##### 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, 2006
 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
    
    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 INFORMATIONItem 1 Financial Statements and Notes (Unaudited)
    
    
    3Consolidated Balance Sheets  September 30, 2006 and December 31, 2005
    
    
    3Consolidated Statements of Operations  for the three months and nine months ended September 30, 2006 and 2005
    
    
    4Consolidated Statements of Cash Flows  for the nine months ended September 30, 2006 and 2005
    
    
    5Notes to Consolidated Financial Statements
    
    
    6Item 2 Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    15Item 3 Quantitative and Qualitative Disclosures about Market Risk
    
    
    26Item 4 Controls and Procedures
    
    
    26PART II. OTHER INFORMATIONItem 1 Legal Proceedings
    
    
    26Item 1A Risk Factors
    
    
    26Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    26Item 3 Defaults Upon Senior Securities
    
    
    26Item 4 Submission of Matters to a Vote of Security Holders
    
    
    26Item 5 Other Information
    
    
    26Item 6 Exhibits
    
    
    27Signatures
    
    
    28EXHIBIT 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)
 September 30,
    
    
    December 31,2006
    
    
    2005(Unaudited)
    
    
    (Note 1)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    4,366
    
    
    $
    20,438Short-term investments
    
    
    4,911
    
    
    
    6,139Accounts receivable, net of allowance for doubtful accounts of $22 and $84 at
September 30, 2006 and December 31, 2005, respectively
    
    
    2,022
    
    
    
    725Inventories, net
    
    
    2,901
    
    
    
    1,577Prepaid expenses and other current assets
    
    
    1,279
    
    
    
    710Total current assets
    
    
    15,479
    
    
    
    29,589Property and equipment, net
    
    
    601
    
    
    
    655Purchased technology, net
    
    
    2,514
    
    
    
    Goodwill
    
    
    299
    
    
    
    299Deposits and other assets
    
    
    716
    
    
    
    805Total assets
    
    $
    19,609
    
    
    $
    31,348LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    1,860
    
    
    $
    1,505Accrued compensation
    
    
    890
    
    
    
    709Sales-related reserves
    
    
    3,177
    
    
    
    2,581Other accrued liabilities
    
    
    533
    
    
    
    632Income taxes payable
    
    
    
    
    
    
    200Preferred stock, 7,125 Series B shares at redemption amount at December 31, 2005
    
    
    
    
    
    
    7,841Total current liabilities
    
    
    6,460
    
    
    
    13,468Lease termination and deferred rent liabilities
    
    
    1,807
    
    
    
    1,350Other non-current liabilities
    
    
    20
    
    
    
    27Preferred stock, no par value, 7,500,000 shares authorized; 2,155,715 Series A
shares issued and outstanding at September 30, 2006 and December 31, 2005
(aggregate liquidation preference of $10,000 at September 30, 2006 and December
31, 2005)
    
    
    5,081
    
    
    
    5,081Shareholders equity:Common stock, no par value, 105,000,000 shares authorized; 57,216,721 and
54,461,291 shares issued and outstanding at September 30, 2006 and December 31,
2005, respectively
    
    
    92,157
    
    
    
    90,571Accumulated deficit
    
    
    (85,920
    )
    
    
    (79,147
    )Accumulated other comprehensive gain (loss)
    
    
    4
    
    
    
    (2
    )Total shareholders equity
    
    
    6,241
    
    
    
    11,422Total liabilities and shareholders equity
    
    $
    19,609
    
    
    $
    31,348
  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
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net product sales
    
    $
    4,045
    
    
    $
    3,558
    
    
    $
    9,384
    
    
    $
    12,346Operating costs and expenses:Cost of product sales (exclusive of amortization of purchased
technology)
    
    
    945
    
    
    
    522
    
    
    
    2,223
    
    
    
    2,297Selling, general and administrative
    
    
    4,171
    
    
    
    2,298
    
    
    
    12,582
    
    
    
    7,140Research and development
    
    
    544
    
    
    
    536
    
    
    
    1,632
    
    
    
    1,597Depreciation and amortization
    
    
    94
    
    
    
    319
    
    
    
    218
    
    
    
    953Total operating costs and expenses
    
    
    5,754
    
    
    
    3,675
    
    
    
    16,655
    
    
    
    11,987Income (loss) from operations
    
    
    (1,709
    )
    
    
    (117
    )
    
    
    (7,271
    )
    
    
    359Other income (expense):Non-cash amortization of deemed discount on convertible debentures
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (108
    )Interest income
    
    
    137
    
    
    
    29
    
    
    
    469
    
    
    
    87Interest expense
    
    
    
    
    
    
    (38
    )
    
    
    
    
    
    
    (247
    )Other income, net
    
    
    51
    
    
    
    5
    
    
    
    51
    
    
    
    6Rental income (expense), net
    
    
    
    
    
    
    67
    
    
    
    (22
    )
    
    
    181Total other income (expense)
    
    
    188
    
    
    
    63
    
    
    
    498
    
    
    
    (81
    )Net income (loss)
    
    
    (1,521
    )
    
    
    (54
    )
    
    
    (6,773
    )
    
    
    278Non-cash deemed dividend related to beneficial conversion feature of
Series B preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    84Dividends on Series B preferred stock
    
    
    
    
    
    
    168
    
    
    
    
    
    
    
    504Net loss applicable to common shareholders
    
    $
    (1,521
    )
    
    $
    (222
    )
    
    $
    (6,773
    )
    
    $
    (310
    )Net loss per share applicable to common shareholders  basic and diluted
    
    $
    (0.03
    )
    
    $
    0.00
    
    
    $
    (0.12
    )
    
    $
    (0.01
    )Shares used in computing net loss per share applicable to common
shareholders  basic and diluted
    
    
    56,870
    
    
    
    52,813
    
    
    
    55,841
    
    
    
    52,236
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QUESTCOR PHARMACEUTICALS, INC.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (IN THOUSANDS)
(UNAUDITED)
 Nine Months EndedSeptember 30,2006
    
    
    2005OPERATING ACTIVITIESNet income (loss)
    
    $
    (6,773
    )
    
    $
    278Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:Share-based compensation expense
    
    
    828
    
    
    
    19Amortization of deemed discount on convertible debentures
    
    
    
    
    
    
    108Depreciation and amortization
    
    
    218
    
    
    
    953Changes in operating assets and liabilities:Accounts receivable
    
    
    (1,297
    )
    
    
    366Inventories
    
    
    (1,282
    )
    
    
    (16
    )Prepaid expenses and other current assets
    
    
    (569
    )
    
    
    (335
    )Accounts payable
    
    
    355
    
    
    
    (266
    )Accrued compensation
    
    
    181
    
    
    
    (325
    )Sales-related reserves
    
    
    596
    
    
    
    887Other accrued liabilities
    
    
    (100
    )
    
    
    (103
    )Income taxes payable
    
    
    (200
    )
    
    
    Other non-current liabilities
    
    
    457
    
    
    
    28Net cash flows provided by (used in) operating activities
    
    
    (7,586
    )
    
    
    1,594INVESTING ACTIVITIESPurchase of property and equipment
    
    
    (92
    )
    
    
    (22
    )Purchase of short-term investments
    
    
    (9,606
    )
    
    
    Maturities of short-term investments
    
    
    10,840
    
    
    
    Acquisition of purchased technology
    
    
    (2,628
    )
    
    
    (2,000
    )Proceeds from sale of equipment
    
    
    
    
    
    
    1Decrease in other assets
    
    
    89
    
    
    
    80Net cash flows used in investing activities
    
    
    (1,397
    )
    
    
    (1,941
    )FINANCING ACTIVITIESIssuance of common stock, net
    
    
    758
    
    
    
    129Redemption of Series B preferred stock
    
    
    (7,841
    )
    
    
    Short-term borrowings
    
    
    
    
    
    
    191Repayment of short-term and long-term debt and capital lease obligation
    
    
    (6
    )
    
    
    (361
    )Redemption of convertible debentures
    
    
    
    
    
    
    (4,000
    )Net cash flows used in financing activities
    
    
    (7,089
    )
    
    
    (4,041
    )Decrease in cash and cash equivalents
    
    
    (16,072
    )
    
    
    (4,388
    )Cash and cash equivalents at beginning of period
    
    
    20,438
    
    
    
    8,729Cash and cash equivalents at end of period
    
    $
    4,366
    
    
    $
    4,341NON-CASH INVESTING AND FINANCING ACTIVITIES:Deemed dividend related to beneficial conversion feature of Series B preferred stock
    
    $
    
    
    
    $
    84Common stock issued in lieu of quarterly cash dividends on Series B preferred stock
    
    $
    
    
    
    $
    672Common stock issued upon conversion of Series B preferred stock and accrued dividends
for Series B stock
    
    $
    
    
    
    $
    24
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QUESTCOR PHARMACEUTICALS, INC.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 1. BASIS OF PRESENTATION
 ® ®
 ® ® ®
 ®
  6




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##### Table of Contents



2. SHARE-BASED COMPENSATION
 Share-Based Payment Accounting for Stock-Based Compensation
  Three Months
    
    
    Nine MonthsEnded
    
    
    EndedSeptember 30, 2006
    
    
    September 30, 2006Cost of product sales
    
    $
    12
    
    
    $
    23Selling, general and administrative
    
    
    348
    
    
    
    676Research and development
    
    
    11
    
    
    
    21Total
    
    $
    371
    
    
    $
    720
  Accounting for Stock Issued to Employees, Accounting for Stock-Based Compensation-Transition and
Disclosure .
 7




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Three Months
    
    
    Nine MonthsEnded
    
    
    EndedSeptember 30, 2005
    
    
    September 30, 2005Net loss applicable to common shareholders, as reported
    
    $
    (222
    )
    
    $
    (310
    )Add: Share-based employee compensation expense included in reported net loss
applicable to common shareholders
    
    
    1
    
    
    
    4Deduct: Share-based employee compensation expense determined under SFAS No. 123
    
    
    (113
    )
    
    
    (341
    )Net loss applicable to common shareholders, pro forma
    
    $
    (334
    )
    
    $
    (647
    )Basic and diluted net loss per share applicable to common shareholders:As reported
    
    $
    0.00
    
    
    $
    (0.01
    )Pro forma
    
    $
    (0.01
    )
    
    $
    (0.01
    )
    Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2006
    
    2005
    
    2006
    
    2005Expected volatility
    
    
    91
    %
    
    
    63
    %
    
    
    96
    %
    
    
    68
    %Expected term (in years)
    
    
    6.25
    
    
    
    4.0
    
    
    
    6.25
    
    
    
    4.0Risk-free interest rate
    
    
    4.6
    %
    
    
    4.0
    %
    
    
    4.8
    %
    
    
    4.1
    %Expected dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 8




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Weighted-AverageWeighted-
    
    RemainingAverage
    
    Contractual
    
    AggregateStock
    
    Exercise
    
    Term
    
    Intrinsic ValueOptions
    
    Price
    
    (in years)
    
    (in thousands)Outstanding at December 31, 2005
    
    
    6,402,074
    
    
    $
    0.76
    
    
    
    7.84Granted
    
    
    2,174,750
    
    
    
    1.24Exercised
    
    
    (553,306
    )
    
    
    0.92Forfeited or expired
    
    
    (680,573
    )
    
    
    1.46Outstanding at September 30, 2006
    
    
    7,342,945
    
    
    $
    0.83
    
    
    
    8.10
    
    
    $
    5,446Vested and exercisable at September 30, 2006
    
    
    2,707,153
    
    
    $
    0.79
    
    
    
    6.94
    
    
    $
    2,147
   Weighted-AverageRestricted
    
    
    Grant Date FairStock
    
    
    ValueNonvested shares at December 31, 2005
    
    
    
    
    
    $
    Granted
    
    
    127,811
    
    
    
    1.69Vested
    
    
    
    
    
    
    Forfeited or expired
    
    
    
    
    
    
    Nonvested shares at September, 2006
    
    
    127,811
    
    
    $
    1.69
   9




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##### Table of Contents



Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2006
    
    2005
    
    2006
    
    2005Expected volatility
    
    
    84
    %
    
    
    63
    %
    
    
    88
    %
    
    
    63
    %Expected term (in years)
    
    
    0.36
    
    
    
    0.25
    
    
    
    0.32
    
    
    
    0.25Risk-free interest rate
    
    
    5.1
    %
    
    
    4.0
    %
    
    
    5.0
    %
    
    
    3.8
    %Expected dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
   3. REVENUE RECOGNITION
    10




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##### Table of Contents



4. CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
  11




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##### Table of Contents



5. INVENTORIES
  September 30,
    
    
    December 31,2006
    
    
    2005Raw materials
    
    $
    2,319
    
    
    $
    1,335Work in process
    
    
    
    
    
    
    Finished goods
    
    
    686
    
    
    
    342Less allowance for excess and obsolete inventories
    
    
    (104
    )
    
    
    (100
    )$
    2,901
    
    
    $
    1,577
 6. PURCHASED TECHNOLOGY AND GOODWILL
   7. COMMITMENTS, INDEMNIFICATIONS AND CONTINGENCIES
    12




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##### Table of Contents



8. NET INCOME (LOSS) PER SHARE APPLICABLE TO COMMON SHAREHOLDERS
  9. WARRANT TRANSACTIONS
  10. SERIES B CONVERTIBLE PREFERRED STOCK
     13




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##### Table of Contents



11. RELATED PARTY TRANSACTIONS
  12. COMPREHENSIVE INCOME (LOSS)
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005($000s)
    
    
    ($000s)Net income (loss)
    
    $
    (1,521
    )
    
    $
    (54
    )
    
    $
    (6,773
    )
    
    $
    278Change in unrealized gains on available-for-sale securities
    
    
    7
    
    
    
    
    
    
    
    6
    
    
    
    Comprehensive income (loss)
    
    $
    (1,514
    )
    
    $
    (54
    )
    
    $
    (6,767
    )
    
    $
    278
 13. ACQUISITION OF DORAL
  14. RECENTLY ISSUED ACCOUNTING STANDARDS
 Accounting for Uncertainty in Income Taxes  an interpretation of FASB Statement No. 109 Accounting for Income
Taxes
 14




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Fair Value Measurements
 
 ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  Overview
     15




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Critical Accounting Policies
  Product Returns, Rebates and Sales Reserves
      16




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Inventories
  Intangible Assets
 Accounting for the Impairment or Disposal of Long-Lived Assets Goodwill and Other
Intangible Assets
 Share-Based Compensation Expense
   Results of Operations
 17




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Three months ended September 30, 2006 compared to the three months ended September 30, 2005:
 Total Net Product Sales
 Three Months EndedSeptember 30,
    
    
    
    
    
    %2006
    
    2005
    
    Increase
    
    Change(in $000s)Net product sales
    
    $
    4,045
    
    
    $
    3,558
    
    
    $
    487
    
    
    
    14
    %
    Cost of Product Sales
 Three Months EndedSeptember
    
    30,
    
    
    
    
    
    %2006
    
    2005
    
    Increase
    
    Change(in $000s)Cost of product sales
    
    $
    945
    
    
    $
    522
    
    
    $
    423
    
    
    
    81
    %
  18




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##### Table of Contents



Selling, General and Administrative
 Three Months EndedSeptember 30,
    
    
    
    
    
    %2006
    
    2005
    
    Increase
    
    Change(in $000s)Selling, general and administrative expense
    
    $
    4,171
    
    
    $
    2,298
    
    
    $
    1,873
    
    
    
    82
    %
   Research and Development
 Three Months EndedSeptember 30,
    
    
    
    
    
    %2006
    
    2005
    
    Increase
    
    Change(in $000s)Research and development
    
    $
    544
    
    
    $
    536
    
    
    $
    8
    
    
    
    2
    %
  Depreciation and Amortization
 Three Months EndedSeptember 30,
    
    
    
    
    
    %2006
    
    2005
    
    (Decrease)
    
    Change(in $000s)Depreciation and amortization
    
    $
    94
    
    
    $
    319
    
    
    $
    (225
    )
    
    
    (71
    )%
 19




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Other Income and Expense Items
 Three Months EndedSeptember 30,
    
    Increase/2006
    
    2005
    
    (Decrease)(in $000s)Interest income
    
    $
    137
    
    
    $
    29
    
    
    $
    108Interest expense
    
    
    
    
    
    
    (38
    )
    
    
    (38
    )Other income, net
    
    
    51
    
    
    
    5
    
    
    
    46Rental income, net
    
    
    
    
    
    
    67
    
    
    
    (67
    )
   Series B Preferred Stock Dividends
  20




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Nine months ended September 30, 2006 compared to the nine months ended September 30, 2005:
 Total Net Product Sales
 Nine Months EndedSeptember 30,
    
    
    
    
    
    %2006
    
    2005
    
    (Decrease)
    
    Change(in $000s)Net product sales
    
    $
    9,384
    
    
    $
    12,346
    
    
    $
    (2,962
    )
    
    
    (24
    )%
  Cost of Product Sales
 Nine Months EndedSeptember 30,
    
    
    
    
    
    %2006
    
    2005
    
    (Decrease)
    
    Change(in $000s)Cost of product sales
    
    $
    2,223
    
    
    $
    2,297
    
    
    $
    (74
    )
    
    
    (3
    )%
  21




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##### Table of Contents



Selling, General and Administrative
 Nine Months EndedSeptember 30,
    
    
    
    
    
    %2006
    
    2005
    
    Increase
    
    Change(in $000s)Selling, general and administrative expense
    
    $
    12,582
    
    
    $
    7,140
    
    
    $
    5,442
    
    
    
    76
    %
  Research and Development
 Nine Months EndedSeptember 30,
    
    
    
    
    
    %2006
    
    2005
    
    Increase
    
    Change(in $000s)Research and development
    
    $
    1,632
    
    
    $
    1,597
    
    
    $
    35
    
    
    
    2
    %
  Depreciation and Amortization
 Nine Months EndedSeptember 30,
    
    
    
    
    
    %2006
    
    2005
    
    (Decrease)
    
    Change(in $000s)Depreciation and amortization
    
    $
    218
    
    
    $
    953
    
    
    $
    (735
    )
    
    
    (77
    )%
  22




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Other Income and Expense Items
 Nine Months EndedSeptember 30,
    
    Increase/2006
    
    2005
    
    (Decrease)(in $000s)Non-cash amortization of deemed discount on convertible debentures
    
    $
    
    
    
    $
    (108
    )
    
    $
    (108
    )Interest income
    
    
    469
    
    
    
    87
    
    
    
    382Interest expense
    
    
    
    
    
    
    (247
    )
    
    
    (247
    )Other income, net
    
    
    51
    
    
    
    6
    
    
    
    45Rental income (expense), net
    
    
    (22
    )
    
    
    181
    
    
    
    (203
    )
    Series B Preferred Stock Dividends
   Liquidity and Capital Resources
  23




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24




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Recently Issued Accounting Standards
 Accounting for Uncertainty in Income Taxes  an interpretation of FASB Statement No. 109 Accounting for Income
Taxes
 Fair Value Measurements
 
 25




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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
  
 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
  26




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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. 27




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SIGNATURES
  QUESTCOR PHARMACEUTICALS, INC.Date: November 14, 2006
    By:
    /s/ James L. FaresJames L. FaresPresident and Chief Executive Officer By:
    /s/ George StuartGeorge StuartVice President, Finance and Chief Financial Officer 28




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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.