1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) Basis of Presentation

The accompanying unaudited consolidated financial statements include the accounts of Auxilium Pharmaceuticals, Inc. and its wholly owned subsidiaries (the “Company”), and have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) pertaining to the Quarterly Report on Form 10-Q. Certain disclosures required for complete annual financial statements are not included herein. All significant intercompany accounts and transactions have been eliminated in consolidation. The information at March 31, 2013 and for the respective three-month periods ended March 31, 2013 and 2012 is unaudited, but includes all adjustments (consisting only of normal recurring adjustments) which, in the opinion of the Company’s management, are necessary to state fairly the financial information set forth herein. The December 31, 2012 balance sheet amounts and disclosures included herein have been derived from the Company’s December 31, 2012 audited consolidated financial statements. The interim results are not necessarily indicative of results to be expected for the full fiscal year. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2012 included in the Company’s Annual Report on Form 10-K filed with the SEC.

(b) Net Loss Per Common Share

The basic net loss per common share is computed by dividing the net loss for the period by the weighted average number of common shares outstanding during the period reduced, where applicable, for unvested outstanding restricted shares.

The following table sets forth the computation of basic and diluted net loss per common share:

	Three Months Ended March 31,
	2013			2012
Numerator:
Net loss	$	(8,160	)	$	(1,748	)

Denominator:
Weighted-average common shares outstanding	49,295,399			48,263,110
Weighted-average unvested restricted common shares subject to forfeiture	(48,067		)	(12,538		)

Shares used in calculating net loss per common share	49,247,332			48,250,572

Basic and diluted net loss per common share	$	(0.17	)	$	(0.04	)

Diluted net loss per common share is computed giving effect to all potentially dilutive securities. The potentially dilutive shares include outstanding stock options, performance-based restricted stock units, restricted stock units, restricted stock and warrants, and incremental shares issuable upon conversion of 1.5% Convertible Senior Notes due 2018 (“2018 Convertible Notes”) (See Note 6, Senior Convertible Notes). Diluted net loss per common share for all periods presented is the same as basic net loss per common share because the potential common stock is anti-dilutive. Anti-dilutive common shares not included in diluted net loss per common share are summarized as follows:

	March 31,
	2013	2012
Common stock options	7,378,730	8,091,681
Restricted common stock	47,700	10,500
Restricted stock units	341,701	45,191
Performance-based restricted stock units	140,550	148,600
Warrants	14,481,950	0
	22,390,631	8,295,972

It is the current intent and policy of the Company to settle conversions of the 2018 Convertible Notes through combination settlement, which involves repayment of the principal amount in cash and any excess of the conversion value over the principle amount (the “conversion spread”) in shares of common stock. Therefore, only the impact of the conversion spread will be included in total dilutive weighted average shares outstanding using the treasury stock method. As such, the 2018 Convertible Notes will have no impact on diluted per share results until the price of the Company’s common stock exceeds the conversion price.

The call options to purchase the Company’s common stock, which were purchased to hedge against potential dilution upon conversion of the 2018 Convertible Notes (See Note 6, Senior Convertible Notes for discussion), are not considered in calculating the total dilutive weighted average shares outstanding, as their effect would be anti-dilutive. Upon exercise, the call options will mitigate the dilutive effect of the 2018 Convertible Notes.

The warrants outstanding will not be considered in calculating the total dilutive weighted average shares outstanding until the price of the Company’s common stock exceeds the strike price of the warrants (See Note 6, Senior Convertible Notes for discussion of the terms of the warrants). When the market price of the Company’s common stock exceeds the strike price of the warrants, the effect of the additional shares that may be issued upon exercise of the warrants will be included in total dilutive weighted average shares outstanding using the treasury stock method.

(c) Revenue Recognition

Net revenues for the three months ended March 31, 2013 and 2012 comprise the following:

	Three months ended March 31,
	2013		2012
Testim revenues-
Net U.S. product sales	$	45,280	$	57,907
International revenues	174		783
	45,454		58,690
XIAFLEX revenues-
Net U.S. product sales	11,966		12,590
International revenues	8,752		2,326
	20,718		14,916
Total net revenues	$	66,172	$	73,606

Net U.S. revenues shown in the above table represent the product sales of the Company within the U.S. net of allowances provided on such sales. International contract revenues represent the amortization of deferred up-front and milestone payments the Company has received on its out-licensing agreements, together with royalties earned on product sales by the licensees.

During the three months ended March 31, 2012, the Company recorded a correction of an error in its financial statements for the year ended December 31, 2011 that resulted from an understatement of the accrual for government health plan charge-backs. This correction reduced Net revenues, and increased the Net loss, reported for the first quarter of 2012 in the amount of $820. Management believes that this adjustment is not material to the Company’s results of operations for 2012.

(d) New Accounting Pronouncements

In February 2013, the Financial Accounting Standards Board issued an Accounting Standards Update on reporting of amounts reclassified out of accumulated other comprehensive income. This guidance, which is effective for fiscal years beginning after December 15, 2012, requires companies to provide information about amounts reclassified out of accumulated other comprehensive income by component (the respective line items of the income statement). The Company adopted this guidance as of January 1, 2013 and its adoption did not have a material effect on the Company’s consolidated financial statements.