##### 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, 2005
 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
(State or other jurisdiction
    
    33-0476164
(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 þ




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QUESTCOR PHARMACEUTICALS, INC.
 FORM 10-Q
 TABLE OF CONTENTS
 PART I. FINANCIAL INFORMATIONItem 1
    
    Financial Statements and Notes (Unaudited)
    
    3Condensed Consolidated Balance Sheets  June 30, 2005 and December 31, 2004
    
    3Condensed Consolidated Statements of Operations  for the three months and six months ended June 30, 2005 and 2004
    
    4Condensed Consolidated Statements of Cash Flows  for the six months ended June 30, 2005 and 2004
    
    5Notes to Condensed 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
    
    23Item 4
    
    Controls and Procedures
    
    23PART II. OTHER INFORMATIONItem 1
    
    Legal Proceedings
    
    23Item 2
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    23Item 3
    
    Defaults Upon Senior Securities
    
    24Item 4
    
    Submission of Matters to a Vote of Security Holders
    
    24Item 5
    
    Other Information
    
    24Item 6
    
    Exhibits
    
    24Signatures
    
    25EXHIBIT 31EXHIBIT 32
  2




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 QUESTCOR PHARMACEUTICALS, INC.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
 June 30
    
    December 31,2005
    
    2004(Unaudited)
    
    (Note 1)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    4,429
    
    
    $
    8,729Accounts receivable, net of allowances for doubtful accounts of $125 and $40 at
June 30, 2005 and December 31, 2004, respectively
    
    
    2,561
    
    
    
    2,349Inventories
    
    
    1,900
    
    
    
    1,769Prepaid expenses and other current assets
    
    
    907
    
    
    
    839Total current assets
    
    
    9,797
    
    
    
    13,686Property and equipment, net
    
    
    520
    
    
    
    614Purchased technology, net
    
    
    14,231
    
    
    
    12,758Goodwill
    
    
    299
    
    
    
    299Deposits and other assets
    
    
    728
    
    
    
    816Total assets
    
    $
    25,575
    
    
    $
    28,173LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    1,038
    
    
    $
    1,103Accrued compensation
    
    
    727
    
    
    
    974Sales-related reserves
    
    
    2,589
    
    
    
    1,683Other accrued liabilities
    
    
    614
    
    
    
    598Short-term debt and current portion of long-term debt and capital lease obligation
    
    
    619
    
    
    
    349Convertible debentures (face amount of $4,000), net of deemed discount of $103 at
December 31, 2004
    
    
    
    
    
    
    3,897Total current liabilities
    
    
    5,587
    
    
    
    8,604Long-term debt and long-term portion of capital lease obligation
    
    
    1,683
    
    
    
    2,021Other non-current liabilities
    
    
    884
    
    
    
    886Preferred stock, no par value, 7,500,000 shares authorized; 2,155,715 Series A
shares issued and outstanding at June 30, 2005 and December 31, 2004 (aggregate
liquidation preference of $10,000 at June 30, 2005 and December 31, 2004)
    
    
    5,081
    
    
    
    5,081Shareholders equity:Preferred stock, no par value, 8,400 Series B shares issued and outstanding at
June 30, 2005 and December 31, 2004, net of issuance costs (aggregate liquidation
preference of $8,400 at June 30, 2005 and December 31, 2004)
    
    
    7,578
    
    
    
    7,578Common stock, no par value, 105,000,000 shares authorized; 52,759,547 and
51,216,488 shares issued and outstanding at June 30, 2005 and December 31, 2004,
respectively
    
    
    89,280
    
    
    
    88,436Deferred compensation
    
    
    (7
    )
    
    
    (10
    )Accumulated deficit
    
    
    (84,511
    )
    
    
    (84,423
    )Total shareholders equity
    
    
    12,340
    
    
    
    11,581Total liabilities and shareholders equity
    
    $
    25,575
    
    
    $
    28,173
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QUESTCOR PHARMACEUTICALS, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
 (UNAUDITED)
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Revenues:Net product sales
    
    $
    4,290
    
    
    $
    4,090
    
    
    $
    8,788
    
    
    $
    9,238Operating costs and expenses:Cost of product sales (exclusive of amortization of purchased technology)
    
    
    1,027
    
    
    
    961
    
    
    
    1,775
    
    
    
    1,817Selling, general and administrative
    
    
    2,224
    
    
    
    2,515
    
    
    
    4,842
    
    
    
    5,543Research and development
    
    
    562
    
    
    
    421
    
    
    
    1,061
    
    
    
    999Depreciation and amortization
    
    
    323
    
    
    
    301
    
    
    
    634
    
    
    
    599Total operating costs and expenses
    
    
    4,136
    
    
    
    4,198
    
    
    
    8,312
    
    
    
    8,958Income (loss) from operations
    
    
    154
    
    
    
    (108
    )
    
    
    476
    
    
    
    280Non-cash amortization of deemed discount on convertible debentures
    
    
    
    
    
    
    (131
    )
    
    
    (108
    )
    
    
    (262
    )Interest income
    
    
    23
    
    
    
    13
    
    
    
    58
    
    
    
    24Interest expense
    
    
    (70
    )
    
    
    (81
    )
    
    
    (209
    )
    
    
    (164
    )Other income, net
    
    
    1
    
    
    
    
    
    
    
    1
    
    
    
    3Rental income, net
    
    
    71
    
    
    
    60
    
    
    
    114
    
    
    
    142Net income (loss)
    
    
    179
    
    
    
    (247
    )
    
    
    332
    
    
    
    23Non-cash deemed dividend related to beneficial conversion feature of Series
B Preferred Stock
    
    
    
    
    
    
    
    
    
    
    84
    
    
    
    Dividends on Series B Preferred Stock
    
    
    168
    
    
    
    168
    
    
    
    336
    
    
    
    340Net income (loss) applicable to common shareholders
    
    $
    11
    
    
    $
    (415
    )
    
    $
    (88
    )
    
    $
    (317
    )Basic and diluted net income (loss) per share applicable to common
shareholders
    
    $
    0.00
    
    
    $
    (0.01
    )
    
    $
    0.00
    
    
    $
    (0.01
    )Shares used in computing basic and diluted net income (loss) per share
applicable to common shareholders
    
    
    52,660
    
    
    
    51,060
    
    
    
    51,942
    
    
    
    50,546
  4




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QUESTCOR PHARMACEUTICALS, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (IN THOUSANDS)
 (UNAUDITED)
 Six Months EndedJune 30,2005
    
    2004OPERATING ACTIVITIESNet income
    
    $
    332
    
    
    $
    23Adjustments to reconcile net income to net cash provided by operating activities:Stock-based compensation expense
    
    
    1
    
    
    
    17Amortization of deemed discount on convertible debentures
    
    
    108
    
    
    
    262Amortization of deferred compensation
    
    
    3
    
    
    
    4Depreciation and amortization
    
    
    634
    
    
    
    599Deferred rent expense
    
    
    (2
    )
    
    
    17Changes in operating assets and liabilities:Accounts receivable
    
    
    (212
    )
    
    
    (17
    )Inventories
    
    
    (131
    )
    
    
    60Prepaid expenses and other current assets
    
    
    268
    
    
    
    299Accounts payable
    
    
    (65
    )
    
    
    (356
    )Accrued compensation
    
    
    (247
    )
    
    
    (111
    )Sales-related reserves
    
    
    906
    
    
    
    137Other accrued liabilities
    
    
    16
    
    
    
    (59
    )Net cash flows provided by operating activities
    
    
    1,611
    
    
    
    875INVESTING ACTIVITIESPurchase of property and equipment
    
    
    (14
    )
    
    
    (195
    )Acquisition of purchased technology
    
    
    (2,000
    )
    
    
    Proceeds from sale of property and equipment
    
    
    1
    
    
    
    (Increase) decrease in other assets
    
    
    83
    
    
    
    (11
    )Net cash flows used in investing activities
    
    
    (1,930
    )
    
    
    (206
    )FINANCING ACTIVITIESIssuance of common stock, net of issuance costs
    
    
    87
    
    
    
    2,430Short-term borrowings
    
    
    191
    
    
    
    211Repayment of short-term and long-term debt
    
    
    (259
    )
    
    
    (295
    )Redemption of convertible debentures
    
    
    (4,000
    )
    
    
    Payment of Series B preferred stock dividends
    
    
    
    
    
    
    (336
    )Net cash flows provided by (used in) financing activities
    
    
    (3,981
    )
    
    
    2,010Increase (decrease) in cash and cash equivalents
    
    
    (4,300
    )
    
    
    2,679Cash and cash equivalents at beginning of period
    
    
    8,729
    
    
    
    3,220Cash and cash equivalents at end of period
    
    $
    4,429
    
    
    $
    5,899SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:Cash paid for interest
    
    $
    209
    
    
    $
    164NON-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
    
    $
    
    
    
    $
    704
  5




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QUESTCOR PHARMACEUTICALS, INC.
 
 NOTES TO CONDENSED CONSOLIDATED JUNE 30, 2005 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
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Three months ended
    
    Six months endedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Net income (loss) applicable to common shareholders as reported
    
    $
    11
    
    
    $
    (415
    )
    
    $
    (88
    )
    
    $
    (317
    )Add: Stock-based employee compensation expense included in
reported net income (loss)
    
    
    1
    
    
    
    2
    
    
    
    2
    
    
    
    7Deduct: Total stock-based employee compensation expense
determined under fair value method for all awards
    
    
    (107
    )
    
    
    (198
    )
    
    
    (228
    )
    
    
    (342
    )Net loss applicable to common shareholders, pro forma
    
    $
    (95
    )
    
    $
    (611
    )
    
    $
    (314
    )
    
    $
    (652
    )Basic and diluted net income (loss) per share applicable to common
shareholders:As reported
    
    $
    0.00
    
    
    $
    (0.01
    )
    
    $
    0.00
    
    
    $
    (0.01
    )Pro forma
    
    $
    0.00
    
    
    $
    (0.01
    )
    
    $
    (0.01
    )
    
    $
    (0.01
    )
 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 Accounting for Stock Issued to Employees
 3. REVENUE RECOGNITION
   7




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4. CASH AND CASH EQUIVALENTS
  5. INVENTORIES
  June 30,
    
    December 31,2005
    
    2004Raw materials
    
    $
    1,160
    
    
    $
    1,239Work in process
    
    
    523
    
    
    
    228Finished goods
    
    
    297
    
    
    
    409Less allowance for excess and obsolete inventories
    
    
    (80
    )
    
    
    (107
    )$
    1,900
    
    
    $
    1,769
 6. PURCHASED TECHNOLOGY AND INTANGIBLE ASSETS
   8




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7. CONVERTIBLE DEBENTURES
    8. SECURED PROMISSORY NOTE
  9. COMMITMENTS, INDEMNIFICATIONS AND CONTINGENCIES
   10. NET INCOME (LOSS) PER SHARE APPLICABLE TO COMMON SHAREHOLDERS
  9




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11. EQUITY TRANSACTIONS
   10




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12. SERIES B CONVERTIBLE PREFERRED STOCK
       13. RELATED PARTY TRANSACTIONS
  11




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14. COMPREHENSIVE INCOME (LOSS)
  
 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®, the only 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.
   12




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TM TM
  Critical Accounting Policies
   Product Returns, Rebates and Sales Reserves
    13




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14




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Inventories
   Intangible Assets
 Accounting for the
Impairment or Disposal of Long-Lived Assets, Goodwill and Other Intangible
Assets,
 Results of Operations
 Three
months ended June 30, 2005 compared to the three months ended
June 30, 2004:
 Total Revenues
 Three Months EndedJune 30,
    
    
    
    %2005
    
    2004
    
    Increase
    
    Change(in $000s)Net product sales
    
    $
    4,290
    
    
    $
    4,090
    
    
    $
    200
    
    
    
    5
    %
  15




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Cost of Product Sales
  Selling, General and Administrative
 Three Months EndedJune 30,
    
    
    
    
    
    %2005
    
    2004
    
    (Decrease)
    
    Change(in $000s)Selling, general and administrative expense
    
    $
    2,224
    
    
    $
    2,515
    
    
    $
    (291
    )
    
    
    (12
    )%Percentage of total revenue
    
    
    52
    %
    
    
    61
    %
 16




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Research and Development
   Depreciation and Amortization
  Other Income and Expense Items
 Three Months EndedJune 30,
    
    Increase/
    
    %2005
    
    2004
    
    (Decrease)
    
    Change(in $000s)Non-cash amortization of deemed discount on convertible debentures
    
    $
    
    
    
    $
    (131
    )
    
    $
    (131
    )
    
    
    (100
    )%Interest income
    
    
    23
    
    
    
    13
    
    
    
    10
    
    
    
    77
    %Interest expense
    
    
    (70
    )
    
    
    (81
    )
    
    
    (11
    )
    
    
    (14
    )%Other income
    
    
    1
    
    
    
    
    
    
    
    1
    
    
    
    
    %Rental income, net
    
    
    71
    
    
    
    60
    
    
    
    11
    
    
    
    18
    %
   17




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##### Table of Contents



Series B Preferred Stock Dividends
  Six months ended June 30, 2005 compared to the six months ended June 30, 2004:
 Total Revenues
 Six Months EndedJune 30,
    
    
    
    
    
    %2005
    
    2004
    
    (Decrease)
    
    Change(in $000s)Net product sales
    
    $
    8,788
    
    
    $
    9,238
    
    
    $
    (450
    )
    
    
    (5
    )%
     18




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Cost of Product Sales
  Selling, General and Administrative
 Six Months EndedJune 30,
    
    
    
    %2005
    
    2004
    
    (Decrease)
    
    Change(in $000s)Selling, general and administrative expense
    
    $
    4,842
    
    
    $
    5,543
    
    
    $
    (701
    )
    
    
    (13
    )%Percentage of total revenue
    
    
    55
    %
    
    
    60
    %
  Research and Development
   Depreciation and Amortization
  Other Income and Expense Items
 Six Months EndedJune 30,
    
    Increase/
    
    %2005
    
    2004
    
    (Decrease)
    
    Change(in $000s)Non-cash amortization of deemed discount on convertible debentures
    
    $
    (108
    )
    
    $
    (262
    )
    
    $
    (154
    )
    
    
    (59
    )%Interest income
    
    
    58
    
    
    
    24
    
    
    
    34
    
    
    
    142
    %Interest expense
    
    
    (209
    )
    
    
    (164
    )
    
    
    45
    
    
    
    27
    %Other income
    
    
    1
    
    
    
    3
    
    
    
    (2
    )
    
    
    (67
    )%Rental income, net
    
    
    114
    
    
    
    142
    
    
    
    (28
    )
    
    
    (20
    )%
 19




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Series B Preferred Stock Dividends
   Liquidity and Capital Resources
     20




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21




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RISK FACTORS
  The Company has experienced changes in key personnel which will have an uncertain impact on future operations.
  22




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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 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  23




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ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  1.
    
    Election of Directors to hold office until the 2006 Annual Meeting of Shareholders and
until their successors are duly elected and qualified.
 Votes For
    
    Votes WithheldAlbert Hansen
    
    
    56,485,964
    
    
    
    510,920Neal Bradsher
    
    
    56,503,217
    
    
    
    493,667James L. Fares
    
    
    56,236,673
    
    
    
    760,211Howard D. Palefsky
    
    
    56,242,744
    
    
    
    754,140Jon S. Saxe
    
    
    56,199,224
    
    
    
    797,660Virgil D. Thompson
    
    
    56,101,736
    
    
    
    895,148
 2.
    
    Ratification of Odenberg Ullakko Muranishi & Co. LLP as the Companys independent
auditors for the fiscal year ending December 31, 2005.
 For:
    
    
    56,795,242Against:
    
    
    112,249Abstain:
    
    
    89,393
 
 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. 24




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SIGNATURES
  QUESTCOR PHARMACEUTICALS, INC.Date: August 12, 2005
    
    By:
    
    /s/ JAMES L. FARESJames L. FaresPresident and Chief Executive OfficerBy:
    
    /s/ JAMES L. FARESJames L. FaresActing Chief Financial Officer and Principal AccountingOfficer
 25




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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.