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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2007
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 Commission file number 0-18006
 ORCHESTRA THERAPEUTICS, INC.
  Delaware
    
    33-0255679(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)5931 Darwin CourtCarlsbad, California
    
    92008(Address of principal executive offices)
    
    (Zip Code)
 Registrants telephone number, including area code: (760) 431-7080
  þ o
  o o þ
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ORCHESTRA THERAPEUTICS, INC.
 INDEX
 PART I  FINANCIAL INFORMATION
    
    
    3Item 1. Financial Statements (unaudited)
    
    
    3Condensed Balance Sheets
    
    
    3Condensed Statements of Operations
    
    
    4Condensed Statements of Cash Flows
    
    
    5Notes to Condensed Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    9Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    11Item 4T. Controls and Procedures
    
    
    11PART II  OTHER INFORMATION
    
    
    12Item 1. Legal Proceedings
    
    
    12Item 1A. Risk Factors
    
    
    12Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    19Item 3. Defaults Upon Senior Securities
    
    
    19Item 4. Submission of Matters to a Vote of Security Holders
    
    
    19Item 5. Other Information
    
    
    19Item 6. Exhibits
    
    
    19SIGNATURES
    
    
    21EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
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PART I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 Orchestra Therapeutics, Inc.
 
 Condensed Balance Sheets
 (in thousands, except for share amounts)
 March 31,
    
    
    December 31,2007
    
    
    2006(unaudited)AssetsCurrent Assets:Cash and cash equivalents
    
    $
    2,199
    
    
    $
    3,421Accounts receivable
    
    
    245
    
    
    
    900Prepaid expenses
    
    
    214
    
    
    
    3892,658
    
    
    
    4,710Property and equipment, net
    
    
    2,590
    
    
    
    2,785Deposits and other assets ($426 and $521 restricted in escrow account as security for
long-term lease at March 31, 2007 and December 31, 2006, respectively)
    
    
    536
    
    
    
    611$
    5,784
    
    
    $
    8,106Liabilities and Stockholders (Deficit) EquityCurrent Liabilities:Accounts payable and accrued expenses
    
    $
    3,493
    
    
    $
    3,084Liability for warrants committed in excess of authorized stock
    
    
    3,657
    
    
    
    7,308Convertible promissory notes, net of discount of $2,084 plus accrued
interest of $439 at March 31, 2007
    
    
    3,440
    
    
    
    Convertible promissory notes, related party, net of discount of $223 plus accrued
interest of $49 at March 31, 2007
    
    
    376
    
    
    
    Current portion of deferred liabilities and revenue
    
    
    376
    
    
    
    35811,342
    
    
    
    10,750Convertible promissory notes, related party, net of discount of $261 and $592 plus
accrued
interest of $482 and $458 at March 31, 2007 and December 31, 2006, respectively
    
    
    3,377
    
    
    
    3,571Convertible promissory notes, net of discount of $2,845 plus accrued interest of $348 at
December 31, 2006
    
    
    
    
    
    
    2,733Long-term deferred liabilities and revenue, net of current portion
    
    
    1,836
    
    
    
    1,936Total long-term liabilities
    
    
    5,213
    
    
    
    8,240Stockholders (Deficit) Equity :Common stock, $.0025 par value, 35,000,000 and 35,000,000 shares authorized;
10,294,136 and 9,088,410 shares issued and outstanding at March 31, 2007
and December 31, 2006, respectively
    
    
    26
    
    
    
    23Warrants
    
    
    2,610
    
    
    
    2,610Additional paid-in capital
    
    
    141,935
    
    
    
    139,908Accumulated deficit
    
    
    (155,342
    )
    
    
    (153,425
    )Total stockholders deficit
    
    
    (10,771
    )
    
    
    (10,884
    )$
    5,784
    
    
    $
    8,106
 See accompanying notes to condensed financial statements.
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Orchestra Therapeutics, Inc.
 
 Condensed Statements of Operations
 (in thousands, except
for per share amounts)
(unaudited)
 Three Months Ended March 31,2007
    
    
    2006Revenues:Licensed research revenue
    
    $
    4
    
    
    $
    4Contract research revenue
    
    
    
    
    
    
    74
    
    
    
    11Expenses:Research and development
    
    
    2,269
    
    
    
    2,463General and administrative
    
    
    1,473
    
    
    
    1,3293,742
    
    
    
    3,792Other income and (expense):Interest expense  including non-cash accretion of $870 and $728 for
2007 and 2006, respectively
    
    
    (1,130
    )
    
    
    (1,230
    )Investment income
    
    
    35
    
    
    
    20Gain on warrant liability marked to fair value
    
    
    3,856
    
    
    
    114,659Beneficial inducement cost
    
    
    (940
    )
    
    
    (14,095
    )1,821
    
    
    
    99,354Net income (loss)
    
    $
    (1,917
    )
    
    $
    95,573Basic income (loss) per share
    
    $
    (0.21
    )
    
    $
    76.66Diluted (loss) per share
    
    $
    (0.21
    )
    
    $
    (2.51
    )
 See accompanying notes to condensed financial statements.
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Orchestra Therapeutics, Inc.
 
 Condensed Statements of Cash Flows
 (in thousands)
(unaudited)
 Three Months Ended March 31,2007
    
    
    2006Net cash used in operating activities
    
    $
    (2,182
    )
    
    $
    (3,163
    )Net cash used in investing activities
    
    
    (1
    )
    
    
    5Cash Flows From Financing Activities:Net proceeds from common stock sold under the Standby EquityDistribution Agreement
    
    
    
    
    
    
    1,139Proceeds from secured convertible notes
    
    
    
    
    
    
    7,700Proceeds from secured convertible note, related party
    
    
    
    
    
    
    550Payments on short-term convertible debenture
    
    
    
    
    
    
    (400
    )Proceeds from warrant exercise
    
    
    1,067
    
    
    
    10Offering costs for debt and equity transactions
    
    
    (106
    )
    
    
    (1,092
    )Net cash provided by financing activities
    
    
    961
    
    
    
    7,907Net increase (decrease) in cash and cash equivalents
    
    
    (1,222
    )
    
    
    4,749Cash and cash equivalents  beginning of period
    
    
    3,421
    
    
    
    146Cash and cash equivalents  end of period
    
    $
    2,199
    
    
    $
    4,895
 See accompanying notes to condensed financial statements.
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ORCHESTRA THERAPEUTICS, INC.
 
 Notes to Condensed Financial Statements (unaudited)
 Note 1  The Company:
  TM
 Note 2  Interim Financial Statements:
    Note 3  Going Concern:
 
   Note 4  Net Income (Loss) per Share:
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Three MonthsEndedMarch 31, 2006Net income used in computing basic net income per share
    
    $
    95,573Impact of assumed conversions:8% interest on convertible debentures
    
    
    154Impact of equity classified as liability:Gain on warrant liability marked to fair value
    
    
    (114,659
    )Net loss used in computing diluted net loss per share
    
    $
    (18,932
    )
  Note 5
 Stockholders Equity:
 2006 Private Placement Convertible Notes Activity  First Quarter 2007:
 2006 Private Placement Investor Warrant Activity  First Quarter 2007:
  Warrants Issued for Limited Recourse Support:
 Commissions Paid and Warrants Issued to Placement Agent:
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Antidilution Adjustments:
 Note 6 Commitments and Contingencies:
 ®
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  Overview
    Liquidity and Capital Resources
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TM
   Results of Operations
 Three Months Ended March 31, 2007 Compared to Three Months Ended March 31, 2006.
  TM , Remune ®
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March 31, 2007
    
    March 31, 2006Dividend yield
    
    
    0.0
    %
    
    
    0.0
    %Expected volatility  based on the
Companys three year historical rate
    
    
    161.95
    %
    
    
    139.61
    %Risk-free interest rate
    
    
    4.54
    %
    
    
    4.83
    %Company common stock price
    
    $
    1.17
    
    
    $
    11.00
 Critical Accounting Policies and Estimates
  
 Item 3. Quantitative and Qualitative Disclosures about Market Risk
  
 Item 4T. Controls and Procedures
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PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  We need more cash immediately, and also on an ongoing basis.
   TM
 
    
    the timing of approval to begin new clinical trials;
    
    our ability to raise additional funding and the amounts raised, if any;
    
    the time and cost involved in obtaining regulatory approvals;
    
    continued scientific progress in our research and development programs;
    
    the scope and results of preclinical studies and clinical trials;
    
    the cost of manufacturing scale-up and/or withdrawal;
    
    the costs involved in filing, prosecuting and enforcing patent claims;
    
    competing technological and market developments;
    
    effective commercialization activities and arrangements;
    
    the costs of defending against and settling lawsuits; and/or
    
    other factors not within our control or known to us.
  
    
    obtaining regulatory approvals;
    
    our research and development programs;
    
    our preclinical and clinical trials.
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
    
    overall financial market conditions;
    
    the security interest in substantially all of our assets in respect of
indebtedness in an aggregate principal amount of $8,790,000;
    
    Potential dilution which would occur upon the exercise or conversion
of outstanding derivative securities which overlie
approximately 8,700,000 shares of our common stock.
 Our independent registered public accountants have expressed substantial doubt as to our ability to
continue as a going concern.
   Our previous stockholders were diluted by over 80% as a result of our 2006 Private Placement and
will suffer additional dilution in connection with any future financings.
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Our stock has been delisted from Nasdaq and is subject to penny stock rules, which may make it more
difficult for us to raise capital and for you to sell your securities.
  Our failure to successfully develop our product candidates may cause us to cease operations.
  TM
     The lengthy product approval process and uncertainty of government regulatory requirements may
delay or prevent us from commercializing products. We must work to re-establish our credibility
with the FDA, especially in our HIV program.
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None of our current clinical trials are being conducted in the United States.
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Our patents and proprietary technology may not be enforceable and the patents and proprietary
technology of others may prevent us from commercializing products. Some of our patents expire
fairly soon.
     Technological change and competition may render our potential products obsolete.
  Our lack of commercial manufacturing and marketing experience and our dependence on third parties
for manufacturing may prevent us from successfully commercializing products. We ceased
manufacturing at our Pennsylvania facility in 2007.
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We may be unable to enter into collaborations.
  Adverse determinations and pressures concerning product pricing, reimbursement and related matters
could prevent us from successfully commercializing any of our product candidates.
  Kevin Kimberlin, a member of our Board of Directors, beneficially owns approximately 16% of our
outstanding common stock and has the rights to acquire approximately 3,459,000 additional shares of
our common stock, which could theoretically result in ownership of up to approximately 37% of our
outstanding shares and could allow him to control or influence stockholder votes.
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Mr. Kimberlin is also a secured creditor.
  We have significant indebtedness that will mature before our operations can repay it.
  Our class action settlement remains subject to final court approval.
 In
re Immune Response Securities Litigation ®
    Our reporting of profits may confuse investors and result in lawsuits against us.
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Hazardous materials and environmental matters could expose us to significant costs.
  Our certificate of incorporation and bylaws include provisions that could make attempts by
stockholders to change management more difficult.
   
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
  
 Item 6. Exhibits
 ExhibitNumber
    
    Description of Document10.205.1 (1)
    
    Statement of Extension of Warrant Exercise Date.10.205.2 (1)
    
    Statement of Extension of Warrant Exercise Date.
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ExhibitNumber
    
    Description of Document10.205.3 (1)
    
    Statement of Warrant Exercise Inducement and Price Protection.31.1
    
    Certification of the Principal Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002/SEC Rule
13a-14(a).31.2
    
    Certification of the Principal Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002/SEC Rule
13a-14(a).32.1
    
    Certification pursuant to Section 1350 of Chapter 63 of 18
U.S.C. as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002/SEC Rule 13a-14(b).32.2
    
    Certification pursuant to Section 1350 of Chapter 63 of 18
U.S.C. as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002/SEC Rule 13a-14(b).
 
 (1)
    
    Incorporated by reference to the Exhibit of the same number filed with our December 31, 2006
Form 10-K. 20




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SIGNATURES
  ORCHESTRA THERAPEUTICS, INC.Date: May 11, 2007
    By:
    /s/ Michael K. GreenMichael K. Green,Chief Operating Officer & Chief Financial Officer 21




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Exhibit Index
 ExhibitNumber
    
    Description of Document31.1
    
    Certification of the Principal Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002/SEC Rule 13a-14(a).31.2
    
    Certification of the Principal Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002/SEC Rule 13a-14(a).32.1
    
    Certification pursuant to Section 1350 of Chapter 63 of 18 U.S.C.
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002/SEC Rule 13a-14(b).32.2
    
    Certification pursuant to Section 1350 of Chapter 63 of 18 U.S.C.
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002/SEC Rule 13a-14(b).