##### 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 JUNE 30, 2007
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
 FOR THE TRANSITION PERIOD FROMTO
 COMMISSION FILE NUMBER: 001-14758
 QUESTCOR PHARMACEUTICALS, INC.
 (Exact name of Registrant as specified in its charter)
 CALIFORNIA
(State or other jurisdiction 
of incorporation or organization)
    
    33-0476164
(I.R.S. Employer
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  June 30, 2007 and December 31, 2006


3Consolidated Statements of Operations  for the three and six months ended June 30, 2007 and 2006


4Consolidated Statements of Cash Flows  for the six months ended June 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


21Item 4 Controls and Procedures


21PART II. OTHER INFORMATION


21Item 1 Legal Proceedings


21Item 1A Risk Factors


21Item 2 Unregistered Sales of Equity Securities and Use of Proceeds


21Item 3 Defaults Upon Senior Securities


21Item 4 Submission of Matters to a Vote of Security Holders


22Item 5 Other Information


22Item 6 Exhibits


22Signatures


23EXHIBIT 31EXHIBIT 32
  2




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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)
 June 30,
    
    
    December 31,2007
    
    
    2006(Unaudited)
    
    
    (Note 1)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    3,931
    
    
    $
    15,937Short-term investments
    
    
    10,142
    
    
    
    2,488Total cash, cash equivalents and short-term investments
    
    
    14,073
    
    
    
    18,425Accounts receivable, net of allowance for doubtful accounts
of $44 and $55 at June 30, 2007 and December 31, 2006,
respectively
    
    
    1,215
    
    
    
    1,783Inventories, net
    
    
    2,414
    
    
    
    2,965Prepaid expenses and other current assets
    
    
    555
    
    
    
    811Total current assets
    
    
    18,257
    
    
    
    23,984Property and equipment, net
    
    
    618
    
    
    
    665Purchased technology, net
    
    
    4,117
    
    
    
    3,965Goodwill
    
    
    299
    
    
    
    299Deposits and other assets
    
    
    733
    
    
    
    722Total assets
    
    $
    24,024
    
    
    $
    29,635LIABILITIES, PREFERRED STOCK AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    1,371
    
    
    $
    2,154Accrued compensation
    
    
    829
    
    
    
    1,019Sales-related reserves
    
    
    2,465
    
    
    
    2,784Other accrued liabilities
    
    
    464
    
    
    
    521Total current liabilities
    
    
    5,129
    
    
    
    6,478Lease termination and deferred rent liabilities
    
    
    1,974
    
    
    
    1,961Other non-current liabilities
    
    
    13
    
    
    
    18Preferred stock, no par value, 7,500,000 shares authorized;
2,155,715 Series A shares issued and outstanding at June 30,
2007 and December 31, 2006 (aggregate liquidation preference of
$10,000 at June 30, 2007 and December 31, 2006)
    
    
    5,081
    
    
    
    5,081Shareholders equity:Common stock, no par value, 105,000,000 shares authorized;
69,207,147 and 68,740,804 shares issued and outstanding at
June 30, 2007 and December 31, 2006, respectively
    
    
    106,551
    
    
    
    105,352Accumulated deficit
    
    
    (94,732
    )
    
    
    (89,256
    )Accumulated other comprehensive gain
    
    
    8
    
    
    
    1Total shareholders equity
    
    
    11,827
    
    
    
    16,097Total liabilities, preferred stock and shareholders equity
    
    $
    24,024
    
    
    $
    29,635
  3




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##### Table of Contents



QUESTCOR PHARMACEUTICALS, INC.
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net product sales
    
    $
    4,144
    
    
    $
    3,329
    
    
    $
    7,845
    
    
    $
    5,339Operating costs and expenses:Cost of product sales (exclusive of amortization of
purchased technology)
    
    
    914
    
    
    
    652
    
    
    
    1,764
    
    
    
    1,278Selling, general and administrative
    
    
    4,747
    
    
    
    4,241
    
    
    
    10,297
    
    
    
    8,411Research and development
    
    
    951
    
    
    
    708
    
    
    
    2,091
    
    
    
    1,088Depreciation and amortization
    
    
    125
    
    
    
    78
    
    
    
    248
    
    
    
    124Total operating costs and expenses
    
    
    6,737
    
    
    
    5,679
    
    
    
    14,400
    
    
    
    10,901Loss from operations
    
    
    (2,593
    )
    
    
    (2,350
    )
    
    
    (6,555
    )
    
    
    (5,562
    )Other income (expense):Interest income
    
    
    181
    
    
    
    151
    
    
    
    391
    
    
    
    332Other income (expense), net
    
    
    247
    
    
    
    (16
    )
    
    
    240
    
    
    
    (22
    )Gain on sale of product rights
    
    
    448
    
    
    
    
    
    
    
    448
    
    
    
    Total other income
    
    
    876
    
    
    
    135
    
    
    
    1,079
    
    
    
    310Net loss
    
    $
    (1,717
    )
    
    $
    (2,215
    )
    
    $
    (5,476
    )
    
    $
    (5,252
    )Net loss per share  basic and diluted
    
    $
    (0.02
    )
    
    $
    (0.04
    )
    
    $
    (0.08
    )
    
    $
    (0.10
    )Shares used in computing net loss per share  basic and diluted
    
    
    68,989
    
    
    
    56,067
    
    
    
    68,882
    
    
    
    55,319
  4




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QUESTCOR PHARMACEUTICALS, INC.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
 Six Months EndedJune 30,2007
    
    
    2006OPERATING ACTIVITIESNet loss
    
    $
    (5,476
    )
    
    $
    (5,252
    )Adjustments to reconcile net loss to net cash used in operating activities:Share-based compensation expense
    
    
    792
    
    
    
    431Depreciation and amortization
    
    
    248
    
    
    
    124Loss on disposal of equipment
    
    
    12
    
    
    
    Gain on sale of product rights
    
    
    (448
    )
    
    
    Changes in operating assets and liabilities:Accounts receivable
    
    
    568
    
    
    
    (1,065
    )Inventories
    
    
    551
    
    
    
    (279
    )Prepaid expenses and other current assets
    
    
    256
    
    
    
    198Accounts payable
    
    
    (783
    )
    
    
    119Accrued compensation
    
    
    (190
    )
    
    
    15Sales-related reserves
    
    
    (319
    )
    
    
    260Other accrued liabilities
    
    
    (57
    )
    
    
    (93
    )Income taxes payable
    
    
    
    
    
    
    (200
    )Other non-current liabilities
    
    
    8
    
    
    
    507Net cash flows used in operating activities
    
    
    (4,838
    )
    
    
    (5,235
    )INVESTING ACTIVITIESPurchase of property and equipment
    
    
    (65
    )
    
    
    (61
    )Acquisition of purchased technology
    
    
    (300
    )
    
    
    (2,628
    )Purchase of short-term investments
    
    
    (14,897
    )
    
    
    (5,643
    )Maturities of short-term investments
    
    
    7,250
    
    
    
    6,140Net proceeds from sale of product rights
    
    
    448
    
    
    
    Changes in deposits and other assets
    
    
    (11
    )
    
    
    93Net cash flows used in investing activities
    
    
    (7,575
    )
    
    
    (2,099
    )FINANCING ACTIVITIESIssuance of common stock, net
    
    
    407
    
    
    
    458Redemption of Series B preferred stock
    
    
    
    
    
    
    (7,841
    )Repayment of capital lease obligation
    
    
    
    
    
    
    (4
    )Net cash flows provided by (used in) financing activities
    
    
    407
    
    
    
    (7,387
    )Decrease in cash and cash equivalents
    
    
    (12,006
    )
    
    
    (14,721
    )Cash and cash equivalents at beginning of period
    
    
    15,937
    
    
    
    20,438Cash and cash equivalents at end of period
    
    $
    3,931
    
    
    $
    5,717
  5




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QUESTCOR PHARMACEUTICALS, INC.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 1. BASIS OF PRESENTATION
 ® ®
     6




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2. SHARE-BASED COMPENSATION
 Share-Based Payment Accounting for Stock-Based Compensation
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Cost of product sales
    
    $
    1
    
    
    $
    7
    
    
    $
    2
    
    
    $
    10Selling, general and administrative
    
    
    292
    
    
    
    207
    
    
    
    697
    
    
    
    328Research and development
    
    
    62
    
    
    
    6
    
    
    
    129
    
    
    
    10Total
    
    $
    355
    
    
    $
    220
    
    
    $
    828
    
    
    $
    348
   Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2007
    
    2006
    
    2007
    
    2006Expected volatility
    
    
    84
    %
    
    
    94
    %
    
    
    84-86
    %
    
    
    94-98
    %Weighted average volatility
    
    
    84
    %
    
    
    94
    %
    
    
    86
    %
    
    
    98
    %Expected term (in years)
    
    
    6.25
    
    
    
    6.25
    
    
    
    6.25
    
    
    
    6.25Risk-free interest rate
    
    
    4.9
    %
    
    
    5.1
    %
    
    
    4.6-4.9
    %
    
    
    4.8-5.1
    %Expected dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
   7




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Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2007
    
    2006
    
    2007
    
    2006Expected volatility
    
    
    70
    %
    
    
    94
    %
    
    
    65-70
    %
    
    
    94-98
    %Weighted average volatility
    
    
    70
    %
    
    
    94
    %
    
    
    67
    %
    
    
    95
    %Expected term (in years)
    
    
    0.71
    
    
    
    0.25
    
    
    
    0.53-0.71
    
    
    
    0.25Risk-free interest rate
    
    
    5.0
    %
    
    
    5.1
    %
    
    
    5.0
    %
    
    
    4.6-5.1
    %Expected dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
  3. REVENUE RECOGNITION
     4. CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
  8




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5. INVENTORIES
  June 30,
    
    
    December 31,2007
    
    
    2006Raw materials
    
    $
    2,186
    
    
    $
    2,120Finished goods
    
    
    683
    
    
    
    1,082Less allowance for excess and obsolete inventories
    
    
    (455
    )
    
    
    (237
    )$
    2,414
    
    
    $
    2,965
 6. PURCHASED TECHNOLOGY
  7. COMMITMENTS, INDEMNIFICATIONS AND CONTINGENCIES
    9




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8. NET INCOME (LOSS) PER SHARE
  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. RELATED PARTY TRANSACTION
  10




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11. COMPREHENSIVE LOSS
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006($000s)
    
    
    ($000s)Net loss
    
    $
    (1,717
    )
    
    $
    (2,215
    )
    
    $
    (5,476
    )
    
    $
    (5,252
    )Change in unrealized gains on available-for-sale securities
    
    
    5
    
    
    
    (1
    )
    
    
    7
    
    
    
    (1
    )Comprehensive loss
    
    $
    (1,712
    )
    
    $
    (2,216
    )
    
    $
    (5,469
    )
    
    $
    (5,253
    )
 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 (
 The Fair Value Option for Financial
Assets and Financial Liabilities
 Fair Value Measurements
 11




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15. SUBSEQUENT EVENT
  
 ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  Overview
     Critical Accounting Policies
  12




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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
 Share-Based Compensation Expense
   Lease Termination Liability
  14




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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.
  Results of Operations
 Three months ended June 30, 2007 compared to the three months ended June 30, 2006:
 Total Net Product Sales
 Three Months EndedJune 30,
    
    
    
    
    
    
    %2007
    
    
    2006
    
    
    Increase
    
    
    Change(in $000s)Net product sales
    
    $
    4,144
    
    
    $
    3,329
    
    
    $
    815
    
    
    
    24
    %
    15




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Cost of Product Sales
 Three Months EndedJune 30,
    
    
    
    
    
    %2007
    
    2006
    
    Increase
    
    Change(in $000s)Cost of product sales
    
    $
    914
    
    
    $
    652
    
    
    $
    262
    
    
    
    40
    %
   Selling, General and Administrative
 Three Months EndedJune 30,
    
    
    
    
    
    %2007
    
    2006
    
    Increase
    
    Change(in $000s)Selling, general and administrative expense
    
    $
    4,747
    
    
    $
    4,241
    
    
    $
    506
    
    
    
    12
    %
  Research and Development
 Three Months EndedJune 30,
    
    
    
    
    
    %2007
    
    2006
    
    Increase
    
    Change(in $000s)Research and development
    
    $
    951
    
    
    $
    708
    
    
    $
    243
    
    
    
    34
    %
  16




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Depreciation and Amortization
 Three Months EndedJune 30,
    
    
    
    
    
    %2007
    
    2006
    
    Increase
    
    Change(in $000s)Depreciation and amortization
    
    $
    125
    
    
    $
    78
    
    
    $
    47
    
    
    
    60
    %
  Other Income, net
 Three Months EndedJune 30,
    
    
    
    
    
    %2007
    
    2006
    
    Increase
    
    Change(in $000s)Other income, net
    
    $
    876
    
    
    $
    135
    
    
    $
    741
    
    
    
    549
    %
  Six months ended June 30, 2007 compared to the six months ended June 30, 2006:
 Total Net Product Sales
 Six Months EndedJune 30,
    
    
    
    
    
    %2007
    
    2006
    
    Increase
    
    Change(in $000s)Net product sales
    
    $
    7,845
    
    
    $
    5,339
    
    
    $
    2,506
    
    
    
    47
    %
  17




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##### Table of Contents



Cost of Product Sales
 Six Months EndedJune 30,
    
    
    
    
    
    %2007
    
    2006
    
    Increase
    
    Change(in $000s)Cost of product sales
    
    $
    1,764
    
    
    $
    1,278
    
    
    $
    486
    
    
    
    38
    %
   Selling, General and Administrative
 Six Months EndedJune 30,
    
    
    
    
    
    %2007
    
    2006
    
    Increase
    
    Change(in $000s)Selling, general and administrative expense
    
    $
    10,297
    
    
    $
    8,411
    
    
    $
    1,886
    
    
    
    22
    %
  Research and Development
 Six Months EndedJune 30,
    
    
    
    
    
    %2007
    
    2006
    
    Increase
    
    Change(in $000s)Research and development
    
    $
    2,091
    
    
    $
    1,088
    
    
    $
    1,003
    
    
    
    92
    %
  18




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Depreciation and Amortization
 Six Months EndedJune 30,
    
    
    
    
    
    %2007
    
    2006
    
    Increase
    
    Change(in $000s)Depreciation and amortization
    
    $
    248
    
    
    $
    124
    
    
    $
    124
    
    
    
    100
    %
  Other Income, net
 Six Months EndedJune 30,
    
    
    
    
    
    %2007
    
    2006
    
    Increase
    
    Change(in $000s)Other income, net
    
    $
    1,079
    
    
    $
    310
    
    
    $
    769
    
    
    
    248
    %
  Liquidity and Capital Resources
      19




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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
 20




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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 4. CONTROLS AND PROCEDURES
    
 PART II. OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
  
 ITEM 1A. RISK FACTORS
  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
  21




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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
   Votes For
    
    Votes WithheldAlbert Hansen
    
    
    55,614,489
    
    
    
    3,190,616Don M. Bailey
    
    
    55,678,118
    
    
    
    3,126,987Neal C. Bradsher
    
    
    55,660,024
    
    
    
    3,145,081James L. Fares
    
    
    55,648,439
    
    
    
    3,156,666Gregg Lapointe
    
    
    55,409,739
    
    
    
    3,395,366Virgil D. Thompson
    
    
    55,426,519
    
    
    
    3,378,586David Young
    
    
    55,368,768
    
    
    
    3,436,337
  For:
    
    55,709,488Against:
    
    3,027,109Abstain:
    
    68,508
 
 ITEM 5. OTHER INFORMATION
  
 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. 22




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SIGNATURES
  QUESTCOR PHARMACEUTICALS, INC.Date: August 10, 2007
    By:
    /s/ Gregg LapointeGregg LapointeDirectorBy:
    /s/ George StuartGeorge StuartSenior Vice President, Finance and Chief Financial Officer 23




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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. 24