I believe I can deduce what was going on at Novamed. Tell me if ‘m wrong or if there could be some nefarious plan behind the actions. China wants to have the drugs available in the hinterlands quickly and broadly but doesn’t want to take responsibility or risk for managing the inventory, either in determining storage quantities or in taking the risk for storage. But the big drug companies don’t want to take that risk either. Thus China crafts a deal whereby they find a middleman who will take the risk—Novamed. But Novamed claims they don’t have the funds to front for the drugs. So China agrees to front the money. China sees it as a loan which is paid back after a year except they will forgive the loan for any amounts of drugs used. Novamed treats it differently in their accounting. Novamed sees the money transfer as a purchases whereby they also have a second agreement to buy back any unused drugs after a year. Thus Novamed puts the deal on their accounting books as revenue acceptance at the initial time of the agreement and a liability for future purchases. They can do this as a company in China because they are not subject to SEC accounting standards. But when Sciclone purchases Novamed, the accountants for Ernst and Sciclone originally don’t recognize the problem but eventually realize during the 2012 accounting review that SEC requires Sciclone to not recognize the revenue until the end user actually takes the drug off the shelf. This would also mean that the personnel who Novamed has on their books may not really be sales staff, but inventory managers instead. This would account for their slow transition into the Sciclone sales staff. Thus the correction involves moving the revenue recognition out of the initial period (2011) into 2012. Revenues are reduced in 2011 and increased in 2012. In this case, $3M additional revenue is recognized in 2012 and removed from 2011. At the same time, the liability which Novamed had on their books for return of unused drugs is removed. They showed the liability estimate as $1M in 2012. According to my accounting, this is about 4-6 cents per share.
Do you have Flu shot? As I know, clinics & drug stores will get the shot materials couple months before end of the year and return whatever leftover after season in next year's spring. This process is similiar to NovaMed's process and is acceptable in US. But, the new recording is a better way for accuracy since this new process can prevent year end stock-up & return year after to generate more bonus for salesmen & Management. The new system will have better benefits for SCLN future growing. If the price move down again, I might be able to pick up more to generate more prifits in future. Thanks and GLTA! Vincent