fair value of this derivative liability will be re-measured at the end of every
reporting period and the change in fair value will be reported in the
consolidated statement of operations as other income (expense).





Furthermore,
under the terms of the sale and purchase agreement, as amended (the “Avecia
Purchase Agreement”) we entered into in connection with the Avecia Acquisition,
we are required to pay Avecia $5 million within 90 days of entering into a
multi-year funded development contract that was to be issued by BARDA under
solicitation number RFP-BARDA-08-15 (or any substitution or replacement thereof)
for the further development of SparVaxTM.  RFP-BARDA-08-15 was
cancelled by BARDA in December 2009.  Accordingly, our obligation to
pay Avecia the $5 million payment would mature only upon our receipt of a
substitution or replacement thereof.  We have received funds from
BARDA and other U.S. government agencies under various development agreements
between us and BARDA.  Any development contract deemed to be a
substitute or replacement of RFP-BARDA-08-15 could trigger our obligation to
make the $5 million payment under the Avecia Purchase
Agreement.




Under the
terms of our New Convertible Notes, unless earlier converted, redeemed or
accelerated, the outstanding principal amount of $19.3 million plus accrued
interest is payable at maturity on July 28, 2011.  Prior to maturity,
the note holders may convert their principal and related accrued interest into
shares of our common stock at a conversion price, subject to adjustment, of
$2.54 per share.  Beginning on July 28, 2010, we have the right to
redeem all or a portion of the New Convertible Notes.  Upon a change
in control or default, as defined in the note, the note holders may require us
to redeem their notes.




23





The
turmoil affecting the banking system and financial markets and the possibility
that financial institutions may consolidate or cease operations has resulted in
a tightening in the credit markets, a low level of liquidity in many financial
markets, and extreme volatility in fixed income, credit, currency and equity
markets.  As a result, there can be no assurance that future funding will
be available to us on reasonably acceptable terms, or at all.  In addition,
due to the U.S. government’s substantial efforts to stabilize the economy, the
U.S. government may be forced or choose to reduce or delay spending in
the biodefense field, which could decrease the likelihood of future
government contract awards, the likelihood that the government will exercise its
right to extend any of its existing contracts with us and/or the likelihood that
the government would procure products from us.  Finally, the note and
warrant purchase agreement entered into in connection with the July 2009
Private Placement prevents us from incurring senior indebtedness (other than
trade payables) in excess of $10 million without the prior written approval of
no less than a majority of the aggregate principal amount of the debt then
outstanding.




We have
incurred cumulative net losses and expect to incur additional losses in
conducting further research and development activities.  We do not have
commercial products and, given the substantial costs relating to the development
of pharmaceutical products, have relatively limited existing capital
resources.  Our plans with regard to these matters include continued
development of our products as well as seeking additional funds to support our
research and development efforts.  Although we continue to pursue these
plans, there is no assurance that we will be successful in obtaining sufficient
future financing on commercially reasonable terms or at all or that we will be
able to secure additional funding through government contracts and
grants.  Our consolidated financial statements have been prepared on a
basis which assumes that we will continue as a going concern and which
contemplates the realization of assets and the satisfaction of liabilities and
commitments in the normal course of business and do not include any adjustments
that might result if the carrying amount of recorded assets and liabilities are
not realized.





Sources
and Uses of Cash





Cash,
cash equivalents, restricted cash and short-term available-for-sale investments
were $0.8 million and $5.8 million at June 30, 2010 and December 31, 2009,
respectively.  The $5.0 million decrease at June 30, 2010 was primarily
attributable to the net impact of cash used to fund operations and the timing of
collections on our U.S. Government accounts receivable. As of June 30, 2010 and
December 31, 2009, total accounts receivables and other receivables (including
unbilled receivables) were $12.9 million and $17.4 million,
respectively.





The
relatively high level of accounts receivables at June 30, 2010 and the
relatively high level of accounts receivables and other receivables (including
unbilled receivables) at December 31, 2009 was primarily due to delays in
billing for services related to the SparVaxTM second generation anthrax vaccine
program.  Although we are now current with the billing of our second
generation anthrax vaccine program, a significant portion of these submitted
invoices are still undergoing the review and approval process prior to being
paid.  In addition, the bid protest (which was denied in June 2010)
with respect to the modification to our research and development contract with
BARDA for the development of SparVaxTM, and resulting “stop-work” order, along
with the accumulated billing and collection delays, have reduced revenues and
our available cash and cash equivalents during the first six months of
2010.





In April
2010, we completed a public sale of 1,666,668 shares of common stock at $1.50
per share and warrants to purchase an aggregate of 500,000 shares of our common
stock at an exercise price of $1.89 per share, generating gross proceeds of $2.5
million.  The warrants become exercisable on October 13, 2010 and
expire on October 13, 2015. Placement fees of $175,000 and legal and other fees
of approximately $100,000 were incurred in connection with this
transaction.




24





In July
2010, we completed a public sale of 2,785,714 shares of common stock at $1.40
per share and warrants to purchase an aggregate of 1,323,214 shares of our
common stock at an exercise price of $1.63 per share, generating gross proceeds
of $3.9 million. The warrants become exercisable on January 23, 2011 and expire
on January 23, 2017. Placement fees of $273,000 and legal and other fees of
approximately $100,000 were incurred in connection with this
transaction.




Operating
Activities





Cash used
in operating activities was $ 6.6 million and $ 13.4 million for the six months
ended June 30, 2010 and 2009, respectively. Cash used in operations during
the six months ended June 30, 2010 reflects a net loss, after the effect of
non-cash adjustments of $9.3 million, a decrease in accrued expenses and other
liabilities of $ 7.2 million due to reduced development activities and an
increase in accounts receivable of $1.4 million, partially offset by a $ 6.6
million increase in accounts payable due to enhanced cash management activities
and a $ 4.7 million decrease in prepaid expenses and other current
assets.




Cash used
in operations during the six months ended June 30, 2009 reflects a net
loss, after the effect of non-cash adjustments, of $10.1 million, a decrease in
accounts receivable of $6.5 million, an increase in other assets (primarily in
unbilled accounts receivable associated with our government contracts) of $11.9
million, and an increase in accrued expenses and accounts payable of $2.2
million (primarily in accrued expenses associated with our settlement agreement
with Avecia).  Non-cash adjustments for the six months ended June 30,
2009 included non-cash stock compensation expense of $1.7 million and the change
in the fair value of our derivative liabilities of $0.8
million.





Investing
Activities




Net cash
provided by investing activities was $2.8 million for the six months ended June
30, 2010, compared to $11.0 million used in investing activities for the six
months ended June 30, 2009.  Investing activities for the 2010 period
related primarily to liquidating investments to meet working capital
requirements.




Investing
activities for the first six months of 2009 related primarily to the payment in
June 2010 of $7.0 million of deferred purchase consideration to Avecia,
purchases, net of sales, of available for sale securities of $3.0 million and
approximately $1.0 million of capital expenditures.





Financing
Activities




Net
cash provided by financing activities was $2.1 million for the six months ended
June 30, 2010 as compared to $14.7 million provided by financing activities for
the six months ended June 30, 2009.  Net cash provided from financing
activities for the six months ended June 30, 2010 was the result of the proceeds
from the issuance of common stock and warrants.





In
March 2009, we raised net proceeds of approximately $4.9 million as a
result of the public sale of shares of our common stock and warrants. 
Additionally, pursuant to the payment to Avecia of the deferred purchase
consideration and the modification of our senior secured credit facility, we
reduced our restricted cash obligations by $11.8 million.  We made
principal repayments of $2.0 million under the credit facility for the six
months ended June 30, 2009.





In April
2010, we completed a public sale of 1,666,668 shares of common stock at $1.50
per share and warrants to purchase an aggregate of 500,000 shares of our common
stock at an exercise price of $1.89 per share, generating gross proceeds of $2.5
million.  The warrants become exercisable on October 13, 2010 and
expire on October 13, 2015. Placement fees of $175,000 and legal and other fees
of approximately $100,000 were incurred in connection with this
transaction.




25





Off-Balance
Sheet Arrangements




We do not
have any off-balance sheet arrangements.




Contractual
Obligations




The
following are contractual commitments at June 30, 2010 associated with leases,
research and development arrangements, collaborative development obligations and
long term debt:








Less
      than
            
            
            
            
            
            
            
            
            More
      thanTotal
            
            
            1
      Year
            
            
            1-3
      Years
            
            
            3-5
      Years
            
            
            5
      YearsOperating
      lease obligations
            
            $
            5,623,570
            
            
            $
            905,538
            
            
            $
            1,503,715
            
            
            $
            1,595,390
            
            
            $
            1,618,927Research
      and development collaboration agreements
            
            
            15,119,201
            
            
            
            13,134,201
            
            
            
            1,985,000
            
            
            
            -
            
            
            
            -Current
      and long term debt
            
            
            23,208,562
            
            
            
            -
            
            
            
            23,208,562
            
            
            
            -
            
            
            
            -Total
            
            $
            43,951,332
            
            
            $
            14,039,739
            
            
            $
            26,697,276
            
            
            $
            1,595,390
            
            
            $
            1,618,927







(1)
            This
      table does not include any royalty payments of future sales of products
      subject to license agreements the Company has entered into in relation to
      its in-licensed technology, as the timing and likelihood of such payments
      are not known.




Item 3.  Quantitative and Qualitative Disclosures about
Market Risk.





Not
applicable.





Item 4.  Controls and Procedures.




Evaluation
of Disclosure Controls and Procedures




Under the
supervision and with the participation of our management, including our
principal executive officer and principal financial officer, we conducted an
evaluation of our disclosure controls and procedures, as such term is defined in
Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended
(the “Exchange Act”), as of the end of the period covered by this report. 
Based on this evaluation, our principal executive officer and our principal
financial officer concluded that our disclosure controls and procedures were
effective to provide reasonable assurance that information required to be
disclosed by us in reports we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
SEC’s rules and forms, and is accumulated and communicated to our
management, including our principal executive officer and principal financial
officer, as appropriate to allow timely decisions regarding required
disclosures.





Changes
in Internal Control Over Financial Reporting




There
were no changes in our internal control over financial reporting, identified in
connection with the evaluation required by Rule 13a-15(d) under the Securities
Exchange Act of 1934, as amended, that occurred during the quarter ended June
30, 2010 that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.





26




Inherent
Limitations on Disclosure Controls and Procedures




In
designing and evaluating the disclosure controls and procedures, management
recognized that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives.  In addition, the design of disclosure controls and procedures
must reflect the fact that there are resource constraints and that management is
required to apply its judgment in evaluating the benefits of possible controls
and procedures relative to their costs.





PART II — OTHER INFORMATION




Item 1.  Legal Proceedings




In
December 2006, we filed a complaint against Siga Technologies, Inc. (“SIGA”) in
the Delaware Court of Chancery.  The complaint alleges, among other
things, that we have the right to license exclusively development and marketing
rights for SIGA’s drug candidate, ST-246, pursuant to a merger agreement between
the parties (the “Merger Agreement”) that was terminated in October
2006.  The complaint also alleges that SIGA failed to negotiate in
good faith the terms of such a license pursuant to the terminated merger
agreement.




We are
seeking alternatively a judgment requiring SIGA to enter into an exclusive
license agreement with the Company for ST-246 in accordance with the terms of
the term sheet attached to the merger agreement or monetary
damages.  In January 2008, the Delaware Court of Chancery issued a
ruling denying a motion by SIGA to dismiss the complaint.  SIGA has
filed a counterclaim against the Company alleging that we breached our duty to
engage in good-faith negotiations by, among other things, presenting SIGA with a
bad-faith initial proposal for a license agreement that did not contain all
necessary terms, demanding SIGA prepare a complete draft of a partnership
agreement and then unreasonably rejecting that agreement, and unreasonably
refusing to consider economic terms that differed from those set forth in the
license agreement term sheet attached to the Merger Agreement.  SIGA
is seeking recovery of its reliance damages from this alleged
breach.




Discovery in the case closed in February 2010.  In
March 2010 SIGA filed a motion for summary judgment, and subsequently we filed
an answering brief in April 2010 and SIGA filed its reply brief.  Oral
argument on SIGA’s motion for summary judgment was held in the Delaware Court of
Chancery in July 2010.  The court has reserved it final decision on SIGA’s
motion but has also set a date for trial to commence on January 3,
2011.





27




Item
1A.  Risk Factors




Investing
in our securities involves risks.  In addition to the other information in
this quarterly report on Form 10-Q, stockholders and potential investors
should carefully consider the risks and uncertainties discussed in the
section "Item 1.A.  Risk Factors" in our annual report on Form 10-K for the
year ended December 31, 2009, as supplemented by the risks and uncertainties in
our quarterly report on Form 10-Q for the period ended March 31, 2010 and as
discussed below.  If any of the risks and uncertainties set forth
below, in our 2009 annual report on Form 10-K or in our quarterly report on
Form 10-Q for the period ended March 31, 2010 actually materialize, our
business, financial condition and/or results of operations could be materially
adversely affected, the trading price of our common stock could decline and a
stockholder could lose all or part of his or her investment. The risks and
uncertainties described below and in our 2009 annual report on Form 10-K
and our quarterly report on Form 10-Q for the period ended March 31, 2010 are
not the only ones we face.  Additional risks and uncertainties not
presently known to us or that we currently consider immaterial may also impair
our business operations.





Risks
Related to Our Financial Condition




We
have a history of losses and negative cash flow, anticipate future losses and
negative cash flow, and cannot provide assurances that we will achieve
profitability.




We have
incurred significant losses since we commenced operations.  For the years
ended December 31, 2009, 2008 and 2007 we incurred net losses of approximately
$32.3 million, $36.4 million and $17.7 million respectively and had an
accumulated deficit of approximately $170.6 million at June 30,
2010.  Our losses to date have resulted principally from research and
development costs related to the development of our product candidates, general
and administrative costs related to operations, and costs related to the Avecia
Acquisition.




Our
likelihood for achieving profitability will depend on numerous factors,
including success in:




·
            developing
      our existing products and developing and testing new product
      candidates;·
            continuing
      to receive government funding and identifying new government funding
      opportunities;·
            receiving
      regulatory approvals;·
            carrying
      out our intellectual property strategy;·
            establishing
      our competitive position;·
            pursuing
      third-party collaborations;·
            acquiring
      or in-licensing products; and·
            manufacturing
      and marketing products.





Many of
these factors will depend on circumstances beyond our control.  We cannot
guarantee that we will achieve sufficient revenues for profitability.  Even
if we do achieve profitability, we cannot guarantee that we can sustain or
increase profitability on a quarterly or annual basis in the future.  If
revenues grow more slowly than we anticipate, or if operating expenses exceed
our expectations or cannot be adjusted accordingly, then our business, results
of operations, financial condition and cash flows will be materially and
adversely affected.  Because our strategy includes potential acquisitions
of other businesses, acquisition expenses and any cash used to make these
acquisitions will reduce our available cash.




28





At June
30, 2010, accounts receivable and other receivables (including unbilled
receivables) totaled approximately $12.9 million primarily due to delays in
billing for services related to the SparVaxTM second generation anthrax vaccine
program.  Although we are now current with our billing of our second
generation anthrax vaccine program, a significant portion of these submitted
invoices are still undergoing the review and approval process prior to being
paid.   In addition, the bid protest filed by a third party with the
U.S. Government Accountability Office (GAO) in March 2010, challenging the
decision by the U.S. Department of Health and Human Services (HHS) to enter into
the modification to our research and development contract with BARDA for the
development of SparVaxTM, and resulting “stop-work” order, caused delays in our
work under that modification. The bid protest was ultimately denied, and the
related stop work-order canceled in June 2010.  Nevertheless, the
protest, along with the accumulated billing and collection delays, have reduced
revenues and our available cash and cash equivalents during the first six months
of 2010.  The combination of these two developments reduced our
operating cash flows, which resulted in a need for additional financing to fund
our working capital needs.





In July
2010, we generated net proceeds of approximately $3.5 million from a registered
direct offering.  We currently believe that, based on the operating
cash requirements and capital expenditures expected through the end of 2010, and
expected receipts from our government contracts and grants, we will not require
additional funding to continue our current level of operations through the end
of 2010.  We may elect to raise additional capital in 2010 or beyond
to expand our business and/or strengthen our financial position or, if our
current expectations and estimates about future operating costs prove to be
incorrect, we may need to raise additional capital in 2010 or
beyond.





Furthermore,
under the terms of the Avecia Purchase Agreement we entered into in connection
with the Avecia Acquisition, we are required to pay Avecia $5 million within 90
days of entering into a multi-year funded development contract that was to be
issued by BARDA under solicitation number RFP-BARDA-08-15 (or any substitution
or replacement thereof) for the further development of
SparVaxTM.  RFP-BARDA-08-15 was cancelled by BARDA in December
2009.  Accordingly, our obligation to pay Avecia the $5 million
payment would mature only upon our receipt of a substitution or replacement
thereof.  We have received funds from BARDA and other U.S. government
agencies under various development agreements between us and
BARDA.  Any development contract deemed to be a substitute or
replacement of RFP-BARDA-08-15 could trigger our obligation to make the $5
million payment under the Avecia Purchase Agreement.




Under the
terms of our New Convertible Notes, unless earlier converted, redeemed or
accelerated, the outstanding principal amount of $19.3 million plus accrued
interest is payable at maturity on July 28, 2011.  Prior to maturity,
the note holders may convert their principal and related accrued interest into
shares of our common stock at a conversion price, subject to adjustment, of
$2.54 per share.  Beginning on July 28, 2010, we have the right to
redeem all or a portion of the New Convertible Notes.  Upon a change
in control or default, as defined in the note, the note holders may require us
to redeem their notes.




The
continuing turmoil affecting the banking system and financial markets and the
possibility that financial institutions may consolidate or cease operations has
resulted in a tightening in the credit markets, a low level of liquidity in many
financial markets and volatility in fixed income, credit, currency and equity
markets.  As a result, there can be no assurances that we will be
successful in obtaining sufficient financing on commercially reasonable terms or
at all.  Our requirements for additional capital may be substantial and
will be dependent on many factors, including the success of our research and
development efforts, our ability to commercialize and market products, our
ability to successfully pursue our licensing and collaboration strategy, the
receipt of continued government funding, competing technological and marketing
developments, costs associated with the protection of our intellectual property
and any future change in our business strategy.





To the
extent that we raise additional capital through the sale of securities, the
issuance of those securities or shares underlying such securities would result
in dilution that could be substantial to our stockholders.  In addition, if
we incur additional debt financing, a substantial portion of our operating cash
flow may be dedicated to the payment of principal and interest on such
indebtedness, thus limiting funds available for our business
activities.




If
adequate funds are not available, we may be required to curtail significantly
our development and commercialization activities.  This would have a
material adverse effect on our business, financial condition and/or results of
operations.





29





Risks
Related to Product Development and Commercialization





If
we cannot maintain successful licensing arrangements and collaborations, enter
into new licensing arrangements and collaborations, or effectively accomplish
strategic acquisitions, our ability to develop and commercialize a diverse
product portfolio could be limited and our ability to compete may be
harmed.




A key
component of our business strategy is the in-licensing of compounds and products
developed by other pharmaceutical and biotechnology companies or academic
research laboratories.




For
example, we have an agreement with Medarex to develop Valortim®, a fully human
monoclonal antibody product designed to protect against and treat inhalation
anthrax.  Under the agreement with Medarex, we will be entitled to a
variable percentage of profits derived from sales of Valortim® , if any,
depending, in part, on the amount of our investment.  In addition, we have
entered into licensing and research and development agreements with a number of
other parties and collaborators.  There can be no assurances that the
research and development conducted pursuant to these agreements will result in
revenue generating product candidates.  If our suppliers, vendors,
licensors, or other collaboration partners experience financial difficulties as
a result of the weak economy, or if they are acquired as part of the
current wave of consolidations in the pharmaceutical industry (such as, for
example, with the acquisitions of Medarex by Bristol Myers Squibb and Diosynth’s
parent company by Merck & Co., Inc. in 2009 and of Avecia’s CMO subsidiary
(Avecia Biologics) by Merck & Co., Inc. in 2010), their priorities or our
working relationship with them might change.  As a result,
they might shift resources away from the research, development and/or
manufacturing efforts intended to benefit our products, which could lead to
significant delays in our development programs and potential future
sales.  Finally, our current licensing, research and development, and
supply agreements may expire and may not be renewable or could be terminated if
we do not meet our obligations.  For example, our license agreement
from DSTL for certain technology related to RypVaxTM requires that we
diligently pursue development of this product candidate to maintain exclusive
rights to the technology.  Our existing contract with the U.S.
government for the development of RypVaxTM  has been wound down, and we
may decide not to continue with development efforts at a level necessary to meet
this requirement, since we do not anticipate that the U.S. government will
provide additional funding in the future for or procure
RypVaxTM.





If we are
not able to identify new licensing opportunities or enter into other licensing
arrangements on acceptable terms, we may be unable to develop a diverse
portfolio of products.  For our future collaboration efforts to be
successful, we must first identify partners whose capabilities complement and
integrate well with ours.  We face, and will continue to face, significant
competition in seeking appropriate collaborators.  Collaboration
arrangements are complex and time consuming to negotiate, document and
implement.  We may not be successful in our efforts to establish and
implement collaborations or other similar arrangements.  The terms of any
collaboration or other arrangements that we establish may not be favorable to
us.  Furthermore, technologies to which we gain access may prove
ineffective or unsafe or our partners may prove difficult to work with or less
skilled than we originally expected.  In addition, any past collaborative
successes are no indication of potential future success.




We may
also pursue strategic acquisitions to further our development and
commercialization efforts.  To achieve the anticipated benefits of an
acquisition, we must integrate the acquired company’s business, technology and
employees in an efficient and effective manner.  The successful combination
of companies in a rapidly changing biodefense industry may be more difficult to
accomplish than in other industries.  The combination of two companies
requires, among other things, integration of the companies’ respective
technologies and research and development efforts.  We cannot assure you
that any integration will be accomplished smoothly or successfully.  The
difficulties of integration are increased by the need to coordinate
geographically separated organizations and address possible differences in
corporate cultures and management philosophies.  The integration of certain
operations will require the dedication of management resources that may
temporarily distract attention from the day-to-day operations of the combined
companies.  The business of the combined companies may also be disrupted by
employee retention uncertainty and lack of focus during integration.  The
inability of management to integrate successfully the operations of the two
companies, in particular, to integrate and retain key scientific personnel, or
the inability to integrate successfully two technology platforms, could have a
material adverse effect on our business, results of operations and financial
condition.




30





Risks
Related to Our Dependence on U.S. Government Contracts




All
of our immediately foreseeable future revenues are contingent upon grants and
contracts from the U.S. government and we may not achieve sufficient revenues
from these agreements to attain profitability.




For the
foreseeable future, we believe our main customer will be national governments,
primarily the U.S. government.  Substantially all of our revenues to date
have been derived from grants and U.S. government contracts.  There can be
no assurances that existing government contracts will be renewed or that we can
enter into new contracts or receive new grants to supply the U.S. or other
governments with our products.  The process of obtaining government
contracts is lengthy and uncertain. In addition, the U.S. government is in the
process of reviewing the public health emergency countermeasure
enterprise.  It is anticipated that the review will include recommendations
for how the U.S government structures and oversees the research, development,
procurement, stockpiling and dispensing of countermeasures as well as how the
enterprise is funded.  The implications of the review are not known at this
time, however, it could impact existing and anticipated contract
opportunities.




If the
U.S. government makes significant contract awards to our competitors for the
supply to the U.S. emergency stockpile, our business will be harmed and it is
unlikely that we will ultimately be able to supply that particular treatment or
product to foreign governments or other third parties.  Further, changes in
government budgets and agendas, cost overruns in our programs, or advances by
our competitors, may result in a decreased and de-prioritized emphasis on, or
termination of, government contracts that support the development and/or
procurement of the biodefense products we are developing.  More
generally, due to the current economic downturn, the accompanying fall in tax
revenues and the U.S. government’s efforts to stabilize the economy, the U.S.
government may be forced or choose to reduce or delay spending in the biodefense
field or eliminate funding of certain programs altogether, which could decrease
the likelihood of future government contract awards or that the government would
procure products from us.  Future funding levels for two of our key
government customers, BARDA and DoD, for the advanced development and
procurement of medical countermeasures are uncertain, and may be subject to
budget cuts as the U.S. Congress and the President look to reduce the nation’s
budget deficit.




For
example, while RFP-BARDA-08-15 for an rPA vaccine for the SNS initially
indicated that the government would make an award by September 26, 2008,
the award was delayed multiple times and ultimately canceled in December
2009.  Furthermore, the U.S. government has selected a plague vaccine
product candidate from a competitor for advanced development funding, and we do
not anticipate that the U.S. government will provide additional funding in the
future for or procure RypVaxTM.  Given the limited future prospects for
RypVaxTM at this time, we and the U.S. government agreed to a reduction to the
scope of work that resulted in early wind down of all activities under our
existing RypVaxTM contract. In addition, we believe the remaining
development costs required to obtain FDA licensure for Protexia® in advance of
government procurement exceed those used in our original proposal and provided
for in the contract with the DoD, and it is unclear whether, under the terms of
our 2006 contract with the DoD, the DoD will elect to continue to fund
development of Protexia® as well as the timing of any decision by the DoD
in that regard.  Further, even if the DoD does so elect to continue
funding and we meet all development milestones, the DoD may nevertheless choose
not to procure any doses of Protexia®.  Further, BARDA has expressed
concerns regarding our performance from April 1, 2009 through April 30, 2010
under our contract for the development of SparVaxTM.  We have been
working closely with the agency to resolve the issues and believe that we have
made significant progress in that regard.  If, however, we are unable
to perform adequately under this contract, we may be at increased risk that
BARDA will curtail our activities under, or terminate, that
contract.




31





In the
fourth quarter of 2009, the FDA placed our phase I clinical trial of Valortim®
and ciprofloxacin on partial clinical hold, pending the results of our
investigation of the potential causes for adverse reactions observed in two
subjects dosed in the trial.  As a consequence, BARDA advised us that
until satisfactory resolution of this issue and the partial clinical hold is
lifted it would not act on our request for additional advanced development
funding for Valortim® under BAA-BARDA-09-34.  In April 2010 BARDA
informed us of its belief that it is not practical at this point to resume
negotiations under the current proposal and encouraged us to submit a new white
paper for Valortim® under Board Agency Announcement,
BARDA-CBRN-BAA-10-100-SOL-00012, if and when FDA agrees to permit us to
reinitiate a Valortim® iv administration clinical trial program.  
BARDA will request a formal proposal to provide additional funding for this
program, and what the effects of any delay in potential future funding of the
program will be on the overall Valortim® development timeline.





The
U.S. government’s determination to award any contracts may be challenged by an
interested party, such as another bidder, at the GAO or in federal court. 
If such a challenge is successful, a contract may be terminated.




The laws
and regulations governing the procurement of goods and services by the U.S.
government provide procedures by which other bidders and other interested
parties may challenge the award of a government contract.  If we are
awarded a government contract, such challenges or protests could be filed even
if there are not any valid legal grounds on which to base the protest.  If
any such protests are filed, the government agency may decide to suspend our
performance under the contract while such protests are being considered by the
GAO or the applicable federal court, thus potentially delaying delivery of goods
and services and payment.  In addition, we could be forced to expend
considerable funds to defend any potential award.  If a protest is
successful, the government may be ordered to terminate our contract and reselect
bids.  The government could even be directed to award a potential contract
to one of the other bidders.  For example, in March 2010 a third-party
filed a bid protest with the GAO challenging the February 2010 decision of the
HHS to modify its existing research and development contract with us for the
development of SparVaxTM.  In
March 2010 HHS suspended performance under the modification pursuant to the
automatic stay provisions of the FAR, pending a decision by the GAO on the
protest.   While the bid protest was ultimately denied, and the
related HHS “stop work” order canceled in June 2010, the protest contributed to
a reduction in revenues and cash and cash equivalents over the period that work
could not be performed under the modification. In addition, we incurred
unexpected general and administrative expenses to intervene in the
protest.





Risks
Related to Personnel




We
depend on our key technical and management personnel, and the loss of these
personnel could impair the development of our products.




We rely,
and will continue to rely, on our key management and scientific staff, all of
whom are employed at-will.  The loss of key personnel or the failure to
recruit necessary additional qualified personnel could have a material adverse
effect on our business and results of operations.  There is intense
competition from other companies, research and academic institutions and other
organizations for qualified personnel.  We may not be able to continue to
attract and retain the qualified personnel necessary for the development of our
business.  If we do not succeed in retaining and recruiting necessary
personnel or developing this expertise, our business could suffer
significantly.




In
particular, as noted above in “Even if we succeed in
commercializing our product candidates, they may not become profitable and
manufacturing problems or side effects discovered at later stages can further
increase costs of commercialization,” we are transferring the
manufacturing process for the bulk rPA drug substance from Avecia in the United
Kingdom to Diosynth, a U.S.-based contract manufacturer.  There can be
no assurance that we will be able to recruit and hire the necessary staff in the
U.S. to complete the transfer of the manufacturing process in a timely and cost
effective manner.




Risks
Related to our Common Stock





If
we are unable to develop or implement a plan to regain compliance with the
minimum stockholders’ equity requirements imposed by the NYSE Amex within the
required timeframe, our securities could be delisted from trading which could
limit investors’ ability to make transactions in our securities and subject us
to additional trading restrictions.




Our
common stock and certain warrants are listed on the NYSE Amex (formerly the NYSE
Alternext US or American Stock Exchange), a national securities exchange, which
imposes continued listing requirements with respect to listed shares.  In
July 2010, we received a letter from the NYSE Amex, stating that we are not in
compliance with the exchange’s continued listing standards, specifically,
Sections 1003(a)(i), (ii) and (iii) of the NYSE Amex Company Guide, because we
have stockholders’ equity of less than $2.0 million, $4.0 million and $6.0
million and losses from continuing operations and/or net losses in two of our
three most recent fiscal years, three of our four most recent fiscal years and
our five most recent fiscal years, respectively.




32





The NYSE
Amex stated in its letter that in order to maintain its listing, we must submit
a plan by August 26, 2010, addressing how we intend to regain compliance with
Sections 1003(a)(i), (ii) and (iii) of the Company Guide by January 26,
2012.  If the NYSE Amex accepts the plan, we will be able to continue
our listing during such time and will be subject to continued periodic review by
the NYSE Amex staff.  If the plan is not submitted on a timely basis,
is not accepted, is accepted but we do not make progress consistent with the
plan during the plan period, or is not met by the end of the plan period, the
NYSE Amex could initiate delisting proceedings.  Furthermore, if we
fail to satisfy any other continued listing standard, such as the requirement
that issuers have more than 300 public shareholders, or that the aggregate
market value of shares publicly held be more than $1,000,000, the NYSE Amex may
also decide to initiate delisting proceedings.  We may appeal any delisting
determination before a listings qualifications panel of the NYSE Amex and in
turn request a review of the decision of such panel by the exchange’s Committee
on Securities.





If our
securities are delisted from trading on the NYSE Amex and we are not able to
list our securities on another exchange or to have them quoted on Nasdaq, our
securities could be quoted on the OTC Bulletin Board or on the “pink
sheets”.  As a result, we could face significant adverse consequences
including:





·
            a
      limited availability of market quotations for our
    securities;·
            a
      determination that our common stock is a “penny stock” which will require
      brokers trading in our common stock to adhere to more stringent
      rules and possibly result in a reduced level of trading activity in
      the secondary trading market for our securities;·
            a
      limited amount of news and analyst coverage for us; and·
            a
      decreased ability to issue additional securities (including pursuant to
      our universal shelf registration statement on Form S-3) or obtain
      additional financing in the future.





Shares
that we may issue in the future in connection with certain capital-raising
transactions and shares available for future issuance upon conversion and
exercise of convertible notes, warrants and options could dilute our
shareholders and depress the market price of our common stock.





We have
filed a shelf registration statement on Form S-3, which was declared effective
on February 12, 2009 in connection with a sale from time to time of common
stock, preferred stock or warrants or any combination of those securities,
either individually or in units, in one or more offerings for up to $50,000,000
(inclusive of the gross proceeds from our July 2010, April 2010 and March 2009
registered offerings), although we are presently subject to significant
limitations on the amount of securities we can issue under that registration
statement.  Raising capital in this manner or any other manner may
depress the market price of our stock, and any such financing(s) will dilute our
existing shareholders.





In
addition, as of June 30, 2010 we had outstanding options to purchase
approximately 5.5 million shares of common stock.  Additional shares
are reserved for issuance under our 2007 Long-Term Incentive Compensation
Plan.  Our stock options are generally exercisable for ten years, with
a significant portion exercisable either immediately or beginning one year after
the date of the grant.  Furthermore, the senior unsecured convertible
notes in the aggregate principal amount of $19.3 million issued in July 2009 are
convertible at approximately $2.54 per share into approximately 7.6 million
shares of our common stock (not including accrued interest), and the
accompanying warrants became exercisable on January 28, 2010 for up to
approximately 2.6 million shares of common stock at $2.50 per
share.  Finally, as of June 30, 2010, the Company had issued and
outstanding additional warrants to purchase up to an additional approximately
1.2 million shares of common stock.  We issued additional warrants
(which become exercisable January 23, 2011) to purchase up to 1,323,214 shares
at $1.63 per share as part of our registered offering in July
2010.  The issuance or even the expected issuance of a large number of
shares of our common stock upon conversion or exercise of the securities
described above could depress the market price of our stock and the issuance of
such shares will dilute the stock ownership of our existing shareholders. Shares
that we may issue in the future in connection with certain capital-raising
transactions and shares available for future issuance upon conversion and
exercise of convertible notes, warrants and options could dilute our
shareholders and depress the market price of our common stock.




33





Item
6.  Exhibits.





No.
            
            Description1.1
            
            Placement
      Agency Agreement dated as of April 7, 2010 by and among the Company and
      Roth Capital Partners, LLC*10.1
            
            Form
      of Securities Purchase Agreement dated as of April 7, 2010 between the
      Company and the Investor*10.2
            
            Form
      of Warrant*10.30.3
            
            Amendment,
      dated as of May 18, 2010, to Employment Agreement, dated as of April 18,
      2008, by and between the Company and Eric I. Richman.
**31.1
            
            Certification
      of Principal Executive Officer Pursuant to SEC
      Rule 13a-14(a)/15d-14(a)31.2
            
            Certification
      of Principal Financial Officer Pursuant to SEC
      Rule 13a-14(a)/15d-14(a)32.1
            
            Certification
      of Principal Executive Officer Pursuant to 18 U.S.C.
      Section 135032.2
            
            Certification
      of Principal Financial Officer Pursuant to 18 U.S.C.
      Section 1350








*
            Incorporated by
      reference to the Company’s Current Report on Form 8-K filed on April 8,
      2010.




**
            Incorporated
      by reference to the Company’s Current Report on Form 8-K filed on May 24,
      2010.




34


SIGNATURES




Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused the report to be signed on its
behalf by the undersigned, thereunto duly authorized.




PHARMATHENE,
      INC.Dated:
      August 13, 2010
            By:
            /s/
      Eric I. RichmanEric
      I. RichmanPresident
      and interim Chief Executive OfficerDated:
      August 13, 2010
            By:
            /s/
      Charles A. Reinhart IIICharles
      A. Reinhart IIIChief
      Financial Officer




35