1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of SciClone Pharmaceuticals, Inc. (“SciClone” or the “Company”) have been prepared in conformity with generally accepted accounting principles in the United States (“GAAP”) consistent with those applied in, and should be read in conjunction with, the audited financial statements for the year ended December 31, 2011 included in the Company’s Form 10-K as filed with the Securities and Exchange Commission. The Company prepared the unaudited condensed consolidated financial statements following the requirements of the Securities and Exchange Commission for interim reporting. As permitted under those rules, certain footnotes or other information that are normally required by GAAP can be condensed or omitted.

On April 18, 2011, SciClone acquired NovaMed Pharmaceuticals, Inc. (“NovaMed”). Commencing April 18, 2011, the Company’s financial statements include the assets, liabilities, operating results and cash flows of NovaMed.

The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.

The interim financial information reflects all adjustments, consisting only of normal recurring adjustments, which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented and are not necessarily indicative of results for subsequent interim periods or for the full year. The condensed consolidated balance sheet data at December 31, 2011 is derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make judgments, assumptions and estimates that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Actual results could differ significantly from those estimates.

Customer Concentration

The People’s Republic of China (“China”) uses a tiered method to import and distribute products. The distributors make the sales in the country, but the product is imported for them by licensed importers. Product sales revenues result from the sale of the Company’s proprietary or in-licensed products to importing agents and distributors. Promotion services revenues result from fees received for exclusively promoting products for certain partners. These importing agents, distributors and partners are the Company’s customers.

For the three months ended September 30, 2012 and 2011, revenues to three and two customers in China accounted for 86% of the Company’s revenues. For the nine months ended September 30, 2012 and 2011, revenues from three customers in China accounted for 88% and 92%, respectively, of the Company’s revenues. No other customer accounted for more than 10% during the three or nine months ended September 30, 2012 or 2011. The Company’s two largest customers were the same for both periods. A third party holds a majority interest in the Company’s largest customer. As of September 30, 2012, approximately $35.6 million, or 96%, of the Company's accounts receivable were attributable to five customers in China. The Company generally does not require collateral from its customers.

Revenue Recognition

The Company recognizes revenue when persuasive evidence of an arrangement exists, services have been rendered or delivery has occurred, the price to the buyer is fixed or determinable and collectability is reasonably assured.

Product Revenue. The Company earns product revenue from selling manufactured ZADAXIN product at the time of delivery. Sales of ZADAXIN to importing agents or distributors are recognized at time of shipment when title to the product is transferred to them. The Company also earns product revenue from purchasing medical products from pharmaceutical companies and selling them directly to importers or distributors. Sales are recognized when the medical products have been delivered to the importers or distributors. Payments by the importing agents and distributors are not contingent upon sale to the end user by the importing agents or distributors. The Company considers the levels of channel inventory as well as the risk of concessions in concluding whether fees due pursuant to an arrangement to sell products to an importer or distributor are fixed or determinable and collectible. Revenue is recognized only if the Company can reasonably estimate the effects of rights of return or other rights given to a distributor or conclude that it will not grant a future concession to the distributor.

Net Income (Loss) Per Share

Basic net income (loss) per share has been computed by dividing net income (loss) by the weighted-average number of shares of common stock outstanding for the period. Diluted net income (loss) per share is computed by dividing net income by the weighted-average number of common equivalent shares outstanding for the period. Diluted net income (loss) per share includes any dilutive impact from outstanding stock options, restricted stock units (“RSUs”) and the employee stock purchase plan using the treasury stock method.

The following is a reconciliation of the numerator and denominators of the basic and diluted net income (loss) per share computations (in thousands, except per share amounts):



	Three Months Ended				Nine Months Ended
	September 30,				September 30,
		2012		2011		2012		2011
Numerator:
Net income (loss)	$	(13,542)	$	10,230	$	5,757	$	16,062

Denominator:
Weighted-average shares outstanding used to
compute basic net income (loss) per share		56,617		58,331		57,184		54,044
Effect of dilutive securities		—		2,106		1,977		2,382
Weighted-average shares outstanding used to
compute diluted net income (loss) per share		56,617		60,437		59,161		56,426

Basic net income (loss) per share	$	(0.24)	$	0.18	$	0.10	$	0.30
Diluted net income (loss) per share	$	(0.24)	$	0.17	$	0.10	$	0.28

For the three months ended September 30, 2012 and 2011, outstanding stock options and RSUs for 5,298,836 and 2,744,796 shares, respectively, were excluded from the calculation of diluted net income (loss) per share because the effect from the assumed exercise of these options and RSUs calculated under the treasury stock method would have been anti-dilutive. In addition, for the three months ended September 30, 2012 and 2011, shares subject to market or performance conditions of 112,500 and 280,000, respectively, were excluded from the calculation of diluted net income (loss) per share because the performance or market criteria had not been met. For the nine months ended September 30, 2012 and 2011, outstanding stock options and RSUs for 3,272,577 and 2,796,688 shares, respectively, were excluded from the calculation of diluted net income (loss) per share because the effect from the assumed exercise of these options and RSUs calculated under the treasury stock method would have been anti-dilutive. In addition, for the nine months ended September 30, 2012 and 2011, shares subject to market or performance conditions of 126,113 and 190,073, respectively, were excluded from the calculation of diluted net income (loss) per share because the performance or market criteria had not been met.