##### 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, 2005
 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 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)Consolidated Balance Sheets  September 30, 2005 and December 31, 2004
    
    
    3Consolidated Statements of Operations  for the three months and nine months ended September
30, 2005 and 2004
    
    
    4Consolidated Statements of Cash Flows  for the nine months ended September 30, 2005 and 2004
    
    
    5Notes to Consolidated Financial Statements
    
    
    6Item 2
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    16Item 3
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    33Item 4
    
    Controls and Procedures
    
    
    33PART II. OTHER INFORMATIONItem 1
    
    Legal Proceedings
    
    
    33Item 2
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    33Item 3
    
    Defaults Upon Senior Securities
    
    
    34Item 4
    
    Submission of Matters to a Vote of Security Holders
    
    
    34Item 5
    
    Other Information
    
    
    34Item 6
    
    Exhibits
    
    
    35Signatures
    
    
    36EXHIBIT 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 31,2005
    
    
    2004(Unaudited)
    
    
    (Note 1)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    4,341
    
    
    $
    8,729Accounts receivable, net of allowances for doubtful accounts of $167 and $40 at
September 30, 2005 and December 31, 2004, respectively
    
    
    1,983
    
    
    
    2,349Inventories, net
    
    
    1,536
    
    
    
    1,769Prepaid expenses and other current assets
    
    
    1,341
    
    
    
    839Assets held for sale, net
    
    
    14,203
    
    
    
    Total current assets
    
    
    23,404
    
    
    
    13,686Property and equipment, net
    
    
    486
    
    
    
    614Purchased technology, net
    
    
    
    
    
    
    12,758Goodwill
    
    
    299
    
    
    
    299Deposits and other assets
    
    
    731
    
    
    
    816Total assets
    
    $
    24,920
    
    
    $
    28,173LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    837
    
    
    $
    1,103Accrued compensation
    
    
    649
    
    
    
    974Sales-related reserves
    
    
    2,570
    
    
    
    1,683Other accrued liabilities
    
    
    495
    
    
    
    598Short-term debt and current portion of long-term debt and capital lease obligation
    
    
    692
    
    
    
    349Convertible debentures (face amount of $4,000), net of deemed discount of $103
at December 31, 2004
    
    
    
    
    
    
    3,897Total current liabilities
    
    
    5,243
    
    
    
    8,604Long-term debt and long-term portion of capital lease obligation
    
    
    1,508
    
    
    
    2,021Other non-current liabilities
    
    
    914
    
    
    
    886Preferred stock, no par value, 7,500,000 shares authorized; 2,155,715 Series A shares
issued and outstanding at September 30, 2005 and December 31, 2004 (aggregate
liquidation preference of $10,000 at September 30, 2005 and December 31, 2004)
    
    
    5,081
    
    
    
    5,081Shareholders equity:Preferred stock, no par value, 8,375 and 8,400 Series B shares issued and
outstanding at September 30, 2005 and December 31, 2004, respectively, net of
issuance costs (aggregate liquidation preference of $8,375 and $8,400 at
September 30, 2005 and December 31, 2004, respectively)
    
    
    7,553
    
    
    
    7,578Common stock, no par value, 105,000,000 shares authorized; 52,875,815 and
51,216,488 shares issued and outstanding at September 30, 2005 and December 31,
2004, respectively
    
    
    89,360
    
    
    
    88,436Deferred compensation
    
    
    (6
    )
    
    
    (10
    )Accumulated deficit
    
    
    (84,733
    )
    
    
    (84,423
    )Total shareholders equity
    
    
    12,174
    
    
    
    11,581Total liabilities and shareholders equity
    
    $
    24,920
    
    
    $
    28,173
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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 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Revenues:Net product sales
    
    $
    3,558
    
    
    $
    3,869
    
    
    $
    12,346
    
    
    $
    13,107Operating costs and expenses:Cost of product sales (exclusive of amortization of purchased
technology)
    
    
    522
    
    
    
    843
    
    
    
    2,297
    
    
    
    2,660Selling, general and administrative
    
    
    2,298
    
    
    
    3,415
    
    
    
    7,140
    
    
    
    8,958Research and development
    
    
    536
    
    
    
    522
    
    
    
    1,597
    
    
    
    1,521Depreciation and amortization
    
    
    319
    
    
    
    306
    
    
    
    953
    
    
    
    905Total operating costs and expenses
    
    
    3,675
    
    
    
    5,086
    
    
    
    11,987
    
    
    
    14,044Income (loss) from operations
    
    
    (117
    )
    
    
    (1,217
    )
    
    
    359
    
    
    
    (937
    )Non-cash amortization of deemed discount on convertible debentures
    
    
    
    
    
    
    (130
    )
    
    
    (108
    )
    
    
    (392
    )Interest income
    
    
    29
    
    
    
    24
    
    
    
    87
    
    
    
    48Interest expense
    
    
    (38
    )
    
    
    (118
    )
    
    
    (247
    )
    
    
    (282
    )Other income, net
    
    
    5
    
    
    
    5
    
    
    
    6
    
    
    
    8Rental income, net
    
    
    67
    
    
    
    70
    
    
    
    181
    
    
    
    212Net income (loss)
    
    
    (54
    )
    
    
    (1,366
    )
    
    
    278
    
    
    
    (1,343
    )Non-cash deemed dividend related to beneficial conversion feature of
Series B Preferred Stock
    
    
    
    
    
    
    
    
    
    
    84
    
    
    
    Dividends on Series B Preferred Stock
    
    
    168
    
    
    
    168
    
    
    
    504
    
    
    
    508Net loss applicable to common shareholders
    
    $
    (222
    )
    
    $
    (1,534
    )
    
    $
    (310
    )
    
    $
    (1,851
    )Basic and diluted net loss per share applicable to common shareholders
    
    $
    0.00
    
    
    $
    (0.03
    )
    
    $
    (0.01
    )
    
    $
    (0.04
    )Shares used in computing basic and diluted net loss per share
applicable to common shareholders
    
    
    52,813
    
    
    
    51,111
    
    
    
    52,236
    
    
    
    50,736
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QUESTCOR PHARMACEUTICALS, INC.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (IN THOUSANDS)
 (UNAUDITED)
 Nine Months EndedSeptember 30,2005
    
    
    2004OPERATING ACTIVITIESNet income (loss)
    
    $
    278
    
    
    $
    (1,343
    )Adjustments to reconcile net income (loss) to net cash provided by operating activities:Stock-based compensation expense
    
    
    15
    
    
    
    22Amortization of deemed discount on convertible debentures
    
    
    108
    
    
    
    392Amortization of deferred compensation
    
    
    4
    
    
    
    5Depreciation and amortization
    
    
    953
    
    
    
    905Deferred rent expense
    
    
    28
    
    
    
    31Changes in operating assets and liabilities:Accounts receivable
    
    
    366
    
    
    
    394Inventories
    
    
    (16
    )
    
    
    (501
    )Prepaid expenses and other current assets
    
    
    (335
    )
    
    
    259Accounts payable
    
    
    (266
    )
    
    
    277Accrued compensation
    
    
    (325
    )
    
    
    633Sales-related reserves
    
    
    887
    
    
    
    508Other accrued liabilities
    
    
    (103
    )
    
    
    (57
    )Net cash flows provided by operating activities
    
    
    1,594
    
    
    
    1,525INVESTING ACTIVITIESPurchase of property and equipment
    
    
    (22
    )
    
    
    (205
    )Purchase of short-term investments
    
    
    
    
    
    
    (999
    )Acquisition of purchased technology
    
    
    (2,000
    )
    
    
    Proceeds from sale of property and equipment
    
    
    1
    
    
    
    1(Increase) decrease in other assets
    
    
    80
    
    
    
    (10
    )Net cash flows used in investing activities
    
    
    (1,941
    )
    
    
    (1,213
    )FINANCING ACTIVITIESIssuance of common stock, net of issuance costs
    
    
    129
    
    
    
    2,452Long-term borrowings
    
    
    
    
    
    
    2,147Short-term borrowings
    
    
    191
    
    
    
    569Repayment of short-term and long-term debt
    
    
    (361
    )
    
    
    (452
    )Redemption of convertible debentures
    
    
    (4,000
    )
    
    
    Payment of Series B preferred stock dividends
    
    
    
    
    
    
    (504
    )Net cash flows provided by (used in) financing activities
    
    
    (4,041
    )
    
    
    4,212Increase (decrease) in cash and cash equivalents
    
    
    (4,388
    )
    
    
    4,524Cash and cash equivalents at beginning of period
    
    
    8,729
    
    
    
    3,220Cash and cash equivalents at end of period
    
    $
    4,341
    
    
    $
    7,744SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:Cash paid for interest
    
    $
    247
    
    
    $
    283NON-CASH INVESTING AND FINANCING ACTIVITIES:Deemed dividend related to beneficial conversion feature of Series B preferred stock
    
    $
    84
    
    
    $
    Common stock issued in lieu of quarterly cash dividends on Series B preferred stock
    
    $
    672
    
    
    $
    Common stock issued upon conversion of Series B preferred stock and accrued dividends
for Series B preferred stock
    
    $
    24
    
    
    $
    704Equipment acquired under capital lease
    
    $
    
    
    
    $
    44
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QUESTCOR PHARMACEUTICALS, INC.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 1. BASIS OF PRESENTATION
    2. STOCK-BASED COMPENSATION
 Accounting for Stock-Based
Compensation Accounting for Stock Issued to Employees Accounting for Stock-Based Compensation  Transition and Disclosure
 6




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Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net loss applicable to common shareholders as reported
    
    $
    (222
    )
    
    $
    (1,534
    )
    
    $
    (310
    )
    
    $
    (1,851
    )Add: Stock-based employee compensation expense included in
reported net loss
    
    
    1
    
    
    
    1
    
    
    
    4
    
    
    
    8Deduct: Total stock-based employee compensation expense
determined under fair value method for all awards
    
    
    (113
    )
    
    
    (168
    )
    
    
    (341
    )
    
    
    (510
    )Add: Adjustment to stock-based employee compensation due to
forfeitures of unvested options, primarily related to CEO
resignation
    
    
    
    
    
    
    359
    
    
    
    
    
    
    
    359Net loss applicable to common shareholders, pro forma
    
    $
    (334
    )
    
    $
    (1,342
    )
    
    $
    (647
    )
    
    $
    (1,994
    )Basic and diluted net loss per share applicable to common shareholders:As reported
    
    $
    0.00
    
    
    $
    (0.03
    )
    
    $
    (0.01
    )
    
    $
    (0.04
    )Pro forma
    
    $
    (0.01
    )
    
    $
    (0.03
    )
    
    $
    (0.01
    )
    
    $
    (0.04
    )
 Accounting for Equity Instruments that are Issued to Other than
Employees for Acquiring, or in conjunction with Selling Goods or Services
 Share-Based Payment Accounting for Stock-Based Compensation
 3. REVENUE RECOGNITION
   7




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4. CASH AND CASH EQUIVALENTS
   8




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5. INVENTORIES
  September 30,
    
    
    December 31,2005
    
    
    2004Raw materials
    
    $
    1,161
    
    
    $
    1,239Work in process
    
    
    
    
    
    
    228Finished goods
    
    
    422
    
    
    
    409Less allowance for excess and obsolete inventories
    
    
    (47
    )
    
    
    (107
    )$
    1,536
    
    
    $
    1,769
  6. INTANGIBLE ASSETS
   7. CONVERTIBLE DEBENTURES
    9




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##### Table of Contents



8. SECURED PROMISSORY NOTE
   9. COMMITMENTS, INDEMNIFICATIONS AND CONTINGENCIES
   10. NET INCOME (LOSS) PER SHARE APPLICABLE TO COMMON SHAREHOLDERS
  11. EQUITY TRANSACTIONS
   12. SERIES B CONVERTIBLE PREFERRED STOCK
  10




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13. RELATED PARTY TRANSACTIONS
  14. COMPREHENSIVE INCOME (LOSS)
  11




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15. SALE OF NASCOBAL, ETHAMOLIN AND GLOFIL-125
   12




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UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 2005
(in thousands, except share amounts)
 Pro FormaHistorical
    
    
    Adjustments
    
    
    Notes
    
    
    Pro FormaASSETSCurrent assets:Cash and cash equivalents
    
    $
    4,341
    
    
    $
    22,250
    
    
    
    (A
    )
    
    $
    26,591Accounts receivable, net
    
    
    1,983
    
    
    
    
    
    
    
    
    
    
    
    1,983Inventories, net
    
    
    1,536
    
    
    
    
    
    
    
    
    
    
    
    1,536Prepaid expenses and other current assets
    
    
    1,341
    
    
    
    
    
    
    
    
    
    
    
    1,341Assets held for sale, net
    
    
    14,203
    
    
    
    (14,203
    )
    
    
    (B
    )
    
    
    Total current assets
    
    
    23,404
    
    
    
    8,047
    
    
    
    
    
    
    
    31,451Property and equipment, net
    
    
    486
    
    
    
    
    
    
    
    
    
    
    
    486Goodwill
    
    
    299
    
    
    
    
    
    
    
    
    
    
    
    299Deposits and other assets
    
    
    731
    
    
    
    
    
    
    
    
    
    
    
    731Total assets
    
    $
    24,920
    
    
    $
    8,047
    
    
    
    
    
    
    $
    32,967LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    837
    
    
    $
    
    
    
    
    
    
    
    $
    837Accrued compensation
    
    
    649
    
    
    
    
    
    
    
    
    
    
    
    649Sales-related reserves
    
    
    2,570
    
    
    
    500
    
    
    
    (C
    )
    
    
    3,070Other accrued liabilities
    
    
    495
    
    
    
    23
    
    
    
    (D
    )
    
    
    518Short-term debt and current portion
of long-term debt and capital lease obligation
    
    
    692
    
    
    
    (692
    )
    
    
    (D
    )
    
    
    Total current liabilities
    
    
    5,243
    
    
    
    (169
    )
    
    
    
    
    
    
    5,074Long-term debt and long-term portion of capital lease obligation
    
    
    1,508
    
    
    
    (1,508
    )
    
    
    (E
    )
    
    
    Other non-current liabilities
    
    
    914
    
    
    
    29
    
    
    
    (E
    )
    
    
    943Preferred stock, no par value, 7,500,000 shares authorized;
2,155,715 Series A shares issued and outstanding
(aggregate liquidation preference of $10,000)
    
    
    5,081
    
    
    
    
    
    
    
    
    
    
    
    5,081Shareholders equity:Preferred stock, no par value, 8,375 Series B shares
issued and outstanding, net of issuance costs
(aggregate liquidation preference of $8,375)
    
    
    7,553
    
    
    
    
    
    
    
    
    
    
    
    7,553Common stock, no par value, 105,000,000 shares
authorized; 52,875,815 shares issued and outstanding
    
    
    89,360
    
    
    
    
    
    
    
    
    
    
    
    89,360Deferred compensation
    
    
    (6
    )
    
    
    
    
    
    
    
    
    
    
    (6
    )Accumulated deficit
    
    
    (84,733
    )
    
    
    9,695
    
    
    
    (F
    )
    
    
    (75,038
    )Total shareholders equity
    
    
    12,174
    
    
    
    9,695
    
    
    
    
    
    
    
    21,869Total liabilities and shareholders equity
    
    $
    24,920
    
    
    $
    8,047
    
    
    
    
    
    
    $
    32,967
  13




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UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005
(in thousands, except per share amounts)
 Pro FormaHistorical
    
    
    Adjustments
    
    
    Notes
    
    
    Pro FormaRevenues:Net product sales
    
    $
    12,346
    
    
    $
    (5,299
    )
    
    
    (G
    )
    
    $
    7,047Operating costs and expenses:Cost of product sales (exclusive of amortization of purchased
technology)
    
    
    2,297
    
    
    
    (785
    )
    
    
    (H
    )
    
    
    1,512Selling, general and administrative
    
    
    7,140
    
    
    
    (112
    )
    
    
    (I
    )
    
    
    7,028Research and development
    
    
    1,597
    
    
    
    (415
    )
    
    
    (I
    )
    
    
    1,182Depreciation and amortization
    
    
    953
    
    
    
    (805
    )
    
    
    (J
    )
    
    
    148Total operating costs and expenses
    
    
    11,987
    
    
    
    (2,117
    )
    
    
    
    
    
    
    9,870Income (loss) from operations
    
    
    359
    
    
    
    (3,182
    )
    
    
    
    
    
    
    (2,823
    )Non-cash amortization of deemed discount on convertible debentures
    
    
    (108
    )
    
    
    
    
    
    
    
    
    
    
    (108
    )Interest income
    
    
    87
    
    
    
    582
    
    
    
    (K
    )
    
    
    669Interest expense
    
    
    (247
    )
    
    
    144
    
    
    
    (L
    )
    
    
    (103
    )Other income, net
    
    
    6
    
    
    
    
    
    
    
    
    
    
    
    6Rental income, net
    
    
    181
    
    
    
    
    
    
    
    
    
    
    
    181Net income (loss)
    
    
    278
    
    
    
    (2,456
    )
    
    
    
    
    
    
    (2,178
    )Non-cash deemed dividend related to beneficial conversion feature of
Series B Preferred Stock
    
    
    84
    
    
    
    
    
    
    
    
    
    
    
    84Dividends on Series B Preferred Stock
    
    
    504
    
    
    
    
    
    
    
    
    
    
    
    504Net loss applicable to common shareholders
    
    $
    (310
    )
    
    $
    (2,456
    )
    
    
    
    
    
    $
    (2,766
    )Basic and diluted net loss per share applicable to common shareholders
    
    $
    (0.01
    )
    
    $
    (0.04
    )
    
    
    
    
    
    $
    (0.05
    )Shares used in computing basic and diluted net loss per share
applicable to common shareholders
    
    
    52,236
    
    
    
    52,236
    
    
    
    
    
    
    
    52,236
  14




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NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
            15




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  Overview
  
    
    H.P. Acthar Gel (Acthar), an injectable drug that is approved for the treatment of
certain CNS disorders with an inflammatory component including the treatment of flares
associated with multiple sclerosis (MS) and is also commonly used in treating patients
with infantile spasm;
    
    Nascobal, a prescription nasal gel used for the treatment of various Vitamin B-12
deficiencies including Vitamin B-12 deficiencies associated with Crohns disease, gastric
bypass surgery and MS;
    
    Ethamolin, an injectable drug used to treat enlarged weakened blood vessels at the
entrance to the stomach that have recently bled, known as esophageal varices; and
    
    Glofil-125, an injectable agent that assesses how well the kidney is working by
measuring glomerular filtration rate, or kidney function.
    16




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TM TM
  Critical Accounting Policies
   Product Returns, Rebates and Sales Reserves
     17




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Inventories
   Intangible Assets
 Accounting for the Impairment or Disposal of Long-Lived Assets, Goodwill and Other Intangible Assets,
 18




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Results of Operations
 Three months ended September 30, 2005 compared to the three months ended September 30, 2004:
 Total Revenues
 Three Months EndedSeptember 30,
    
    
    
    
    
    %2005
    
    2004
    
    (Decrease)
    
    Change(in $000s)Net product sales
    
    $
    3,558
    
    
    $
    3,869
    
    
    $
    (311
    )
    
    
    (8
    )%
   Cost of Product Sales
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Selling, General and Administrative
 Three Months EndedSeptember 30,
    
    
    
    
    
    %2005
    
    2004
    
    (Decrease)
    
    Change(in $000s)Selling, general and administrative expense
    
    $
    2,298
    
    
    $
    3,415
    
    
    $
    (1,117
    )
    
    
    (33
    )%
  Research and Development
   Depreciation and Amortization
  Other Income and Expense Items
 Three Months EndedSeptember 30,
    
    Increase/2005
    
    2004
    
    (Decrease)(in $000s)Non-cash amortization of deemed discount on convertible debentures
    
    $
    
    
    
    $
    (130
    )
    
    $
    130Interest income
    
    
    29
    
    
    
    24
    
    
    
    5Interest expense
    
    
    (38
    )
    
    
    (118
    )
    
    
    80Other income
    
    
    5
    
    
    
    5
    
    
    
    Rental income, net
    
    
    67
    
    
    
    70
    
    
    
    (3
    )
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Series B Preferred Stock Dividends
  Nine months ended September 30, 2005 compared to the nine months ended September 30, 2004:
 Total Revenues
 Nine Months EndedSeptember 30,
    
    
    
    
    
    %2005
    
    2004
    
    (Decrease)
    
    Change(in $000s)Net product sales
    
    $
    12,346
    
    
    $
    13,107
    
    
    $
    (761
    )
    
    
    (6
    )%
  Cost of Product Sales
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Selling, General and Administrative
 Nine Months EndedSeptember 30,
    
    
    
    
    
    %2005
    
    2004
    
    (Decrease)
    
    Change(in $000s)Selling, general and administrative expense
    
    $
    7,140
    
    
    $
    8,958
    
    
    $
    (1,818
    )
    
    
    (20
    )%
  Research and Development
  Depreciation and Amortization
  Other Income and Expense Items
 Nine Months EndedSeptember 30,
    
    Increase/2005
    
    2004
    
    (Decrease)(in $000s)Non-cash amortization of deemed discount on convertible debentures
    
    $
    (108
    )
    
    $
    (392
    )
    
    $
    284Interest income
    
    
    87
    
    
    
    48
    
    
    
    39Interest expense
    
    
    (247
    )
    
    
    (282
    )
    
    
    35Other income
    
    
    6
    
    
    
    8
    
    
    
    (2
    )Rental income, net
    
    
    181
    
    
    
    212
    
    
    
    (31
    )
   22




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Series B Preferred Stock Dividends
   Liquidity and Capital Resources
     23




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24




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RISK FACTORS
 We have a history of operating losses and may never generate sufficient revenue to achieve profitability.
   
    
    develop, finance and implement an effective promotional strategy for Acthar,
    
    finance and acquire additional marketed products,
    
    finance operations until consistent positive cash flows are achieved,
    
    transfer the Acthar potency bioassay,
    
    continue to receive product from our sole-source contract manufacturer on a timely basis and at acceptable costs,
    
    continue to control our operating expenses, and
    
    ensure customers compliance with our sales and product return policies.
  If our revenues from product sales decline or fail to grow, we may not have sufficient revenues to fund our operations.
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Our business will be harmed if we are unable to implement our growth strategy successfully.
  
    
    Initially focusing our promotional efforts on Acthar, our neurological product,
    
    Acquiring additional pharmaceutical products that have sales growth potential, are
promotionally responsive to a focused and targeted sales and marketing effort, complement
 our therapeutic focus on neurology and can be acquired at a reasonable valuation
relative to our cost of capital, and
    
    Developing new medications focused on our target markets through corporate
collaborations.
  If we are unsuccessful in completing the Acthar potency bioassay transfer, we may be unable to
meet the demand for Acthar and lose potential revenues.
  We have little or no control over our wholesalers buying patterns, which may impact future
revenues, exchanges and excess inventory.
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Our inability to secure additional funding could lead to a loss of your investment.
   
    
    existing product sales performance,
    
    successfully implementing our growth strategy,
    
    achieving better operating efficiencies,
    
    maintaining customer compliance with our policies,
    
    obtaining product from our sole-source contract manufacturers and completing the Acthar potency bioassay, and
    
    acquiring or developing additional products.
  If we are unable to contract with third party contract manufacturers, we may be unable to meet the
demand for our products and lose potential revenues.
  27




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##### Table of Contents



If our third party distributors are unable to distribute our products or the costs to distribute
our products increase substantially, we will lose potential revenues and profits.
   The Company has experienced changes in key personnel which will have an uncertain impact on future
operations.
   Our products may not be accepted by the market, which may result in lower future revenues as well
as a decline in our competitive positioning.
   
    
    The establishment and demonstration of the clinical efficacy and safety of the product candidates,
    
    Their potential advantage over alternative treatment methods and competing products,
    
    Reimbursement policies of government and third party payers, and
    
    Our ability to market and promote the products effectively.
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A large percentage of our voting stock is beneficially owned by a small number of stockholders,
who in the future could attempt to take control of our management and operations or exercise
voting power to advance their own best interests and not necessarily those of other stockholders.
  If competitors develop and market products that are more effective than ours, our commercial
opportunity will be reduced or eliminated.
     
    
    product efficacy and safety,
    
    the timing and scope of regulatory approvals,
    
    availability of resources,
    
    price, and
    
    patent position, including potentially dominant patent positions of others.
  29




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If we fail to maintain or enter into new contracts related to collaborations and in-licensed or
acquired technology and products, our product development and commercialization could be delayed.
    If we are unable to protect our proprietary rights, we may lose our competitive position and
future revenues.
  
    
    obtain patents for our products and technologies,
    
    protect trade secrets,
    
    operate without infringing upon the proprietary rights of others, and
    
    prevent others from infringing on our proprietary rights.
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Since we must obtain regulatory approval to market our products in the United States and in
foreign jurisdictions, we cannot predict whether or when we will be permitted to commercialize our
products.
  
    
    stall the marketing, selling and distribution of any products that our corporate partners or we develop,
    
    impose significant additional costs on our corporate partners and us,
    
    diminish any competitive advantages that we or our corporate partners may attain, and
    
    decrease our ability to receive royalties and generate revenues and profits.
   Our ability to generate revenues is affected by the availability of reimbursement on our products,
and our ability to generate revenues will be diminished if we fail to obtain an adequate level of
reimbursement for our products from third party payors.
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Our business is subject to changing regulation of corporate governance and public disclosure that
has increased both our costs and the risk of noncompliance.
    Our stock price has a history of volatility, and an investment in our stock could decline in
value.
  32




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If product liability lawsuits are successfully brought against us or we become subject to other
forms of litigation, we may incur substantial liabilities and costs and may be required to limit
commercialization of our products.
  
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 4. CONTROLS AND PROCEDURES
    
 PART II. OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
  
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  33




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##### Table of Contents



ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
 ITEM 5. OTHER INFORMATION
  34




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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. 35




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SIGNATURES
  QUESTCOR PHARMACEUTICALS, INC.Date:
November 14, 2005
    
    By:
    
    /s/ JAMES L. FARESJames L. FaresPresident and Chief Executive OfficerBy:
    
    /s/ GEORGE STUARTGeorge StuartChief Financial Officer
 36




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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.