Note 1 – Condensed Consolidated Financial Statements

Principles of Consolidation and Basis of Presentation

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles in the United States of America (U.S. GAAP) for interim financial information and with the instructions of Form 10-Q and Article 10 of Regulation S-X and, therefore, do not include all of the information and notes required by U.S. GAAP for complete annual financial statements. The accompanying financial information reflects all adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods. The results of operations for the three and six months ended December 31, 2011 are not necessarily indicative of the results to be expected for the full year. These Condensed Consolidated Financial Statements should be read in conjunction with the audited condensed consolidated statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2011 (fiscal 2011).

The Condensed Consolidated Financial Statements include the accounts of Kensey Nash Corporation and its wholly-owned subsidiaries (the Company). All intercompany transactions and balances have been eliminated.

The preparation of the financial statements in conformity with U.S. GAAP and the notes to the financial statements requires management to make estimates and assumptions. These estimates and assumptions, which may differ from actual results, will affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues, expenses and cash flows for the periods presented.

All amounts in the Condensed Consolidated Financial Statements for the current and prior period, including these notes, have been presented in thousands, except for share and per share data, or as otherwise noted. Certain reclassifications have been made to the prior period balances to conform to the current period presentation, such as the condensed aggregated presentation of total Net plant, property and equipment within the Condensed Consolidated Balance Sheets, the aggregated presentation of Net sales within the Condensed Consolidated Statements of Operations and the aggregated presentation of the changes in current and long-term deferred revenue within the Condensed Consolidated Statements of Cash Flows.

Revenue Recognition

Sales Revenue

The Company recognizes revenue in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Subtopic 605-10-S99, "Revenue Recognition" (ASC 605-10-S99). Sales revenue is recognized when the products are shipped or the services are completed. Advance payments received for products or services are recorded as deferred revenue and are recognized when the products are shipped or services are performed. The Company reduces sales revenue for estimated customer returns and other allowances. The Company recorded no net sales return provisions, credits and discounts for the three months ended December 31, 2011 or 2010. For the six months ended December 31, 2011 and 2010, the Company recorded net sales return provisions, credits and discounts of $0 and $30, respectively.

In addition, the Company accounts for customer arrangements containing multiple revenue elements in accordance with FASB ASC Subtopic 605-25, "Multiple Element Arrangements" (ASC 605-25). The Company considers a variety of factors in determining the appropriate method of accounting for its multiple element agreements, including whether the various elements can be separated and accounted for individually as separate units of accounting. When the Company's multiple element arrangements are combined into a single unit of accounting, revenues are deferred and recognized over the expected period of performance. The specific methodology for the recognition of the revenue is determined on a case-by-case basis according to the facts and circumstances applicable to each agreement.

Up-front, non-refundable payments that do not have stand-alone value are recorded as deferred revenue once received and recognized as revenue over the expected period of performance.

The Company evaluates milestone payments on an individual basis and recognizes revenue from non-refundable milestone payments when the earnings process is complete and the payment is reasonably assured. Non-refundable milestone payments related to arrangements under which the Company has continuing performance obligations are recognized using a contingency-adjusted performance model over the period of performance, where revenue is recognized for the milestone proportionately to the extent of the performance period to date and the remainder is spread ratably over the remaining performance period of the arrangement.

Royalty Income

The Company recognizes its royalty revenue at the end of each quarter, when the relevant net total end-user product sales dollars are reported by customers to the Company for the quarter. Royalty payments are typically received within 45 days after the end of each calendar quarter.

Geographic Information

The Company's total revenues are attributed to a country based on the location of the customer. A portion of the Company's total revenues, including sales and royalties, are dependent on U.S.-based customers selling to end-users outside the U.S. The Company primarily sells to U.S.-based customers, however, a portion of total revenues is attributable to European-based customers. The increase in the Company's revenue from European-based customers in the Company's fiscal year ending June 30, 2012 (fiscal 2012) was primarily due to product sales to Synthes, Inc. (Synthes) resulting from the Company's May 2011 Norian Corporation (Norian) asset acquisition. In addition, all of the Company's long-lived tangible assets are located in the U.S. The Company's revenues are categorized geographically below:


	Revenues for the Three Months Ended December 31,				Revenues for the Six Months Ended December 31,
	2011		2010		2011		2010
United States	$	20,417	$	16,674	$	37,524	$	33,480
Europe		2,571		681		5,486		840

Total	$	22,988	$	17,355	$	43,010	$	34,320

Earnings Per Share

Earnings per share are calculated in accordance with FASB ASC Topic 260, "Earnings Per Share" (ASC 260). Basic and diluted earnings per share (EPS) are computed using the weighted average number of shares of Common Stock outstanding, with common equivalent shares from options and nonvested stock awards included in the diluted computation when their effect is dilutive. The effect of dilutive options and nonvested stock awards for the three months ended December 31, 2011 and 2010 was 97,149 and 305,411 shares, respectively. For the six months ended December 31, 2011 and 2010, the effect of dilutive options and nonvested stock awards was 102,940 and 261,062 shares, respectively. There were no nonvested stock awards included for the three and six months ended December 31, 2011 and 2010 that were anti-dilutive. Options to purchase shares of the Company's Common Stock that were outstanding for the three and six months ended December 31, 2011 and 2010, but were not included in the computation of diluted EPS because the options would have been anti-dilutive, are shown in the table below:


	Three months ended December 31,				Six months ended December 31,
	2011		2010		2011		2010
Number of shares underlying options		1,468,130		1,199,967		1,476,635		1,382,541

Option exercise price range	$	23.45 - $35.71	$	23.45 - $35.71	$	23.45 - $35.71	$	23.45 - $35.71

Goodwill

The Company accounts for goodwill under the provisions of FASB ASC Topic 350, "Intangibles – Goodwill and Other" (ASC 350). Goodwill is not amortized, but is subject to impairment tests on an annual basis or at an interim date if certain events or circumstances indicate that the asset might be impaired. The most recent annual test as of June 30, 2011 indicated that goodwill was not impaired. There were no indicators of impairment during the six-month period ended December 31, 2011.

New Accounting Standards

Adopted:

In December 2010, the FASB issued Accounting Standards Update (ASU) 2010-29, "Disclosure of Supplementary Pro Forma Information for Business Combinations (Topic 805)—Business Combinations" (ASU 2010-29), to improve consistency in how pro forma disclosures are calculated. Additionally, ASU 2010-29 enhances the disclosure requirements and requires a description of the nature and amount of any material, nonrecurring pro forma adjustments directly attributable to a business combination. The Company's adoption of this new accounting update on July 1, 2011 did not have a significant impact on the Company's Condensed Consolidated Financial Statements. The Company will apply ASU 2010-29 to any future business combinations.

In May 2011, the FASB issued ASU No. 2011-04, "Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (IFRS) (Topic 820)—Fair Value Measurement" (ASU 2011-04), to provide a consistent definition of fair value and ensure that the fair value measurement and disclosure requirements are similar between U.S. GAAP and IFRS. ASU 2011-04 is effective for the Company in its third quarter of fiscal 2012 and its adoption by the Company on January 1, 2012 did not have a material effect on its Condensed Consolidated Financial Statements.

To Be Adopted:

In June 2011, the FASB issued ASU No. 2011-05, "Comprehensive Income (Topic 220)—Presentation of Comprehensive Income" (ASU 2011-05), to require an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of equity. In December 2011, the FASB issued ASU 2011-12, "Comprehensive Income (Topic 220)—Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in ASU 2011-05" (ASU 2011-12), which defers the implementation of certain provisions of ASU 2011-05. ASU 2011-05 and ASU 2011-12 will be effective for the Company in its first quarter of fiscal 2013. The Company's pending adoption of ASU 2011-05 and 2011-12 is not expected to have a material effect on the Company's financial position, results of operations or cash flows, other than the change to the required presentation format.

In September 2011, the FASB issued ASU No. 2011-08, "Intangibles—Goodwill and Other—Testing Goodwill for Impairment" (ASU 2011-08), to allow entities to use a qualitative approach to test goodwill for impairment. ASU 2011-08 permits an entity to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If it is concluded that this is the case, it is necessary to perform the currently prescribed two-step goodwill impairment test. Otherwise the two-step goodwill test is not required. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, which is the Company's fiscal 2013, with early adoption permitted. The Company is currently evaluating the impact of the adoption of ASU 2011-08 on its Condensed Consolidated Financial Statements.