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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 MARCH 31, 2006
 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
of incorporation or organization)
    
    (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
 R £
  £ £ R
 £ R




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QUESTCOR PHARMACEUTICALS, INC.


FORM 10-Q


TABLE OF CONTENTS




|           |  |                                                                                           
|---------- |  | ------------------------------------------------------------------------------------------
|           |  | PART I. FINANCIAL INFORMATION                                                             
|Item 1     |  | Financial Statements and Notes (Unaudited)                                                
|           |  | Consolidated Balance Sheets  March 31, 2006 and December 31, 2005                        
|           |  | Consolidated Statements of Operations  for the three months ended March 31, 2006 and 2005
|           |  | Consolidated Statements of Cash Flows  for the three months ended March 31, 2006 and 2005
|           |  | Notes to Consolidated Financial Statements                                                
|Item 2     |  | Managements Discussion and Analysis of Financial Condition and Results of Operations     
|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                                                                              
|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                                                                                  
|Signatures
|EXHIBIT 31
|EXHIBIT 32

2



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PART I. FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 QUESTCOR PHARMACEUTICALS, INC.
 
 CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
 March 31,
    
    
    December 31,2006
    
    
    2005(Unaudited)
    
    
    (Note 1)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    8,679
    
    
    $
    20,438Short-term investments
    
    
    6,497
    
    
    
    6,139Accounts receivable, net of allowance for doubtful accounts of $68 and $84 at
March 31, 2006 and December 31, 2005, respectively
    
    
    946
    
    
    
    725Inventories, net
    
    
    1,697
    
    
    
    1,577Prepaid expenses and other current assets
    
    
    895
    
    
    
    710Total current assets
    
    
    18,714
    
    
    
    29,589Property and equipment, net
    
    
    655
    
    
    
    655Goodwill
    
    
    299
    
    
    
    299Deposits and other assets
    
    
    737
    
    
    
    805Total assets
    
    $
    20,405
    
    
    $
    31,348LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    1,428
    
    
    $
    1,505Accrued compensation
    
    
    565
    
    
    
    709Sales-related reserves
    
    
    2,542
    
    
    
    2,581Other accrued liabilities
    
    
    436
    
    
    
    632Income taxes payable
    
    
    
    
    
    
    200Preferred stock, 7,125 Series B shares at redemption amount at December 31, 2005
    
    
    
    
    
    
    7,841Total current liabilities
    
    
    4,971
    
    
    
    13,468Lease termination and deferred rent liability
    
    
    1,494
    
    
    
    1,350Other non-current liabilities
    
    
    25
    
    
    
    27Preferred stock, no par value, 7,500,000 shares authorized; 2,155,715 Series A
shares issued and outstanding at March 31, 2006 and December 31, 2005 (aggregate
liquidation preference of $10,000 at March 31, 2006 and December 31, 2005)
    
    
    5,081
    
    
    
    5,081Shareholders equity:Common stock, no par value, 105,000,000 shares authorized; 54,843,530 and
54,461,291 shares issued and outstanding at March 31, 2006 and December 31,
2005, respectively
    
    
    91,020
    
    
    
    90,576Deferred compensation
    
    
    
    
    
    
    (5
    )Accumulated deficit
    
    
    (82,184
    )
    
    
    (79,147
    )Accumulated other comprehensive loss
    
    
    (2
    )
    
    
    (2
    )Total shareholders equity
    
    
    8,834
    
    
    
    11,422Total liabilities and shareholders equity
    
    $
    20,405
    
    
    $
    31,348
  3




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QUESTCOR PHARMACEUTICALS, INC.
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
 Three Months EndedMarch 31,2006
    
    
    2005Revenues:Net product sales
    
    $
    2,010
    
    
    $
    4,498Operating costs and expenses:Cost of product sales (exclusive of amortization of purchased technology)
    
    
    626
    
    
    
    748Selling, general and administrative
    
    
    4,170
    
    
    
    2,618Research and development
    
    
    380
    
    
    
    499Depreciation and amortization
    
    
    46
    
    
    
    311Total operating costs and expenses
    
    
    5,222
    
    
    
    4,176Income (loss) from operations
    
    
    (3,212
    )
    
    
    322Other income (expense):Non-cash amortization of deemed discount on convertible debentures
    
    
    
    
    
    
    (108
    )Interest income
    
    
    181
    
    
    
    35Interest expense
    
    
    
    
    
    
    (139
    )Rental income (expense), net
    
    
    (6
    )
    
    
    43Total other income (expense)
    
    
    175
    
    
    
    (169
    )Net income (loss)
    
    
    (3,037
    )
    
    
    153Non-cash deemed dividend related to beneficial conversion feature of Series B preferred stock
    
    
    
    
    
    
    84Dividends on Series B preferred stock
    
    
    
    
    
    
    168Net loss applicable to common shareholders
    
    $
    (3,037
    )
    
    $
    (99
    )Net loss per share applicable to common shareholders  basic and diluted
    
    $
    (0.06
    )
    
    $
    0.00Shares used in computing net loss per share applicable to common shareholders  basic and diluted
    
    
    54,562
    
    
    
    51,216
  4




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QUESTCOR PHARMACEUTICALS, INC.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
 Three Months EndedMarch 31,2006
    
    
    2005OPERATING ACTIVITIESNet income (loss)
    
    $
    (3,037
    )
    
    $
    153Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:Share-based compensation expense
    
    
    146
    
    
    
    1Amortization of deemed discount on convertible debentures
    
    
    
    
    
    
    108Depreciation and amortization
    
    
    46
    
    
    
    311Changes in operating assets and liabilities:Accounts receivable
    
    
    (221
    )
    
    
    132Inventories
    
    
    (120
    )
    
    
    128Prepaid expenses and other current assets
    
    
    (185
    )
    
    
    (43
    )Accounts payable
    
    
    (77
    )
    
    
    (238
    )Income taxes payable
    
    
    (200
    )
    
    
    Accrued compensation
    
    
    (144
    )
    
    
    (18
    )Sales-related reserves
    
    
    (39
    )
    
    
    674Other accrued liabilities
    
    
    (196
    )
    
    
    178Other non-current liabilities
    
    
    144
    
    
    
    (23
    )Net cash flows provided by (used in) operating activities
    
    
    (3,883
    )
    
    
    1,363INVESTING ACTIVITIESPurchase of property and equipment
    
    
    (46
    )
    
    
    (14
    )Purchase of short-term investments
    
    
    (3,498
    )
    
    
    Maturities of short-term investments
    
    
    3,140
    
    
    
    Acquisition of purchased technology
    
    
    
    
    
    
    (2,000
    )Proceeds from sale of equipment
    
    
    
    
    
    
    1Decrease in other assets
    
    
    68
    
    
    
    85Net cash flows used in investing activities
    
    
    (336
    )
    
    
    (1,928
    )FINANCING ACTIVITIESIssuance of common stock, net
    
    
    303
    
    
    
    35Redemption of Series B preferred stock
    
    
    (7,841
    )
    
    
    Short-term borrowings
    
    
    
    
    
    
    191Repayment of short-term and long-term debt and capital lease obligation
    
    
    (2
    )
    
    
    (159
    )Net cash flows provided by (used in) financing activities
    
    
    (7,540
    )
    
    
    67Decrease in cash and cash equivalents
    
    
    (11,759
    )
    
    
    (498
    )Cash and cash equivalents at beginning of period
    
    
    20,438
    
    
    
    8,729Cash and cash equivalents at end of period
    
    $
    8,679
    
    
    $
    8,231SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:Cash paid for interest
    
    $
    
    
    
    $
    58NON-CASH INVESTING AND FINANCING ACTIVITIES:Deemed dividend related to beneficial conversion feature of Series B preferred stock
    
    $
    
    
    
    $
    84
  5




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QUESTCOR PHARMACEUTICALS, INC.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 1. BASIS OF PRESENTATION
 ®
 ® ® ® ®
 ®
 2. SHARE-BASED COMPENSATION
  Share-Based Payment
 6




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Accounting for Stock-Based Compensation Accounting for Stock Issued to Employees, Accounting for Stock-Based Compensation-Transition
and Disclosure .
  Three MonthsEndedMarch 31, 2006Cost of product sales
    
    $
    4Selling, general and administrative
    
    
    120Research and development
    
    
    4Total
    
    $
    128
   Three MonthsEndedMarch 31, 2005Net loss applicable to common shareholders, as reported
    
    $
    (99
    )Add: Share-based employee compensation expense included reported net loss applicable to
common shareholders
    
    
    1Deduct: Share-based employee compensation expense determined under the fair value method
    
    
    (121
    )Net loss applicable to common shareholders, pro forma
    
    $
    (219
    )Basic and diluted net loss per share applicable to common shareholders:As reported
    
    $
    0.00Pro forma
    
    $
    0.00
 Stock Option Plans
 7




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Three Months EndedMarch 31,2006
    
    
    2005Expected volatility
    
    
    98
    %
    
    
    69
    %Expected term (in years)
    
    
    6.25
    
    
    
    3.9Risk-free rate
    
    
    4.8
    %
    
    
    4.2
    %Expected dividends
    
    
    
    
    
    
    
   Shares
    
    
    Weighted-AverageExercisePrice
    
    

Weighted-AverageRemainingContractualTerm(in years)
    
    

AggregateIntrinsic Value(in thousands)Options outstanding at December 31, 2005
    
    
    6,402,074
    
    
    $
    0.76
    
    
    
    7.84Options granted
    
    
    1,569,500
    
    
    
    1.05Options exercised
    
    
    (247,807
    )
    
    
    0.92Options forfeited or expired
    
    
    (330,921
    )
    
    
    1.33Options outstanding at March 31, 2006
    
    
    7,392,846
    
    
    $
    0.79
    
    
    
    8.21
    
    
    $
    6,534Options vested and exercisable at March 31, 2006
    
    
    2,429,232
    
    
    $
    0.96
    
    
    
    6.44
    
    
    $
    1,867
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Employee Stock Purchase Plan
   Three Months EndedMarch 31,2006
    
    
    2005Expected volatility
    
    
    98
    %
    
    
    64
    %Expected term (in years)
    
    
    0.25
    
    
    
    0.24Risk-free rate
    
    
    4.6
    %
    
    
    3.7
    %Expected dividends
    
    
    
    
    
    
    
  3. REVENUE RECOGNITION
    9




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4. CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
  5. INVENTORIES
  March 31,
    
    
    December 31,2006
    
    
    2005Raw materials
    
    $
    1,256
    
    
    $
    1,335Work in process
    
    
    320
    
    
    
    Finished goods
    
    
    240
    
    
    
    342Less allowance for excess and obsolete inventories
    
    
    (119
    )
    
    
    (100
    )$
    1,697
    
    
    $
    1,577
 6. GOODWILL
  7. COMMITMENTS, INDEMNIFICATIONS AND CONTINGENCIES
  10




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8. NET LOSS PER SHARE APPLICABLE TO COMMON SHAREHOLDERS
  9. EQUITY TRANSACTIONS
  10. REDEMPTION OF SERIES B CONVERTIBLE PREFERRED STOCK
    11




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11. RELATED PARTY TRANSACTIONS
  12. COMPREHENSIVE INCOME (LOSS)
  13. SUBSEQUENT EVENTS
  ®
 
 ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  12




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Overview
 ®
     Critical Accounting Policies
  Product Returns, Rebates and Sales Reserves
  13




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14




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Inventories
  Intangible Assets
  Share-Based Compensation Expense
   Results of Operations
 Three months ended March 31, 2006 compared to the three months ended March 31, 2005:
 Total Revenues
 Three Months EndedMarch 31,
    
    
    
    
    
    
    %2006
    
    
    2005
    
    
    (Decrease)
    
    
    Change(in $000's)Net product sales
    
    $
    2,010
    
    
    $
    4,498
    
    
    $
    (2,488
    )
    
    
    (55
    )%
  15




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Cost of Product Sales
 Three Months EndedMarch 31,
    
    
    
    
    
    
    %2006
    
    
    2005
    
    
    (Decrease)
    
    
    Change(in $000s)Cost of product sales
    
    $
    626
    
    
    $
    748
    
    
    $
    (122
    )
    
    
    (16
    )%
   Selling, General and Administrative
 Three Months EndedMarch 31,
    
    
    
    
    
    
    %2006
    
    
    2005
    
    
    Increase
    
    
    Change(in $000s)Selling, general and administrative expense
    
    $
    4,170
    
    
    $
    2,618
    
    
    $
    1,552
    
    
    
    59
    %
  16




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Research and Development
 Three Months EndedMarch 31,
    
    
    
    
    
    
    %2006
    
    
    2005
    
    
    (Decrease)
    
    
    Change(in $000's)Research and development
    
    $
    380
    
    
    $
    499
    
    
    $
    (119
    )
    
    
    (24
    )%
  Depreciation and Amortization
 Three Months EndedMarch 31,
    
    
    
    
    
    
    %2006
    
    
    2005
    
    
    (Decrease)
    
    
    Change(in $000's)Depreciation and amortization
    
    $
    46
    
    
    $
    311
    
    
    $
    (265
    )
    
    
    (85
    )%
  17




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Other Income and Expense Items
 Three Months EndedMarch 31,
    
    
    Increase/2006
    
    
    2005
    
    
    (Decrease)(in $000's)Non-cash amortization of deemed discount on convertible debentures
    
    $
    
    
    
    $
    (108
    )
    
    $
    (108
    )Interest income
    
    
    181
    
    
    
    35
    
    
    
    146Interest expense
    
    
    
    
    
    
    (139
    )
    
    
    (139
    )Rental income (expense), net
    
    
    (6
    )
    
    
    43
    
    
    
    (49
    )
    Series B Preferred Stock Dividends
  Liquidity and Capital Resources
   18




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19




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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
  20




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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
 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. 21




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SIGNATURES
  QUESTCOR PHARMACEUTICALS, INC.Date: May 12, 2006
    By:
    /s/ JAMES L. FARESJames L. FaresPresident and Chief Executive OfficerBy:
    /s/ GEORGE STUARTGeorge StuartVice President, Finance and Chief Financial Officer 22




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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.