##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
 (MARK ONE)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2007
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
 FOR
THE TRANSITION PERIOD FROM  TO
 COMMISSION FILE NUMBER: 001-14758
 QUESTCOR PHARMACEUTICALS, INC.
 (Exact name of Registrant as specified in its charter)
 CALIFORNIA
    
    33-0476164(State or other jurisdiction
    
    (I.R.S. Employerof incorporation or organization)
    
    Identification No.)
 3260 Whipple Road
Union City, CA 94587-1217
(Address of Principal Executive Offices)
 REGISTRANTS TELEPHONE NUMBER, INCLUDING AREA CODE: (510) 400-0700
 þ o
  o o þ
 o þ




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##### 



QUESTCOR PHARMACEUTICALS, INC.
 FORM 10-Q
 TABLE OF CONTENTS
 PART I. FINANCIAL INFORMATION
    
    
    3Item 1 Financial Statements and Notes (Unaudited)
    
    
    3Consolidated Balance Sheets  September 30, 2007 and December 31, 2006
    
    
    3Consolidated Statements of Operations  for the three and nine months ended September 30, 2007 and 2006
    
    
    4Consolidated Statements of Cash Flows  for the nine months ended September 30, 2007 and 2006
    
    
    5Notes to Consolidated Financial Statements
    
    
    6Item 2 Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    12Item 3 Quantitative and Qualitative Disclosures about Market Risk
    
    
    22Item 4 Controls and Procedures
    
    
    22PART II. OTHER INFORMATION
    
    
    23Item 1 Legal Proceedings
    
    
    23Item 1A Risk Factors
    
    
    23Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    23Item 3 Defaults Upon Senior Securities
    
    
    23Item 4 Submission of Matters to a Vote of Security Holders
    
    
    23Item 5 Other Information
    
    
    23Item 6 Exhibits
    
    
    24Signatures
    
    
    25EXHIBIT 31EXHIBIT 32
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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 QUESTCOR PHARMACEUTICALS, INC.
 
 CONSOLIDATED BALANCE SHEETS
 (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
 September 30,
    
    
    December 31,2007
    
    
    2006(Unaudited)
    
    
    (Note 1)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    3,149
    
    
    $
    15,937Short-term investments
    
    
    7,443
    
    
    
    2,488Total cash, cash equivalents and short-term investments
    
    
    10,592
    
    
    
    18,425Accounts receivable, net of allowance for doubtful accounts
of $52 and $55 at September 30, 2007 and December 31, 2006,
respectively
    
    
    14,149
    
    
    
    1,783Inventories, net
    
    
    2,568
    
    
    
    2,965Prepaid expenses and other current assets
    
    
    628
    
    
    
    811Total current assets
    
    
    27,937
    
    
    
    23,984Property and equipment, net
    
    
    570
    
    
    
    665Purchased technology, net
    
    
    4,042
    
    
    
    3,965Goodwill
    
    
    299
    
    
    
    299Deposits and other assets
    
    
    738
    
    
    
    722Total assets
    
    $
    33,586
    
    
    $
    29,635LIABILITIES, PREFERRED STOCK AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    1,926
    
    
    $
    2,154Accrued compensation
    
    
    716
    
    
    
    1,019Sales-related reserves
    
    
    2,141
    
    
    
    2,784Income taxes payable
    
    
    102
    
    
    
    Other accrued liabilities
    
    
    846
    
    
    
    521Total current liabilities
    
    
    5,731
    
    
    
    6,478Lease termination and deferred rent liabilities
    
    
    2,027
    
    
    
    1,961Other non-current liabilities
    
    
    10
    
    
    
    18Preferred stock, no par value, 7,500,000 shares authorized;
2,155,715 Series A shares issued and outstanding at September
30, 2007 and December 31, 2006 (aggregate liquidation preference
of $10,000 at September 30, 2007 and December 31, 2006)
    
    
    5,081
    
    
    
    5,081Shareholders equity:Common stock, no par value, 105,000,000 shares authorized;
69,291,641 and 68,740,804 shares issued and outstanding at
September 30, 2007 and December 31, 2006, respectively
    
    
    106,826
    
    
    
    105,352Accumulated deficit
    
    
    (86,107
    )
    
    
    (89,256
    )Accumulated other comprehensive gain
    
    
    18
    
    
    
    1Total shareholders equity
    
    
    20,737
    
    
    
    16,097Total liabilities, preferred stock and shareholders equity
    
    $
    33,586
    
    
    $
    29,635
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QUESTCOR PHARMACEUTICALS, INC.
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
 (UNAUDITED)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net product sales
    
    $
    14,809
    
    
    $
    4,045
    
    
    $
    22,654
    
    
    $
    9,384Operating costs and expenses:Cost of product sales (exclusive of amortization of
purchased technology)
    
    
    1,534
    
    
    
    945
    
    
    
    3,298
    
    
    
    2,223Selling, general and administrative
    
    
    3,322
    
    
    
    4,171
    
    
    
    13,619
    
    
    
    12,582Research and development
    
    
    1,264
    
    
    
    544
    
    
    
    3,355
    
    
    
    1,632Depreciation and amortization
    
    
    125
    
    
    
    94
    
    
    
    373
    
    
    
    218Total operating costs and expenses
    
    
    6,245
    
    
    
    5,754
    
    
    
    20,645
    
    
    
    16,655Income (loss) from operations
    
    
    8,564
    
    
    
    (1,709
    )
    
    
    2,009
    
    
    
    (7,271
    )Other income (expense):Interest income
    
    
    164
    
    
    
    137
    
    
    
    555
    
    
    
    469Other income (expense), net
    
    
    (1
    )
    
    
    51
    
    
    
    239
    
    
    
    29Gain on sale of product rights
    
    
    
    
    
    
    
    
    
    
    448
    
    
    
    Total other income
    
    
    163
    
    
    
    188
    
    
    
    1,242
    
    
    
    498Net income (loss) before income taxes
    
    
    8,727
    
    
    
    (1,521
    )
    
    
    3,251
    
    
    
    (6,773
    )Income tax expense
    
    
    102
    
    
    
    
    
    
    
    102
    
    
    
    Net income (loss)
    
    
    8,625
    
    
    
    (1,521
    )
    
    
    3,149
    
    
    
    (6,773
    )Allocation of undistributed earnings to Series A preferred stock
    
    
    261
    
    
    
    
    
    
    
    95
    
    
    
    Net income (loss) applicable to common shareholders
    
    $
    8,364
    
    
    $
    (1,521
    )
    
    $
    3,054
    
    
    $
    (6,773
    )Net income (loss) per share applicable to common shareholders 
basic and diluted
    
    $
    0.12
    
    
    $
    (0.03
    )
    
    $
    0.04
    
    
    $
    (0.12
    )Shares used in computing net income (loss) per share applicable
to common shareholders:Basic
    
    
    69,192
    
    
    
    56,870
    
    
    
    68,986
    
    
    
    55,841Diluted
    
    
    69,224
    
    
    
    56,870
    
    
    
    69,985
    
    
    
    55,841
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QUESTCOR PHARMACEUTICALS, INC.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (IN THOUSANDS)
 (UNAUDITED)
 Nine Months EndedSeptember 30,2007
    
    
    2006OPERATING ACTIVITIESNet income (loss)
    
    $
    3,149
    
    
    $
    (6,773
    )Adjustments to reconcile net income (loss) to net cash used in operating activities:Share-based compensation expense
    
    
    1,025
    
    
    
    828Depreciation and amortization
    
    
    373
    
    
    
    218Loss on disposal of equipment
    
    
    12
    
    
    
    Gain on sale of product rights
    
    
    (448
    )
    
    
    Changes in operating assets and liabilities:Accounts receivable
    
    
    (12,366
    )
    
    
    (1,297
    )Inventories
    
    
    397
    
    
    
    (1,282
    )Prepaid expenses and other current assets
    
    
    183
    
    
    
    (569
    )Accounts payable
    
    
    (228
    )
    
    
    355Accrued compensation
    
    
    (303
    )
    
    
    181Sales-related reserves
    
    
    (643
    )
    
    
    596Other accrued liabilities
    
    
    325
    
    
    
    (100
    )Income taxes payable
    
    
    102
    
    
    
    (200
    )Other non-current liabilities
    
    
    58
    
    
    
    457Net cash flows used in operating activities
    
    
    (8,364
    )
    
    
    (7,586
    )INVESTING ACTIVITIESPurchase of property and equipment
    
    
    (67
    )
    
    
    (92
    )Acquisition of purchased technology
    
    
    (300
    )
    
    
    (2,628
    )Purchase of short-term investments
    
    
    (17,188
    )
    
    
    (9,606
    )Maturities of short-term investments
    
    
    12,250
    
    
    
    10,840Net proceeds from sale of product rights
    
    
    448
    
    
    
    Changes in deposits and other assets
    
    
    (16
    )
    
    
    89Net cash flows used in investing activities
    
    
    (4,873
    )
    
    
    (1,397
    )FINANCING ACTIVITIESIssuance of common stock, net
    
    
    449
    
    
    
    758Redemption of Series B preferred stock
    
    
    
    
    
    
    (7,841
    )Repayment of capital lease obligation
    
    
    
    
    
    
    (6
    )Net cash flows provided by (used in) financing activities
    
    
    449
    
    
    
    (7,089
    )Decrease in cash and cash equivalents
    
    
    (12,788
    )
    
    
    (16,072
    )Cash and cash equivalents at beginning of period
    
    
    15,937
    
    
    
    20,438Cash and cash equivalents at end of period
    
    $
    3,149
    
    
    $
    4,366
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QUESTCOR PHARMACEUTICALS, INC.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 1. BASIS OF PRESENTATION
 ® ®
      2. SHARE-BASED COMPENSATION
 Share-Based Payment Accounting for Stock-Based Compensation
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Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Cost of product sales
    
    $
    1
    
    
    $
    12
    
    
    $
    3
    
    
    $
    23Selling, general and administrative
    
    
    162
    
    
    
    348
    
    
    
    859
    
    
    
    676Research and development
    
    
    60
    
    
    
    11
    
    
    
    189
    
    
    
    21Total
    
    $
    223
    
    
    $
    371
    
    
    $
    1,051
    
    
    $
    720
   Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2007
    
    2006
    
    2007
    
    2006Expected volatility
    
    
    82
    %
    
    
    91
    %
    
    
    82-86
    %
    
    
    91-98
    %Weighted average volatility
    
    
    82
    %
    
    
    91
    %
    
    
    85
    %
    
    
    96
    %Expected term (in years)
    
    
    6.25
    
    
    
    6.25
    
    
    
    6.25
    
    
    
    6.25Risk-free interest rate
    
    
    4.3
    %
    
    
    4.6
    %
    
    
    4.3-4.9
    %
    
    
    4.8
    %Expected dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
   Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2007
    
    2006
    
    2007
    
    2006Expected volatility
    
    
    76
    %
    
    
    84
    %
    
    
    65-76
    %
    
    
    84-98
    %Weighted average volatility
    
    
    76
    %
    
    
    84
    %
    
    
    68
    %
    
    
    88
    %Expected term (in years)
    
    
    1.00
    
    
    
    0.36
    
    
    
    0.53-1.00
    
    
    
    0.32Risk-free interest rate
    
    
    4.9
    %
    
    
    5.1
    %
    
    
    5.0
    %
    
    
    5.0
    %Expected dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
  7




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3. REVENUE RECOGNITION
       4. CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
  8




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5. INVENTORIES
  September 30,
    
    
    December 31,2007
    
    
    2006Raw materials
    
    $
    1,987
    
    
    $
    2,120Finished goods
    
    
    1,119
    
    
    
    1,082Less allowance for excess and obsolete inventories
    
    
    (538
    )
    
    
    (237
    )$
    2,568
    
    
    $
    2,965
 6. PURCHASED TECHNOLOGY
  7. COMMITMENTS, INDEMNIFICATIONS AND CONTINGENCIES
    8. NET INCOME (LOSS) PER SHARE
  9




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Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net income (loss) applicable to common shareholders
    
    $
    8,364
    
    
    $
    (1,521
    )
    
    $
    3,054
    
    
    $
    (6,773
    )Shares used in computing net income (loss) per
share applicable to common shareholders:Basic
    
    
    69,192
    
    
    
    56,870
    
    
    
    68,986
    
    
    
    55,841Effect of dilutive potential common shares:Stock options
    
    
    32
    
    
    
    
    
    
    
    968
    
    
    
    Warrants and placement agent unit options
    
    
    
    
    
    
    
    
    
    
    31
    
    
    
    Diluted
    
    
    69,224
    
    
    
    56,870
    
    
    
    69,985
    
    
    
    55,841Basic and diluted net income (loss) per share
applicable to common shareholders
    
    $
    0.12
    
    
    $
    (0.03
    )
    
    $
    0.04
    
    
    $
    (0.12
    )
  9. INCOME TAXES
 Financial Accounting Standards Board Interpretation 48 Accounting for Uncertainty in Income Taxes  an interpretation of
FASB Statement No. 109. Accounting for
Income Taxes
   10




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10. RELATED PARTY TRANSACTION
  11. COMPREHENSIVE INCOME (LOSS)
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006($000s)
    
    
    ($000s)Net income (loss)
    
    $
    8,625
    
    
    $
    (1,521
    )
    
    $
    3,149
    
    
    $
    (6,773
    )Change in unrealized gains on available-for-sale securities
    
    
    10
    
    
    
    7
    
    
    
    17
    
    
    
    6Comprehensive income (loss)
    
    $
    8,635
    
    
    $
    (1,514
    )
    
    $
    3,166
    
    
    $
    (6,767
    )
 12. SALE OF PRODUCT RIGHTS
  13. REDUCTION IN FIELD ORGANIZATION
  14. RECENTLY ISSUED ACCOUNTING STANDARDS
 Accounting for Non-Refundable Advance
Payments for Goods or Services to Be Used in Future Research and Development Activities (
 11




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The Fair Value Option for Financial
Assets and Financial Liabilities
 Fair Value Measurements
 15. SUBLEASE OF HAYWARD FACILITY
  
 ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  Overview
   12




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Critical Accounting Policies
  Sales Reserves
    13




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Inventories
  Intangible and Long-Lived Assets
 Goodwill and Other Intangible
Assets Accounting for
the Impairment or Disposal of Long-Lived Assets
 14




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Share-Based Compensation Expense
   Lease Termination Liability
  Accounting for a
Loss on a Sublease, an interpretation of FASB 13 and APB Opinion No. 30 Accounting
for the Loss on a Sublease Not Involving the Disposal of a Segment.
  15




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Results of Operations
 Three months ended September 30, 2007 compared to the three months ended September 30, 2006:
 Total Net Product Sales
 Three Months EndedSeptember 30,
    
    
    
    
    
    %2007
    
    2006
    
    Increase
    
    Change(in $000s)Net product sales
    
    $
    14,809
    
    
    $
    4,045
    
    
    $
    10,764
    
    
    
    266
    %
      16




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Cost of Product Sales
 Three Months EndedSeptember 30,
    
    
    
    
    
    %2007
    
    2006
    
    Increase
    
    Change(in $000s)Cost of product sales
    
    $
    1,534
    
    
    $
    945
    
    
    $
    589
    
    
    
    62
    %
  Selling, General and Administrative
 Three Months EndedSeptember 30,
    
    
    
    
    
    %2007
    
    2006
    
    Decrease
    
    Change(in $000s)Selling, general and administrative expense
    
    $
    3,322
    
    
    $
    4,171
    
    
    $
    (849
    )
    
    
    (20
    )%
  Research and Development
 Three Months EndedSeptember 30,
    
    
    
    
    
    %2007
    
    2006
    
    Increase
    
    Change(in $000s)Research and development
    
    $
    1,264
    
    
    $
    544
    
    
    $
    720
    
    
    
    132
    %
  Depreciation and Amortization
 Three Months EndedSeptember 30,
    
    
    
    
    
    %2007
    
    2006
    
    Increase
    
    Change(in $000s)Depreciation and amortization
    
    $
    125
    
    
    $
    94
    
    
    $
    31
    
    
    
    33
    %
 17




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Other Income, net
 Three Months EndedSeptember 30,
    
    
    
    
    
    %2007
    
    2006
    
    Decrease
    
    Change(in $000s)Other income, net
    
    $
    163
    
    
    $
    188
    
    
    $
    (25
    )
    
    
    (13
    )%
  Income Tax Expense
 Three Months EndedSeptember 30,2007
    
    2006
    
    Increase(in $000s)Income tax expense
    
    $
    102
    
    
    $
    
    
    
    $
    102
  Preferred Stock Distribution
 Three Months EndedSeptember 30,2007
    
    2006
    
    Increase(in $000s)Allocation of undistributed earnings to Series A Preferred Stock
    
    $
    261
    
    
    $
    
    
    
    $
    261
  Nine months ended September 30, 2007 compared to the nine months ended September 30, 2006:
 Total Net Product Sales
 Nine Months EndedSeptember 30,
    
    
    
    
    
    %2007
    
    2006
    
    Increase
    
    Change(in $000s)Net product sales
    
    $
    22,654
    
    
    $
    9,384
    
    
    $
    13,270
    
    
    
    141
    %
 18




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Cost of Product Sales
 Nine Months EndedSeptember 30,
    
    
    
    
    
    %2007
    
    2006
    
    Increase
    
    Change(in $000s)Cost of product sales
    
    $
    3,298
    
    
    $
    2,223
    
    
    $
    1,075
    
    
    
    48
    %
  Selling, General and Administrative
 Nine Months EndedSeptember 30,
    
    
    
    
    
    %2007
    
    2006
    
    Increase
    
    Change(in $000s)Selling, general and administrative expense
    
    $
    13,619
    
    
    $
    12,582
    
    
    $
    1,037
    
    
    
    8
    %
 19




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##### Table of Contents



Research and Development
 Nine Months EndedSeptember 30,
    
    
    
    
    
    %2007
    
    2006
    
    Increase
    
    Change(in $000s)Research and development
    
    $
    3,355
    
    
    $
    1,632
    
    
    $
    1,723
    
    
    
    106
    %
  Depreciation and Amortization
 Nine Months EndedSeptember 30,
    
    
    
    
    
    %2007
    
    2006
    
    Increase
    
    Change(in $000s)Depreciation and amortization
    
    $
    373
    
    
    $
    218
    
    
    $
    155
    
    
    
    71
    %
  Other Income, net
 Nine Months EndedSeptember 30,
    
    
    
    
    
    %2007
    
    2006
    
    Increase
    
    Change(in $000s)Other income, net
    
    $
    1,242
    
    
    $
    498
    
    
    $
    744
    
    
    
    149
    %
  20




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Income Tax Expense
 Nine Months EndedSeptember 30,2007
    
    2006
    
    Increase(in $000s)Income tax expense
    
    $
    102
    
    
    $
    
    
    
    $
    102
  Preferred Stock Distribution
 Nine Months EndedSeptember 30,2007
    
    2006
    
    Increase(in $000s)Allocation of undistributed earnings to Series A Preferred Stock
    
    $
    95
    
    
    $
    
    
    
    $
    95
  Liquidity and Capital Resources
     21




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Recently Issued Accounting Standards
 Accounting for Non-Refundable Advance Payments for Goods or Services to Be Used in Future Research
and Development Activities (
 The Fair Value Option for Financial
Assets and Financial Liabilities
 Fair Value Measurements
 
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 4. CONTROLS AND PROCEDURES
  22




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PART II. OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
  
 ITEM 1A. RISK FACTORS
  Our
implementation of our new strategy and business model for Acthar creates risks and uncertainties.
  We may experience distribution problems as a result of the outsourcing of our distribution
functions to CuraScript.
  
 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
  23




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ITEM 6. EXHIBITS
 Exhibit No
    
    Description31
    
    Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32*
    
    Certifications pursuant to Section 906 of the Public Company Accounting Reform and Investor Act of 2002.
 
 *
    
    These certifications are being furnished solely to accompany this quarterly report pursuant
to 18 U.S.C. Section 1350, and are not being filed for purposes of Section 18 of the
Securities Exchange Act of 1934 and are not to be incorporated by reference into any filing of
Questcor Pharmaceuticals, Inc., whether made before or after the date hereof, regardless of
any general incorporation language in such filing. 24




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##### Table of Contents



SIGNATURES
  QUESTCOR PHARMACEUTICALS, INC.Date:
November 14, 2007
    
    By:
    
    /s/ Don M. BaileyDon M. BaileyInterim PresidentBy:
    
    /s/ George StuartGeorge StuartSenior Vice President, Finance and Chief Financial Officer
 25




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##### Table of Contents



Exhibit Index
 Exhibit No
    
    Description31
    
    Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32 *
    
    Certifications pursuant to Section 906 of the Public Company Accounting Reform and Investor Act of 2002.
 
 *
    
    These certifications are being furnished solely to accompany this quarterly report pursuant
to 18 U.S.C. Section 1350, and are not being filed for purposes of Section 18 of the
Securities Exchange Act of 1934 and are not to be incorporated by reference into any filing of
Questcor Pharmaceuticals, Inc., whether made before or after the date hereof, regardless of
any general incorporation language in such filing.