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 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 June 30, 2013 and for the respective three and six month periods ended June 30, 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) Revenue Recognition

Net revenues for the three and six months ended June 30, 2013 and 2012 comprise the following:

	Three months ended June 30,				Six months ended June 30,
	2013		2012		2013		2012
Testim revenues-
Net U.S. revenues	$	53,185	$	62,456	$	98,465	$	120,363
International revenues	1,209		1,268		1,382		2,051
	54,394		63,724		99,847		122,414
XIAFLEX revenues-
Net U.S. revenues	14,952		11,900		26,919		24,491
International revenues	3,916		2,547		12,668		4,873
	18,868		14,447		39,587		29,364
Other net U.S. revenues-
TESTOPEL	14,382		0		14,382		0
Edex	5,032		0		5,032		0
Other	7,843		0		7,843		0
	27,257		0		27,257		0
Total net revenues	$	100,519	$	78,171	$	166,691	$	151,778

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 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.

As discussed in Note (2), on April 26, 2013, the Company acquired Actient Holdings LLC (“Actient”), a privately-held urology specialty pharmaceutical company with a diversified product offering of four marketed products in the urology space and two marketed products in the respiratory space. TESTOPEL is a product used for the treatment of testosterone deficiency in aging men as well as androgen deficiency caused by other conditions. Edex is an injectable used for the treatment of erectile dysfunction. Other U.S. net revenues, as shown in the above table, for the three and six months ended June 30, 2013 are sales of additional products the Company acquired in this acquisition. TESTOPEL and Edex and certain other of Actient products do not currently have any patent protection. Therefore, the Company must rely on trade secrets and other unpatented proprietary information in order to obtain a competitive advantage with respect to such products.

TESTOPEL is sold under a buy-and-bill model. Under this model, the Company’s customers are health care providers who maintain a stock of TESTOPEL for future patient procedures. Revenue is recognized for this product upon the delivery, whereupon title passes, all obligations have been fulfilled, and collection of the related receivable is fixed, determinable, probable, and reasonably assured. The Company offers volume discounts and discounts for credit card payments when customer orders are received, and these discounts are recognized when the related product sales are recorded.

The Company recognizes revenue for Edex and other Actient branded pharmaceutical products upon the delivery of goods, whereupon title passes, all obligations have been fulfilled, and collection of the related receivable is fixed, determinable, probable, and reasonably assured. The Company provides for chargebacks (primarily related to its sales to government entities, such as the U.S. Veterans Administration), rebates, returns, and other adjustments in the same period the related product sales are recorded. Reserves for these government chargebacks, rebates, returns, and other adjustments are based upon analysis of historical data. Each period, the Company reviews its reserves for government chargebacks, rebates, returns, and other adjustments based on data available at that time. Any adjustment to these reserves results in charges to revenue.

For Actient non-drug medical devices, revenue is recognized upon the shipment of goods or upon the delivery of goods, whereupon title passes, all obligations have been fulfilled, and collection of the related receivable is fixed, determinable, probable, and reasonably assured. The Company records estimated sales returns and discounts as a reduction of net sales in the period revenue is recognized. The Company maintains an allowance for these returns and reduces reported revenue for expected returns from shipments each reporting period. This allowance is not significant and is based on historical and current trends in product returns.

Shipping and handling fees for Actient products are billed to customers are recognized in net revenues. Other shipping and handling costs are included in the cost of sales.

In the first quarter of 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 Net income reported for the six months ended June 30, 2012 in the amount of $820. Management believes this adjustment is not material to the Company’s results of operations for 2012.

(c) Net Income (Loss) Per Common Share

Basic income (loss) per common share is computed based on the weighted average number of common shares outstanding during the period. Diluted income (loss) per common share is computed based on the weighted average number of common shares outstanding and, if there is net income during the period, the dilutive impact of common stock equivalents outstanding during the period. Common stock equivalents are measured under the treasury stock method.

The following is a reconciliation of net income and weighted average common shares outstanding for purposes of calculating basic and diluted income per common share.

Basic income (loss) per share:

	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
Numerator:
Net income (loss)	$	57,088		$	7,724		$	48,928		$	5,976

Denominator:
Weighted-average common shares outstanding	49,313,106			48,592,506			49,304,301			48,639,339
Weighted-average unvested restricted common shares subject to forfeiture	(32,955		)	(17,088		)	(40,469		)	(14,813		)

Shares used in calculating basic net income (loss) per common share	49,280,151			48,575,418			49,263,832			48,624,526

Basic net income (loss) per common share	$	1.16		$	0.16		$	0.99		$	0.12

Diluted income (loss) per share:

	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
Numerator:
Net income (loss)	$	57,088		$	7,724		$	48,928		$	5,976

Denominator:
Weighted-average common shares outstanding	49,313,106			48,592,506			49,304,301			48,639,339
Weighted-average unvested restricted common shares subject to forfeiture	(32,955		)	(17,088		)	(40,469		)	(14,813		)
Incremental shares from assumed conversions of stock compensation plans	303,226			596,794			301,086			670,810

Shares used in calculating diluted net income (loss) per common share	49,583,377			49,172,212			49,564,918			49,295,336

Diluted net income (loss) per common share	$	1.15		$	0.16		$	0.99		$	0.12

Diluted net income per common share is computed giving effect to all potentially dilutive securities. The potentially dilutive shares include outstanding stock options and awards, outstanding warrants, and incremental shares issuable upon conversion of 1.5% Convertible Senior Notes due 2018 (“2018 Convertible Notes”) (See Note 9, Senior Convertible Notes). The following weighted-average number of stock options and restricted stock units were antidilutive and, therefore, excluded from the computation of diluted net income per common share for the three and six month periods ended June 30, 2013: 6,617,868 and 6,390,070, respectively.

The Company has 1,250,000 warrants outstanding issued in connection with the acquisition of Actient as discussed in Note (2) and 14,481,950 warrants sold in connection with the issuance of convertible debt as discussed in Note (9). The warrants 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. 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.

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, as discussed in Note 9, 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.

(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.