##### 



SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 Form 10-Q/AAmendment
No. 1 (Mark One)(X)
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended March 31, 2004Or( )
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934For the transition period from  to
 Commission file number 000-20805 ReGen Biologics, Inc. (Exact name of registrant as specified in its charter)
 Delaware
    
    23-2476415(State or other jurisdiction of
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)509 Commerce Street,
1st Floor, East Wing,
Franklin Lakes, NJ
    
    07417(Address of principal executive offices)
    
    (Zip Code)
 Registrants telephone number, including area code: (201) 651-5140 Securities registered pursuant to Section 12(b) of the Act:
None Securities registered pursuant to Section 12(g) of the Act:Title of Class Common Stock $.01 par value per share Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes (X) No (  ) Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes (  ) No (X) The number of outstanding shares of the registrants common stock as of
April 30, 2004 was 41,611,787.




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##### 



Description of Amendment to Form 10-Q for the Quarter Ended
March 31, 2004 The undersigned registrant hereby
amends its quarterly report on Form 10-Q for the Quarter ended
March 31, 2004 as follows: Based on subsequent reviews by
Ernst & Young, Item 1 has been revised to reflect the charge to
retained earnings that results from the accounting for the accretion of
the beneficial conversion and issuance costs associated with the Series
C Preferred Stock as a deemed dividend to the Series C Preferred
stockholders for purposes of determining the net loss attributable to common
stockholders for the three months ended March 31, 2004 and the period
from December 21, 1989 (inception) through March 31, 2004 and net
loss per share attributable to common stockholders. This change did not
impact the Companys net loss or net equity for any period presented. The following changes were made: Item 1 - Condensed Consolidated
Statements of Operations - Included the deemed dividend to Series C
Preferred stockholders upon issuance of shares with a beneficial conversion
and net loss attributable to common stockholders for the three month period
ended March 31, 2004 and the period from December 21, 1989
(inception) through March 31, 2004. Recalculated net loss per share for
the period based on the net loss attributable to common stockholders. Item 1 - Note 1 to the Notes to
Condensed Consolidated Financial Statements - Revised the pro-forma
disclosure of net loss and net loss per share for the three month period
ended March 31, 2004 required by SFAS No. 123 as amended by
SFAS No. 148 to conform with the changes made to the Condensed Consolidated
Statements of Operations discussed above. Item 1 - Added Note 3 to the
condensed consolidated statements of operation to disclose the restatement.




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##### 



REGEN BIOLOGICS, INC. INDEX PART I  Financial InformationItem 1.
    
    Financial StatementsCondensed Consolidated Balance Sheets at March 31, 2004
(unaudited) and December 31, 2003Condensed Consolidated Statements of Operations for the
Three Months Ended March 31, 2004 (unaudited) and 2003
(unaudited), and the Period from December 21, 1989 to
March 31, 2004 (unaudited)Consolidated Statement of Changes in Stockholders Equity
(Deficit) and Series A & Series C Redeemable Convertible
Preferred Stock for the Period from December 21, 1989
(inception) to March 31, 2004 (unaudited)Condensed Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 2004 (unaudited) and 2003
(unaudited) and the Period from December 21, 1989
(inception) to March 31, 2004 (unaudited)Notes to Condensed Consolidated Financial Statements
(unaudited)Item 2.
    
    Managements Discussion and Analysis of Financial
Conditions and Results of OperationsItem 3.
    
    Quantitative and Qualitative Disclosures about Market RiskItem 4.
    
    Controls and ProceduresPART II  Other InformationItem 1.
    
    Legal ProceedingsItem 2.
    
    Changes in Securities and Use of ProceedsItem 3.
    
    Defaults upon Senior SecuritiesItem 4.
    
    Submission of Matters to a Vote of Security HoldersItem 5.
    
    Other InformationItem 6.
    
    Exhibits and Reports on Form 8-KSignaturesCertifications
 2




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##### 



PART I  Financial Information Item 1. Financial Statements REGEN BIOLOGICS, INC.
(A Development Stage Company) CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data) March 31, 2004
    
    December 31, 2003(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    6,880
    
    
    $
    8,323Trade receivables
    
    
    99
    
    
    
    11Receivables from related parties
    
    
    1
    
    
    
    Inventory
    
    
    232
    
    
    
    216Prepaid expenses and other current assets
    
    
    246
    
    
    
    247Total current assets
    
    
    7,458
    
    
    
    8,797Property and equipment, net
    
    
    61
    
    
    
    80Other assets
    
    
    145
    
    
    
    152Total assets
    
    $
    7,664
    
    
    $
    9,029LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)Current liabilities:Accounts payable
    
    $
    642
    
    
    $
    408Accounts payable to related parties
    
    
    22
    
    
    
    26Accrued expenses
    
    
    400
    
    
    
    541Current portion of capital leases
    
    
    6
    
    
    
    4Total current liabilities
    
    
    1,070
    
    
    
    979Pension liability
    
    
    153
    
    
    
    144Other liabilities
    
    
    19
    
    
    
    19Long-term portion of capital leases
    
    
    4
    
    
    
    3Long-term portion of notes payable to related parties,
Including accrued interest of $987 and $958 as of
March 31, 2004 and December 31, 2003, respectively
    
    
    7,030
    
    
    
    7,001Total liabilities
    
    
    8,276
    
    
    
    8,146Series A redeemable convertible preferred stock, $.01
par value; 30,000,000 shares authorized, liquidation
preference of $6,855; and 15,298,351 shares issued
and outstanding as of March 31, 2004 and
December 31, 2003
    
    
    6,855
    
    
    
    6,855Series C redeemable convertible preferred stock, $.01
par value; 30,000,000 shares authorized, liquidation
preference of $9,969; and 22,246,153 issued and
outstanding as of March 31, 2004 and December 31, 2003
    
    
    8,491
    
    
    
    8,439Stockholders equity (deficit):Common stock
    
    
    293
    
    
    
    293Accumulated other comprehensive loss
    
    
    (58
    )
    
    
    (58
    )Additional paid-in capital
    
    
    37,436
    
    
    
    37,249Deficit accumulated during development stage
    
    
    (53,629
    )
    
    
    (51,895
    )Total stockholders equity (deficit)
    
    
    (15,958
    )
    
    
    (14,411
    )Total liabilities and stockholders
equity (deficit)
    
    $
    7,664
    
    
    $
    9,029
 See accompanying Notes to Condensed Consolidated Financial Statements. 3




---



##### 



REGEN BIOLOGICS, INC.
(A Development Stage Company) CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data) Three Months Ended March 31,
    
    Period fromDecember 21, 1989(Inception) to2004
    
    2003
    
    March 31, 2004(Restated See Note (3))
    
    
    
    (Restated See Note (3))(unaudited)
    
    (unaudited)
    
    (unaudited)Revenues:Sales
    
    $
    95
    
    
    $
    174
    
    
    $
    2,490Royalties
    
    
    12
    
    
    
    8
    
    
    
    153Grant and other revenue
    
    
    
    
    
    
    
    
    
    
    433Total revenues
    
    
    107
    
    
    
    182
    
    
    
    3,076Expenses:Costs of goods sold
    
    
    59
    
    
    
    271
    
    
    
    2,990Research and development
    
    
    785
    
    
    
    410
    
    
    
    28,252Business development, general
and administrative
    
    
    807
    
    
    
    556
    
    
    
    14,533Compensation expense associated with
stock options and warrants
    
    
    119
    
    
    
    
    
    
    
    6,461Total expenses
    
    
    1,770
    
    
    
    1,237
    
    
    
    52,236Operating loss
    
    
    (1,663
    )
    
    
    (1,055
    )
    
    
    (49,160
    )Merger cost
    
    
    
    
    
    
    
    
    
    
    (515
    )Interest and other income
    
    
    9
    
    
    
    5
    
    
    
    1,243Rental income
    
    
    79
    
    
    
    131
    
    
    
    1,645Rent expense
    
    
    (78
    )
    
    
    (109
    )
    
    
    (1,509
    )Interest expense
    
    
    (29
    )
    
    
    (36
    )
    
    
    (2,988
    )License fees
    
    
    
    
    
    
    
    
    
    
    2,050Net loss
    
    $
    (1,682
    )
    
    $
    (1,064
    )
    
    $
    (49,234
    )Deemed dividend to Series C Preferred Stockholders upon
issuance of Series C Preferred Stock with a beneficial conversion
    
    
    (52
    )
    
    
    
    
    
    
    (4,395
    )Net loss attributable to common stockholders
    
    $
    (1,734
    )
    
    $
    (1,064
    )
    
    $
    (53,629
    )Basic and diluted net loss per share attributable to common stockholders
    
    $
    (0.06
    )
    
    $
    (0.04
    )
    
    $
    (2.95
    )Weighted average number of shares used for
calculation of net loss per share
    
    
    29,322
    
    
    
    29,071
    
    
    
    18,149
 See accompanying Notes to Condensed Consolidated Financial Statements. 4




---



##### 



ReGen Biologics, Inc.
(A DEVELOPMENT STAGE COMPANY)
Consolidated Statement of Changes in Stockholders Equity (Deficit) and Series
A and Series C Redeemable Convertible Preferred Stock
Period from December 21, 1989 (inception) to March 31, 2004 (unaudited)(In thousands, except share and per share data)



|                             |                                                                                                                                                                                    |  |             |  |             |  |              |  |             |  |        |  |        |  |        |  |        |  |                               |           |  |   |   |   |  |  |  |  |  |  |  |  | 
|---------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------- |  | ----------- |  | ------------ |  | ----------- |  | ------ |  | ------ |  | ------ |  | ------ |  | ----------------------------- | --------- |  | - | - | - |  |  |  |  |  |  |  |  | 
|                             |                                                                                                                                                                                    |  |             |  |             |  |              |  |             |  |        |  |        |  |        |  |        |  | Stockholders Equity (Deficit)
|                             |                                                                                                                                                                                    |  |             |  |             |  |              |  |             |  |        |  |        |  |        |  |        |  |                              
|                             |                                                                                                                                                                                    |  | Series A    |  | Series C    |  |              |  |             |  |        |  |        |  |        |  |        |  |                               |           | 
|                             |                                                                                                                                                                                    |  | Redeemable  |  | Redeemable  |  | Series A - F |  | Series B   
|                             |                                                                                                                                                                                    |  | Convertible |  | Convertible |  | Convertible  |  | Convertible
|                             |                                                                                                                                                                                    |  | Preferred   |  | Preferred   |  | Preferred    |  | Preferred  
|                             |                                                                                                                                                                                    |  | Stock       |  | Stock       |  | Stock        |  | Stock      
|                             |                                                                                                                                                                                    |  |             |  |             |  |              |  |            
|                             |                                                                                                                                                                                    |  | Shares      |  | Amount      |  | Shares       |  | Amount      |  | Shares |  | Amount |  | Shares |  | Amount
|                             |                                                                                                                                                                                    |  |             |  |             |  |              |  |             |  |        |  |        |  |        |  |       
|                             | Issuance of common stock
at $0.03127 per share for
net assets contributed by
founders in May 1990                                                                                  |  |             |  |             |  |              |  |             |  |        |  |        |  |        |  |        |  |                               |          |  |   | $ |  |  |  |  |  |  |  |  |  | 
|                             | Issuance of common stock
at $0.005 per share for
cash in November 1991                                                                                                             |  |             |  |             |  |              |  |             |  |        |  |        |  |        |  |        |  |                               |          |  |   |   |  |  |  |  |  |  |  |  |  | 
|                             | Issuance of Series A
convertible preferred
stock at $1.00 per share
for cash in April 1991,
net of offering costs of
$44                                                           |  |             |  |             |  |              |  |             |  |        |  |        |  |        |  |        |  |                               | 725,000   |  |   |   | 1 |  |  |  |  |  |  |  |  | 
|                             | Issuance of Series B
convertible preferred
stock at $3.00 per share
for cash and in exchange
for notes payable in
January, March, May, and
July 1992, net of
offering costs of $29 |  |             |  |             |  |              |  |             |  |        |  |        |  |        |  |        |  |                               | 1,226,338 |  |   |   |  |  |  |  |  |  |  |  |  | 
|                             | Net loss from inception
(December 21, 1989)
through December 31, 1992                                                                                                              |  |             |  |             |  |              |  |             |  |        |  |        |  |        |  |        |  |                               |          |  |   |   |  |  |  |  |  |  |  |  |  | 
|Balance at December 31, 1992 |                                                                                                                                                                                    |  |             |  |             |  |              |  |             |  |        |  |        |  |        |  |        |  | 1,951,338                     |           |  |   | 1 |   |  |  |  |  |  |  |  | 
|                             | Issuance of Series C
convertible preferred
stock at $4.50 per share
for cash in December
1993, net of offering
costs of $29                                                        |  |             |  |             |  |              |  |             |  |        |  |        |  |        |  |        |  |                               | 550,552   |  |   |   |  |  |  |  |  |  |  |  |  | 
|                             | Exercise of common stock
options at $0.30 per
share for cash in
February 1993                                                                                                      |  |             |  |             |  |              |  |             |  |        |  |        |  |        |  |        |  |                               |          |  |   |   |  |  |  |  |  |  |  |  |  | 
|                             | Issuance of common stock
at $0.30 per share in
1993 in exchange for
services to a consultant                                                                                       |  |             |  |             |  |              |  |             |  |        |  |        |  |        |  |        |  |                               |          |  |   |   |  |  |  |  |  |  |  |  |  | 
|                             | Net loss                                                                                                                                                                           |  |             |  |             |  |              |  |             |  |        |  |        |  |        |  |        |  |                               |          |  |   |   |  |  |  |  |  |  |  |  |  | 
|Balance at December 31, 1993 |                                                                                                                                                                                    |  |             |  |             |  |              |  |             |  |        |  |        |  |        |  |        |  | 2,501,890                     |           |  |   | 1 |   |  |  |  |  |  |  |  | 
|                             | Net loss                                                                                                                                                                           |  |             |  |             |  |              |  |             |  |        |  |        |  |        |  |        |  |                               |          |  |   |   |  |  |  |  |  |  |  |  |  | 
|Balance at December 31, 1994 |                                                                                                                                                                                    |  |             |  |             |  |              |  |             |  |        |  |        |  |        |  |        |  | 2,501,890                     |           |  |   | 1 |   |  |  |  |  |  |  |  | 
|                             | Net loss                                                                                                                                                                           |  |             |  |             |  |              |  |             |  |        |  |        |  |        |  |        |  |                               |          |  |   |   |  |  |  |  |  |  |  |  |  | 
|Balance at December 31, 1995 |                                                                                                                                                                                    |  |             |  |             |  |              |  |             |  |        |  |        |  |        |  |        |  | 2,501,890                     |           |  | $ | 1 |   |  |  |  |  |  |  |  | 

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                             |                                                                                                                                                                                    |  |                               |           |         |   |              |   |       |   |            |       |           |  |             |  |               |  |               |   |  |   |             |        |             |  |       |  |  |   |       |        |  
|---------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------- | --------- | ------- | - | ------------ | - | ----- | - | ---------- | ----- | --------- |  | ----------- |  | ------------- |  | ------------- | - |  | - | ----------- | ------ | ----------- |  | ----- |  |  | - | ----- | ------ | -
|                             |                                                                                                                                                                                    |  | Stockholders Equity (Deficit)
|                             |                                                                                                                                                                                    |  |                              
|                             |                                                                                                                                                                                    |  |                               |           |         |   |              |   |       |   |            |       |           |  |             |  |               |  |               |   |  |   | Deficit     |        |             |  |       |  |  |   |      
|                             |                                                                                                                                                                                    |  |                               |           |         |   |              |   |       |   |            |       |           |  |             |  |               |  |               |   |  |   | Accumulated |        | Accumulated |  | Total
|                             |                                                                                                                                                                                    |  |                               |           |         |   |              |   |       |   | Additional |       | Deferred  |  | During      |  | Other         |  | Stockholders'
|                             |                                                                                                                                                                                    |  |                               |           |         |   |              |   |       |   | Paid In    |       | Stock     |  | Development |  | Comprehensive |  | Equity       
|                             |                                                                                                                                                                                    |  | Common Stock                  |           | Capital |   | Compensation |   | Stage |   | Loss       |       | (Deficit)
|                             |                                                                                                                                                                                    |  |                               |           |         |   |              |   |       |   |            |       |          
|                             |                                                                                                                                                                                    |  | Shares                        |           | Amount  |   |              |   |       |   |            |       |           |  |             |  |               |  |               |   |  |   |             |        |             |  |       |  | 
|                             |                                                                                                                                                                                    |  |                               |           |         |   |              |   |       |   |            |       |           |  |             |  |               |  |               |   |  |   |             |        |             |  |       |  | 
|                             | Issuance of common stock
at $0.03127 per share for
net assets contributed by
founders in May 1990                                                                                  |  |                               | 1,400,000 |         |   | $            | 1 |       |   | $          | 44    |           |  | $           |  |               |  |               |  |  |   | $           |       |             |  |       |  |  |   | $     | 45     |  
|                             | Issuance of common stock
at $0.005 per share for
cash in November 1991                                                                                                             |  |                               | 700,000   |         |   |              |  |       |   |            | 3     |           |  |             |  |               |  |               |  |  |   |             |       |             |  |       |  |  |   |       | 3      |  
|                             | Issuance of Series A
convertible preferred
stock at $1.00 per share
for cash in April 1991,
net of offering costs of
$44                                                           |  |                               |          |         |   |              |  |       |   |            | 681   |           |  |             |  |               |  |               |  |  |   |             |       |             |  |       |  |  |   |       | 682    |  
|                             | Issuance of Series B
convertible preferred
stock at $3.00 per share
for cash and in exchange
for notes payable in
January, March, May, and
July 1992, net of
offering costs of $29 |  |                               |          |         |   |              |  |       |   |            | 3,650 |           |  |             |  |               |  |               |  |  |   |             |       |             |  |       |  |  |   |       | 3,650  |  
|                             | Net loss from inception
(December 21, 1989)
through December 31, 1992                                                                                                              |  |                               |          |         |   |              |  |       |   |            |      |           |  |             |  |               |  |               |  |  |   |             | (2,476 | )           |  |       |  |  |   |       | (2,476 | )
|Balance at December 31, 1992 |                                                                                                                                                                                    |  | 2,100,000                     |           |         |   | 1            |   |       |   | 4,378      |       |           |  |             |  |               |  |              |   |  |   | (2,476      | )      |             |  |       |  |  |   | 1,904 |       
|                             | Issuance of Series C
convertible preferred
stock at $4.50 per share
for cash in December
1993, net of offering
costs of $29                                                        |  |                               |          |         |   |              |  |       |   |            | 2,448 |           |  |             |  |               |  |               |  |  |   |             |       |             |  |       |  |  |   |       | 2,448  |  
|                             | Exercise of common stock
options at $0.30 per
share for cash in
February 1993                                                                                                      |  |                               | 200       |         |   |              |  |       |   |            | 1     |           |  |             |  |               |  |               |  |  |   |             |       |             |  |       |  |  |   |       | 1      |  
|                             | Issuance of common stock
at $0.30 per share in
1993 in exchange for
services to a consultant                                                                                       |  |                               | 5,000     |         |   |              |  |       |   |            | 1     |           |  |             |  |               |  |               |  |  |   |             |       |             |  |       |  |  |   |       | 1      |  
|                             | Net loss                                                                                                                                                                           |  |                               |          |         |   |              |  |       |   |            |      |           |  |             |  |               |  |               |  |  |   |             | (1,342 | )           |  |       |  |  |   |       | (1,342 | )
|Balance at December 31, 1993 |                                                                                                                                                                                    |  | 2,105,200                     |           |         |   | 1            |   |       |   | 6,828      |       |           |  |             |  |               |  |              |   |  |   | (3,818      | )      |             |  |       |  |  |   | 3,012 |       
|                             | Net loss                                                                                                                                                                           |  |                               |          |         |   |              |  |       |   |            |      |           |  |             |  |               |  |               |  |  |   |             | (1,463 | )           |  |       |  |  |   |       | (1,463 | )
|Balance at December 31, 1994 |                                                                                                                                                                                    |  | 2,105,200                     |           |         |   | 1            |   |       |   | 6,828      |       |           |  |             |  |               |  |              |   |  |   | (5,281      | )      |             |  |       |  |  |   | 1,549 |       
|                             | Net loss                                                                                                                                                                           |  |                               |          |         |   |              |  |       |   |            |      |           |  |             |  |               |  |               |  |  |   |             | (1,959 | )           |  |       |  |  |   |       | (1,959 | )
|Balance at December 31, 1995 |                                                                                                                                                                                    |  | 2,105,200                     |           |         | $ | 1            |   |       | $ | 6,828      |       |           |  |             |  |               |  |              |   |  | $ | (7,240      | )      |             |  |       |  |  | $ | (410  | )     

See accompanying Notes to Condensed Consolidated Financial Statements

5



---



##### 



ReGen Biologics, Inc.
(A DEVELOPMENT STAGE COMPANY)
Consolidated Statement of Changes in Stockholders Equity (Deficit) and Series
A and Series C Redeemable Convertible Preferred Stock
Period from December 21, 1989 (inception) to March 31, 2004 (unaudited)(In thousands, except share and per share data) Stockholders' Equity (Deficit)Series A
    
    Series CRedeemable
    
    Redeemable
    
    Series A - F
    
    Series BConvertible
    
    Convertible
    
    Convertible
    
    ConvertiblePreferred
    
    Preferred
    
    Preferred
    
    PreferredStock
    
    Stock
    
    Stock
    
    StockShares
    
    Amount
    
    Shares
    
    Amount
    
    Shares
    
    Amount
    
    Shares
    
    AmountBalance at December 31, 1995 (carried forward)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,501,890
    
    
    $
    1Issuance of Series D convertible preferred stock at
$7.25 per share for cash in March and April 1996, net
of offering costs of $536
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,191,321
    
    
    
    Exercise of common stock options at $0.10, $0.30, and
$0.45 per share in August and October 1996
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance at December 31, 1996
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,693,211
    
    
    
    1Issuance of Series E convertible preferred stock at
$7.25 per share for cash in August and September 1997,
net of offering costs of $53
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    335,314
    
    
    
    Exercise of common stock options at $0.10, $0.30, and
$0.45 per share in April, August, and September 1997
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance at December 31, 1997
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,028,525
    
    
    
    1Exercise of common stock options at $0.10, $0.20,
$1.27, and $1.45 per share in May, July, November and
December 1998, respectively
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Compensation expense associated with stock
option modifications
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance at December 31, 1998
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,028,525
    
    
    
    1Exercise of common stock options at $.725 and $1.45 per
share in April, June and August 1999
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Issuance of Series F convertible preferred stock at
$8.73 per share for cash
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    453,310
    
    
    
    Compensation expense associated with stock option grants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance at December 31, 1999
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,481,835
    
    
    $
    1
 [Additional columns below] [Continued from above table, first column(s) repeated] Stockholders' Equity (Deficit)DeficitAccumulated
    
    Accumulated
    
    TotalAdditional
    
    Deferred
    
    During
    
    Other
    
    Stockholders'Paid In
    
    Stock
    
    Development
    
    Comprehensive
    
    EquityCommon Stock
    
    Capital
    
    Compensation
    
    Stage
    
    Loss
    
    (Deficit)Shares
    
    AmountBalance at December 31, 1995 (carried forward)
    
    
    2,105,200
    
    
    $
    1
    
    
    $
    6,828
    
    
    $
    
    
    
    $
    (7,240
    )
    
    
    
    
    
    $
    (410
    )Issuance of Series D convertible preferred stock at
$7.25 per share for cash in March and April 1996, net
of offering costs of $536
    
    
    
    
    
    
    
    
    
    
    8,101
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,101Exercise of common stock options at $0.10, $0.30, and
$0.45 per share in August and October 1996
    
    
    163,333
    
    
    
    
    
    
    
    43
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    43Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,931
    )
    
    
    
    
    
    
    (1,931
    )Balance at December 31, 1996
    
    
    2,268,533
    
    
    
    1
    
    
    
    14,972
    
    
    
    
    
    
    
    (9,171
    )
    
    
    
    
    
    
    5,803Issuance of Series E convertible preferred stock at
$7.25 per share for cash in August and September 1997,
net of offering costs of $53
    
    
    
    
    
    
    
    
    
    
    2,378
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,378Exercise of common stock options at $0.10, $0.30, and
$0.45 per share in April, August, and September 1997
    
    
    32,111
    
    
    
    
    
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,868
    )
    
    
    
    
    
    
    (3,868
    )Balance at December 31, 1997
    
    
    2,300,644
    
    
    
    1
    
    
    
    17,355
    
    
    
    
    
    
    
    (13,039
    )
    
    
    
    
    
    
    4,318Exercise of common stock options at $0.10, $0.20,
$1.27, and $1.45 per share in May, July, November and
December 1998, respectively
    
    
    159,879
    
    
    
    
    
    
    
    108
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    108Compensation expense associated with stock
option modifications
    
    
    
    
    
    
    
    
    
    
    56
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    56Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,815
    )
    
    
    
    
    
    
    (3,815
    )Balance at December 31, 1998
    
    
    2,460,523
    
    
    
    1
    
    
    
    17,519
    
    
    
    
    
    
    
    (16,854
    )
    
    
    
    
    
    
    667Exercise of common stock options at $.725 and $1.45 per
share in April, June and August 1999
    
    
    42,396
    
    
    
    
    
    
    
    32
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    32Issuance of Series F convertible preferred stock at
$8.73 per share for cash
    
    
    
    
    
    
    
    
    
    
    3,956
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,956Compensation expense associated with stock option grants
    
    
    
    
    
    
    
    
    
    
    3,436
    
    
    
    (3,247
    )
    
    
    
    
    
    
    
    
    
    
    189Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,458
    )
    
    
    
    
    
    
    (5,458
    )Balance at December 31, 1999
    
    
    2,502,919
    
    
    $
    1
    
    
    $
    24,943
    
    
    $
    (3,247
    )
    
    $
    (22,312
    )
    
    
    
    
    
    $
    (614
    )
 See accompanying Notes to Condensed Consolidated Financial Statements 6




---



##### 



ReGen Biologics, Inc.
(A DEVELOPMENT STAGE COMPANY)
Consolidated Statement of Changes in Stockholders Equity (Deficit) and Series
A and Series C Redeemable Convertible Preferred Stock
Period from December 21, 1989 (inception) to March 31, 2004 (unaudited)(In thousands, except share and per share data) Stockholders' Equity (Deficit)Series A
    
    Series CRedeemable
    
    Redeemable
    
    Series A - F
    
    Series BConvertible
    
    Convertible
    
    Convertible
    
    ConvertiblePreferred
    
    Preferred
    
    Preferred
    
    PreferredStock
    
    Series C
    
    Stock
    
    StockShares
    
    Amount
    
    Shares
    
    Amount
    
    Shares
    
    Amount
    
    Shares
    
    AmountBalance at December 31, 1999 (carried forward)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,481,835
    
    
    $
    1Compensation expense associated with stock
option grants in prior year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Compensation expense associated with stock
option grants in current year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock options cancelled during 2000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance at December 31, 2000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,481,835
    
    
    
    1Exercise of common stock options at $.10
per share in 2001
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercise of common stock options at $1.45
per share in 2001
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Compensation expense associated with stock
option grants in prior years
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Compensation expense associated with stock
option grants in current year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock options cancelled during 2001
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Deferred stock compensation associated with
stock option grants to non-employees in
2001
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance at December 31, 2001
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,481,835
    
    
    $
    1
 [Additional columns below] [Continued from above table, first column(s) repeated] Stockholders' Equity (Deficit)DeficitAccumulated
    
    Accumulated
    
    TotalAdditional
    
    Deferred
    
    During
    
    Other
    
    Stockholders'Paid In
    
    Stock
    
    Development
    
    Comprehensive
    
    EquityCommon Stock
    
    Capital
    
    Compensation
    
    Stage
    
    Loss
    
    (Deficit)Shares
    
    AmountBalance at December 31, 1999 (carried forward)
    
    
    2,502,919
    
    
    $
    1
    
    
    $
    24,943
    
    
    $
    (3,247
    )
    
    $
    (22,312
    )
    
    
    
    
    
    $
    (614
    )Compensation expense associated with stock
option grants in prior year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    738
    
    
    
    
    
    
    
    
    
    
    
    738Compensation expense associated with stock
option grants in current year
    
    
    
    
    
    
    
    
    
    
    2,124
    
    
    
    (1,642
    )
    
    
    
    
    
    
    
    
    
    
    482Stock options cancelled during 2000
    
    
    
    
    
    
    
    
    
    
    (1,089
    )
    
    
    1,089
    
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,229
    )
    
    
    
    
    
    
    (5,229
    )Balance at December 31, 2000
    
    
    2,502,919
    
    
    
    1
    
    
    
    25,978
    
    
    
    (3,062
    )
    
    
    (27,541
    )
    
    
    
    
    
    
    (4,623
    )Exercise of common stock options at $.10
per share in 2001
    
    
    25,000
    
    
    
    
    
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3Exercise of common stock options at $1.45
per share in 2001
    
    
    125
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Compensation expense associated with stock
option grants in prior years
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    935
    
    
    
    
    
    
    
    
    
    
    
    935Compensation expense associated with stock
option grants in current year
    
    
    
    
    
    
    
    
    
    
    1,010
    
    
    
    (833
    )
    
    
    
    
    
    
    
    
    
    
    177Stock options cancelled during 2001
    
    
    
    
    
    
    
    
    
    
    (161
    )
    
    
    161
    
    
    
    
    
    
    
    
    
    
    
    Deferred stock compensation associated with
stock option grants to non-employees in
2001
    
    
    
    
    
    
    
    
    
    
    228
    
    
    
    (131
    )
    
    
    
    
    
    
    
    
    
    
    97Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,330
    )
    
    
    
    
    
    
    (4,330
    )Balance at December 31, 2001
    
    
    2,528,044
    
    
    $
    1
    
    
    $
    27,058
    
    
    $
    (2,930
    )
    
    $
    (31,871
    )
    
    
    
    
    
    $
    (7,741
    )
 See accompanying Notes to Condensed Consolidated Financial Statements 7




---



##### 



ReGen Biologics, Inc. (A DEVELOPMENT STAGE COMPANY)
Consolidated Statement of Changes in Stockholders Equity (Deficit) and Series
A and Series C Redeemable Convertible Preferred Stock
Period from December 21, 1989 (inception) to March 31, 2004 (unaudited)(In thousands, except share and per share data) Stockholders' Equity (Deficit)Series A
    
    Series CRedeemable
    
    Redeemable
    
    Series A - F
    
    Series BConvertible
    
    Convertible
    
    Convertible
    
    ConvertiblePreferred
    
    Preferred
    
    Preferred
    
    PreferredStock
    
    Stock
    
    Stock
    
    StockShares
    
    Amount
    
    Shares
    
    Amount
    
    Shares
    
    Amount
    
    Shares
    
    AmountBalance at December 31, 2001 (carried forward)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,481,835
    
    
    $
    1Issuance of Common StockIssuance of Convertible Preferred Stock for cash and conversion of
bridge financing net of issuance costs of $138
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,564,047
    
    
    
    1Deferred stock compensation associated with stock option grants in
2002Compensation expense associated with stock options
outstandingEffect of reverse merger and recapitalization:Valuation of warrants associated with bridge
financingValuation of beneficial conversion associated with bridge
financingCompensation expense associated with stock options
outstanding recognized as a result of the reverse
mergerConversion of convertible preferred shares to Redeemable
Convertible Preferred Series A at liquidation / redemption value
    
    
    15,298,351
    
    
    $
    6,855
    
    
    
    
    
    
    
    
    
    
    
    (5,564,047
    )
    
    
    (1
    )Conversion of convertible preferred shares to Common Stock and
Series B Preferred Shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,481,835
    )
    
    
    (1
    )
    
    
    12,025,656
    
    
    $
    120Conversion of Subsidiary Common Stock into Company Common Stock
and Series B Preferred Shares:Elimination of Subsidiary Common StockIssuance of Company Common StockCompany Common Stock and related equity held by
existing shareholders (net of 18,115 shares held treasury)Conversion of Convertible Preferred Series B Stock to Company
Common Stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12,025,656
    )
    
    
    (120
    )Minimum Pension Liability AdjustmentNet lossOther Comprehensive LossBalance at December 31, 2002
    
    
    15,298,351
    
    
    
    6,855
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Compensation expense associated with stock options
outstandingIssuance of Redeemable Convertible Preferred Series C Stock, net
of issuance costs of $612, which include the issuance of non-cash
consideration in the form of warrants
    
    
    
    
    
    
    
    
    
    
    22,246,153
    
    
    $
    9,357Issuance of Common Stock warrants to Series C Stockholders
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (969
    )Valuation of beneficial conversion associated with Series C Stock
financing
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,292
    )Accretion of beneficial conversion associated with Series C Stock
financing
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,292Issuance of Common Stock  warrants exercisedAccretion of Series C Stock issuance cost
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    51Net lossBalance at December 31, 2003
    
    
    15,298,351
    
    
    $
    6,855
    
    
    
    22,246,153
    
    
    $
    8,439
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
 [Additional columns below] [Continued from above table, first column(s) repeated] Stockholders' Equity (Deficit)DeficitAccumulated
    
    Accumulated
    
    TotalAdditional
    
    Deferred
    
    During
    
    Other
    
    Stockholders'Paid In
    
    Stock
    
    Development
    
    Comprehensive
    
    EquityCommon Stock
    
    Capital
    
    Compensation
    
    Stage
    
    Loss
    
    (Deficit)Shares
    
    AmountBalance at December 31, 2001 (carried forward)
    
    
    2,528,044
    
    
    $
    1
    
    
    $
    27,058
    
    
    $
    (2,930
    )
    
    $
    (31,871
    )
    
    
    
    
    
    $
    (7,741
    )Issuance of Common Stock
    
    
    301,930
    
    
    
    1
    
    
    
    104
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    105Issuance of Convertible Preferred Stock for cash and conversion of
bridge financing net of issuance costs of $138
    
    
    
    
    
    
    
    
    
    
    6,716
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,717Deferred stock compensation associated with stock option grants in
2002
    
    
    
    
    
    
    
    
    
    
    370
    
    
    
    (370
    )Compensation expense associated with stock options
outstanding
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    452
    
    
    
    
    
    
    
    
    
    
    
    452Effect of reverse merger and recapitalization:Valuation of warrants associated with bridge
financing
    
    
    
    
    
    
    
    
    
    
    657
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    657Valuation of beneficial conversion associated with bridge
financing
    
    
    
    
    
    
    
    
    
    
    843
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    843Compensation expense associated with stock options
outstanding recognized as a result of the reverse
merger
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,848
    
    
    
    
    
    
    
    
    
    
    
    2,848Conversion of convertible preferred shares to Redeemable
Convertible Preferred Series A at liquidation / redemption value
    
    
    
    
    
    
    
    
    
    
    (6,854
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,855
    )Conversion of convertible preferred shares to Common Stock and
Series B Preferred Shares
    
    
    297,146
    
    
    
    3
    
    
    
    (122
    )Conversion of Subsidiary Common Stock into Company Common Stock
and Series B Preferred Shares:Elimination of Subsidiary Common Stock
    
    
    (2,829,974
    )
    
    
    (1
    )
    
    
    1Issuance of Company Common Stock
    
    
    7,781,018
    
    
    
    78
    
    
    
    (78
    )Company Common Stock and related equity held by
existing shareholders (net of 18,115 shares held treasury)
    
    
    8,966,966
    
    
    
    89
    
    
    
    2,678
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,767Conversion of Convertible Preferred Series B Stock to Company
Common Stock
    
    
    12,025,656
    
    
    
    120Minimum Pension Liability Adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (58
    )
    
    
    (58
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,951
    )
    
    
    
    
    
    
    (9,951
    )Other Comprehensive Loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,009
    )Balance at December 31, 2002
    
    
    29,070,786
    
    
    
    291
    
    
    
    31,373
    
    
    
    
    
    
    
    (41,822
    )
    
    
    (58
    )
    
    
    (10,216
    )Compensation expense associated with stock options
outstanding
    
    
    
    
    
    
    
    
    
    
    405
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    405Issuance of Redeemable Convertible Preferred Series C Stock, net
of issuance costs of $612, which include the issuance of non-cash
consideration in the form of warrants
    
    
    
    
    
    
    
    
    
    
    97
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    97Issuance of Common Stock warrants to Series C Stockholders
    
    
    
    
    
    
    
    
    
    
    969
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    969Valuation of beneficial conversion associated with Series C Stock
financing
    
    
    
    
    
    
    
    
    
    
    4,292
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,292Accretion of beneficial conversion associated with Series C Stock
financing
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,292
    )
    
    
    
    
    
    
    (4,292
    )Issuance of Common Stock  warrants exercised
    
    
    230,000
    
    
    
    2
    
    
    
    113
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    115Accretion of Series C Stock issuance cost
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (51
    )
    
    
    
    
    
    
    (51
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,730
    )
    
    
    
    
    
    
    (5,730
    )Balance at December 31, 2003
    
    
    29,300,786
    
    
    $
    293
    
    
    $
    37,249
    
    
    $
    
    
    
    $
    (51,895
    )
    
    $
    (58
    )
    
    $
    (14,411
    )
 See accompanying Notes to Condensed Consolidated Financial Statements. 8




---



##### 



ReGen Biologics, Inc.
(A DEVELOPMENT STAGE COMPANY)
Consolidated Statement of Changes in Stockholders Equity (Deficit) and Series
A and Series C Redeemable Convertible Preferred Stock
Period from December 21, 1989 (inception) to March 31, 2004 (unaudited)(In thousands, except share and per share data) Stockholders' Equity (Deficit)Series A
    
    Series CRedeemable
    
    Redeemable
    
    Series A - F
    
    Series BConvertible
    
    Convertible
    
    Convertible
    
    ConvertiblePreferred
    
    Preferred
    
    Preferred
    
    PreferredStock
    
    Stock
    
    Stock
    
    StockShares
    
    Amount
    
    Shares
    
    Amount
    
    Shares
    
    Amount
    
    Shares
    
    AmountBalance at December 31, 2003
    
    
    15,298,351
    
    
    $
    6,855
    
    
    
    22,246,153
    
    
    $
    8,439
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    Compensation expense associated with stock options
outstandingAccretion of Series C Stock issuance cost
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    52Issuance of Common Stock  warrants exercisedNet lossBalance at March 31, 2004 (unaudited)
    
    
    15,298,351
    
    
    $
    6,855
    
    
    
    22,246,153
    
    
    $
    8,491
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
 [Additional columns below] [Continued from above table, first column(s) repeated] Stockholders' Equity (Deficit)DeficitAccumulated
    
    Accumulated
    
    TotalAdditional
    
    Deferred
    
    During
    
    Other
    
    Stockholders'Paid In
    
    Stock
    
    Development
    
    Comprehensive
    
    EquityCommon Stock
    
    Capital
    
    Compensation
    
    Stage
    
    Loss
    
    (Deficit)Shares
    
    AmountBalance at December 31, 2003
    
    
    29,300,786
    
    
    $
    293
    
    
    $
    37,249
    
    
    $
    
    
    
    $
    (51,895
    )
    
    $
    (58
    )
    
    $
    (14,411
    )Compensation expense associated with stock options
outstanding
    
    
    
    
    
    
    
    
    
    
    156
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    156Accretion of Series C Stock issuance cost
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (52
    )
    
    
    
    
    
    
    (52
    )Issuance of Common Stock  warrants exercised
    
    
    69,930
    
    
    
    
    
    
    
    31
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    31Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,682
    )
    
    
    
    
    
    
    (1,682
    )Balance at March 31, 2004 (unaudited)
    
    
    29,370,716
    
    
    $
    293
    
    
    $
    37,436
    
    
    $
    
    
    
    $
    (53,629
    )
    
    $
    (58
    )
    
    $
    (15,958
    )
 See accompanying Notes to Condensed Consolidated Financial Statements. 9




---



##### 



REGEN BIOLOGICS, INC.
(A Development Stage Company)CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) Three Months Ended March 31,
    
    Period fromDecember 21, 1989(Inception) to2004
    
    2003
    
    March 31, 2004(unaudited)
    
    (unaudited)
    
    (unaudited)Operating ActivitiesNet loss
    
    $
    (1,682
    )
    
    $
    (1,064
    )
    
    $
    (49,234
    )Adjustments to reconcile net loss to net cash used in operating activities:Compensation expense associated with stock options
    
    
    119
    
    
    
    
    
    
    
    6,463Amortization of debt discount for warrant and
beneficial conversion feature
    
    
    
    
    
    
    
    
    
    
    1,500Non-cash interest expense
    
    
    29
    
    
    
    35
    
    
    
    1,183Depreciation and amortization
    
    
    28
    
    
    
    49
    
    
    
    2,154Loss on disposal of property and equipment
    
    
    
    
    
    
    
    
    
    
    9Changes in operating assets and liabilities:Other current assets and receivables
    
    
    (51
    )
    
    
    (24
    )
    
    
    (216
    )Inventory
    
    
    (16
    )
    
    
    (80
    )
    
    
    (232
    )Other assets
    
    
    7
    
    
    
    7
    
    
    
    (95
    )Accounts payable and accrued expenses
    
    
    89
    
    
    
    83
    
    
    
    753Other liabilities
    
    
    9
    
    
    
    
    
    
    
    28Net cash used in operating activities
    
    
    (1,468
    )
    
    
    (994
    )
    
    
    (37,687
    )Investing ActivitiesPurchases of property and equipment
    
    
    (5
    )
    
    
    (9
    )
    
    
    (1,988
    )Changes in short-term investments
    
    
    
    
    
    
    1,005
    
    
    
    2,945Net cash provided by (used in) investing activities
    
    
    (5
    )
    
    
    996
    
    
    
    957Financing ActivitiesIssuance of common stock to founders for contributed patents
    
    
    
    
    
    
    
    
    
    
    42Issuance of Series B preferred stock upon conversion of interest payable
    
    
    
    
    
    
    
    
    
    
    6Reduction in payable to stockholder
    
    
    
    
    
    
    
    
    
    
    (76
    )Proceeds from issuance of convertible preferred stock, net
of offering costs paid in cash
    
    
    
    
    
    
    
    
    
    
    34,221Proceeds from issuance of common stock
    
    
    31
    
    
    
    
    
    
    
    447Repayment of capital lease obligations
    
    
    (1
    )
    
    
    (2
    )
    
    
    (118
    )Proceeds from notes payable
    
    
    
    
    
    
    
    
    
    
    11,410Payments on notes payable
    
    
    
    
    
    
    
    
    
    
    (2,323
    )Net cash provided by (used in) financing activities
    
    
    30
    
    
    
    (2
    )
    
    
    43,609Net increase (decrease) in cash
    
    
    (1,443
    )
    
    
    
    
    
    
    6,879Cash at beginning of period
    
    
    8,323
    
    
    
    1
    
    
    
    1Cash at end of period
    
    $
    6,880
    
    
    $
    1
    
    
    $
    6,880Supplemental Disclosure of Cash Flow InformationNon-cash disclosure:Issuance of Series B convertible preferred stock upon conversion of notes payable
    
    $
    
    
    
    $
    
    
    
    $
    300Equipment purchased pursuant to capital leases
    
    
    4
    
    
    
    
    
    
    
    128Cancellation of stock options associated with deferred
stock compensation
    
    
    
    
    
    
    
    
    
    
    1,250Net assets assumed in merger
    
    
    
    
    
    
    
    
    
    
    2,733Conversion of bridge financing to equity
    
    
    
    
    
    
    
    
    
    
    2,860Beneficial Conversion of Series C Stock
    
    
    
    
    
    
    
    
    
    
    4,292Warrants associated with Series C Stock
    
    
    
    
    
    
    
    
    
    
    969Warrants associated with Series C Stock private placement agent fee
    
    
    
    
    
    
    
    
    
    
    97Cash disclosure:Cash paid for interest
    
    
    
    
    
    
    
    
    
    
    314
 See accompanying Notes to Condensed Consolidated Financial Statements. 10




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##### 



REGEN BIOLOGICS, INC. (A Development Stage Company) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation On June 21, 2002, ReGen Biologics, Inc (ReGen or the Company) acquired
RBio, Inc., formerly named ReGen Biologics, Inc. The acquisition was recorded
for accounting purposes as a reverse merger and recapitalization. For purposes
of this Form 10-Q, the historical financial statements of RBio, Inc., including
related notes, have replaced the prior historical financial statements of the
Company. The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with the instructions to Form 10-Q and do not
include all the information and notes required by accounting principles
generally accepted in the United States for complete financial statements. In
the opinion of management, the accompanying condensed consolidated financial
statements contain all adjustments (consisting of normal recurring accruals)
necessary to present fairly the financial position and the results of
operations for the interim periods. ReGen will continue to require additional capital to further develop its
products and further develop sales and distribution channels for its products
around the world. Accordingly, the Company is still considered a development
stage enterprise. Management believes that ReGen will emerge from the
development stage when the Collagen Meniscus Implant, or CMI, product is
available for sale in the U.S. or sales of all of its products have reached a
volume that will provide for positive gross margins. For further information, refer to the consolidated financial statements
and notes included in ReGens Annual Report on Form 10-K for the year ended
December 31, 2003. ReGen currently operates in one business segment that designs, develops,
manufactures and markets minimally invasive human implants and medical devices
for the repair and regeneration of damaged human tissue. ReGen is managed and
operated as one business segment. Accordingly, ReGen does not prepare financial
information for separate product areas and does not have separate reportable
segments as defined by Statement of Financial Accounting Standards (SFAS) No.
131, Disclosure about Segments of an Enterprise and Related Information. Concentrations of Risk The Company currently has two principal customers, which market and sell
the Companys two current products. Customer A has the license to sell the
Sharp Shooter product. Customer B, which is also a shareholder of the Company,
has a non-exclusive license to sell the CMI product outside of the United
States and a license to sell the SharpShooter product in a limited manner in
connection with the sale of the CMI. Concentrations of receivables and revenues
by customer as of and for the periods ended March 31, 2004 and March 31, 2003
are as follows: Three Months EndedMarch 31,2004
    
    2003Accounts receivable:Customer A
    
    
    99
    %
    
    
    7
    %Customer B
    
    
    1
    %
    
    
    93
    %Sales revenues:Customer A
    
    
    97
    %
    
    
    27
    %Customer B
    
    
    3
    %
    
    
    73
    %Royalties:Customer A
    
    
    100
    %
    
    
    100
    %
 11




---



##### 



In several cases the Company relies on a single vendor to supply critical
materials or components. All of these materials and components can currently be
obtained by alternative suppliers, subject to the time and other resources
required to initiate new vendor relationships. Adoption of New Accounting Pronouncements In January 2003, the FASB issued Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities. Interpretation No. 46 requires a
variable interest entity to be consolidated by a company if that company is
subject to a majority of the risk of loss from the variable interest entitys
activities or is entitled to receive a majority of the entitys residual
returns or both. Previously, entities were generally consolidated by a company
that had a controlling financial interest through ownership of a majority
voting interest in the entity. In December 2003, the FASB issued FIN 46
(revised December 2003), Consolidation of Variable Interest Entities,(FIN 46R)
to clarify some of the provisions of FIN 46. For the year ended December 31,
2003, the Company was required to apply the provisions of FIN 46 that relate to
special purpose entities (SPEs) created prior to February 1, 2003. Adoption of
these provisions did not have a material impact on the Companys financial
statements. For the quarter ended March 31, 2004, the Company is required to
adopt the provisions related to non-SPEs created prior to February 1, 2003, and
the provisions related to all entities, regardless of whether an SPE, that were
created subsequent to January 31, 2003. Adoption of these provisions did not
have a material impact on the Companys financial statements. In December 2003, the FASB issued FASB Statement No. 132 (revised 2003),
Employers Disclosures about Pensions and Other Postretirement Benefits. The
revised standard requires new disclosures in addition to those required by the
original standard about the assets, obligations, cash flows and net periodic
benefit cost of defined benefit pension plans and other defined benefit
postretirement plans. As revised, SFAS No. 132 is effective for financial
statements with fiscal years ending after December 15, 2003. The interim-period
disclosures required by this standard are effective for interim periods
beginning after December 15, 2003. See Defined Benefit Plan for newly
required interim disclosures. Reclassifications Certain prior year and inception to March 31, 2004 balances have been
reclassified to conform to the current periods presentation.
Rent expense includes related operating expenses allocated pro rata
based on sub-leased square footage. Cash and Cash Equivalents The Company considers all highly liquid investments purchased with a
maturity of 90 days or less at the date of acquisition to be cash equivalents
and as such has classified cash held in a money market account and sweep
account as cash equivalents. The Company held cash equivalents of $6,721 and
$8,091 in a money market account and $159 and $232 in a sweep account as of
March 31, 2004 and December 31, 2003, respectively. Inventories Inventories are valued at the lower of actual cost or market, using the
first-in, first-out (FIFO) method. Work in process is calculated by estimating
the number of units that will be successfully converted to finished goods,
based upon a build-up in the stage of completion using estimated labor inputs
for each stage and historical yields reduced by estimated usage for quality
control testing and for research and development. Inventory consists of the following: March 31,
    
    December 31,2004
    
    2003(In thousands)Raw material
    
    $
    28
    
    
    $
    29Work in process
    
    
    6
    
    
    
    16Finished goods
    
    
    198
    
    
    
    171$
    232
    
    
    $
    216
 Inventory was adjusted down $11 and $62 during the periods ended March 31,
2004 and December 31, 2003, respectively, to reflect values at the lower of
cost or market. At March 31, 2004, 9% of the units in inventory are valued at
below the Companys cost. Due to a high degree of fixed costs in the production
process, and the early stage of market acceptance for the Companys products,
current sales and production volumes are not adequate to provide for per unit
costs that are lower than the current market prices. 12




---



##### 



Accrued Expenses Accrued expenses consist of the following: March 31,
    
    December 31,2004
    
    2003(In thousands)Accrued professional fees
    
    $
    234
    
    
    $
    190Accrued officer compensation
    
    
    
    
    
    
    178Accrued printing cost
    
    
    31
    
    
    
    26Accrued common stock registration cost
    
    
    65
    
    
    
    75Accrued vacation
    
    
    33
    
    
    
    22Other accrued cost
    
    
    37
    
    
    
    50$
    400
    
    
    $
    541
 Defined Benefit Plan Prior to the reverse merger and recapitalization, the Company sponsored a
defined benefit pension plan (Pension Plan) covering all former employees of
National Health Advisors, a subsidiary of the Company acquired in 1997. The
Pension Plan was amended to freeze benefit accruals and the entry of new
participants effective October 31, 1997. The sale of the Companys APACHE
business in 2001 resulted in the termination of all remaining participants in
the Pension Plan. The Company previously disclosed in its financial statements for the year
ended December 31, 2003, that it did not expect to make contributions to the
plan during 2004 and as of March 31, 2004 no contributions have been made.
Pension expense during the three month periods ended March 31, 2004 and 2003
was not material. Stock Based Compensation The Company has adopted the disclosure only provisions of SFAS No. 123.
Accordingly, if the exercise price of the Companys employee stock options
equals or exceeds the estimated fair value of the underlying stock on the date
of grant, no compensation expense is generally recognized. Had compensation costs for the Companys stock options been determined
based on SFAS No. 123 as amended by SFAS No. 148, the
Companys net loss attributable to common stockholders and
net loss per share attributable to common stockholders would have been as follows (in thousands, except per share
data): Three Months EndedMarch 31,2004
    
    2003Net loss attributable to common stockholders, as reported
    
    $
    (1,734
    )
    
    $
    (1,064
    )Add: Total stock-based employee compensation expense as
reported under intrinsic value method (APB No 25) for all
awards, net of related tax effects
    
    
    113
    
    
    
    Deduct: Total stock-based compensation expense determined
under fair value based method (SFAS No. 123) for all
awards, net of related tax effects
    
    
    (253
    )
    
    
    (46
    )Pro forma
net loss attributable to common stockholders
    
    $
    (1,874
    )
    
    $
    (1,110
    )Net loss per
share attributable to common stockholders:Basic and diluted  as reported
    
    $
    (0.06
    )
    
    $
    (0.04
    )Basic and diluted  pro forma
    
    $
    (0.06
    )
    
    $
    (0.04
    )Shares
    
    
    29,322
    
    
    
    29,071
 (2) FINANCINGS AND CAPITAL TRANSACTIONS The Series C Stock and Series A Stock are subject to Registration Rights
Agreements entered into as of September 23, 2003 and September 30, 2003 whereby
the holders of such shares have, in certain circumstances, the right to require
the Company to register the common shares into which the Series C Stock and the
Series A Stock is convertible. ReGen has received notice from certain holders
of the Series C Stock and Series A Stock, representing 35,549,814 shares,
requesting that ReGen register such shares pursuant to the terms of the
Registration Rights Agreements. 13




---



##### 



On April 19, 2004, the Company completed a private placement for
12,074,595 shares of restricted common stock at a price per share of $0.85,
resulting in proceeds net of issuance costs of approximately $9,781 (the April
Financing). The common stock sold in the private placement may be registered
by the Company on one or more registration statements to be filed with the SEC,
and will be subject to lock-up provisions for a period of 150 days after the
completion of the private placement. On April 26, 2004, the Company filed a preliminary registration statement
(the Registration Statement) with the SEC on Form S-1 for registration of
47,624,409 shares of common stock. The shares being registered include common
shares registered pursuant to the Registration Rights Agreements (issuable upon
the conversion of certain shares of Series A Stock and Series C Stock) and the
shares issued in the April Financing. The Registration Statement has not yet
been declared effective. (3) RESTATEMENT The Statement of Operations for the three month period ended
March 31, 2004 and the period from December 21, 1989 (inception)
through March 31, 2004 have been restated to reflect the accretion
for the beneficial conversion and issuance costs on the Series C Stock as
a deemed dividend and therefore an addition to the net loss attributable to
common stockholders. Basic and diluted net loss per share attributable to
common stockholders for the period from December 21, 1989 (inception)
through March 31, 2004 has also been restated to reflect this change. Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations (dollars in thousands, except per share data) On June 21, 2002, ReGen Biologics, Inc (ReGen) acquired RBio, Inc.,
formerly named ReGen Biologics, Inc. The acquisition was recorded for
accounting purposes as a reverse merger and recapitalization. For purposes of
this filing, the historical financial statements of RBio, Inc. including
related notes have replaced the prior historical financial statements of ReGen. The following discussion and analysis should be read in conjunction with
the condensed consolidated financial statements and related notes included
elsewhere in this Form 10-Q. This section of the Form 10-Q contains
forward-looking statements that involve risks and uncertainties, such as
statements about our plans, objectives, expectations and intentions. We use
words such as anticipate, believe, expect, future and intend and
similar expressions to identify forward-looking statements. Our actual results
could differ materially from those anticipated in these forward-looking
statements for many reasons. You should not place undue reliance on these
forward-looking statements, which apply only as of the date of this Form 10-Q. Business We are a leading orthopedic products company that develops and
manufactures tissue repair products for unmet markets in both the U.S. and
globally. Our primary product, the Collagen Meniscus Implant, or CMI, is an
implant designed to regenerate meniscus tissue in the human knee. A damaged
meniscus is frequently treated with an arthroscopic surgical procedure known as
a partial meniscectomy. During this procedure, surgeons remove damaged meniscus
tissue leaving less meniscus tissue to support the knee and protect the patient
from further degeneration or injury. Implantation of the CMI represents the
only procedure of which we are aware with the potential to re-grow tissue
otherwise lost in partial meniscectomy procedures enabling the patient to
return to a more active lifestyle. In November 2002, ReGen completed the required enrollment and related
surgical procedures for its CMI clinical trial in the U.S. At the request of
surgeons participating in the trial, additional patients were enrolled and
surgeries completed by early 2003. The results of this clinical trial will
comprise our Pre-market Approval Application, or PMA. All patients included in
the trial are expected to complete two years of follow-up prior to ReGens
submission of the results in its PMA to the FDA. ReGen expects the last of
these two-year clinical follow-up exams will be completed by early 2005, with
submission of the completed PMA to the FDA shortly thereafter. The process of
review by the FDA is uncertain, but ReGen expects that the FDA Orthopedic Panel
will issue its ruling in late 2005 or early 2006, with a final decision from
the FDA shortly thereafter. Should the FDA approve the CMI for sale in the
U.S., sales of the CMI in the U.S. are not expected to occur until 2006. The CMI is currently cleared for sale in Europe, Australia and Chile. The
CMI is distributed outside the U.S. on a non-exclusive basis by the Centerpulse
unit (Centerpulse) of Zimmer Holdings, Inc. (NYSE: ZMH) (Zimmer). We also sell the SharpShooter Tissue Repair System, or SharpShooter, a
suturing device used to facilitate the surgical implantation of the CMI, as
well as to perform other similar arthroscopic meniscal repair procedures. The
SharpShooter is currently marketed through a worldwide distribution agreement
with Linvatec Corporation (Linvatec), a subsidiary of ConMed (NASDAQ: CNMD).
The SharpShooter is cleared for sale in the U.S., Europe, Canada, Australia,
Chile and Japan. 14




---



##### 



In general, we have seen positive reception to the CMI by surgeons and
patients in Europe. The CMI is approved for sale in most European countries and
Australia, but application for reimbursement approval in certain countries,
including Germany, the largest European country, is still underway.
Centerpulse, the Companys distribution partner in Europe, has been in the
process of building a sports medicine division, designed to market and sell the
CMI. It was necessary for Centerpulse to build a sports medicine business
because its historical focus was on producing, marketing and selling joint
replacement products, which are used at later time points in the progression of
the patients osteoarthritis than is the CMI. In August 2003, Centerpulse
agreed to be acquired by Zimmer, and on October 2, 2003 Zimmer announced the
completion of its exchange offers. The acquisition by Zimmer resulted in
beneficial ownership by Zimmer of 98.7% of Centerpulses issued shares. We
believe that the ongoing acquisition-related activities that affected
Centerpulse throughout 2003 were disruptive to Centerpulses focus on marketing
and selling sports medicine products in general, and the CMI in particular. In 2003 Centerpulse was obligated to sell a minimum of 800 CMIs. On
February 5, 2004 Centerpulse delivered its final sales report for the calendar
year ended December 31, 2003. This report indicated that Centerpulse failed to
meet the minimum sales requirements. According to the terms of the distribution
agreement with Centerpulse, we had 45 calendar days from receipt of the final
sales report to exercise the options provided to us in the agreement. We have
elected to amend the distribution agreement to make the distribution rights to
the CMI held by Centerpulse non-exclusive. Pursuant to the terms of the
distribution agreement, this election took effect on April 17, 2004, 30 days
from the date of Centerpulses receipt of our notice. The CMI is currently cleared for sale in Europe, Australia and Chile. Our current strategy is to focus on the following initiatives:  
    
    Obtaining FDA approval of the CMI;
    
    Finding a suitable partner to market the CMI in the U.S.;
    
    Launching the CMI in the U.S.; and
    
    Conducting further research on select product opportunities within our research and development pipeline. Our long-term strategy is to capitalize on our proven collagen scaffold
technology by continuing to design, develop, manufacture, and market our own
products, as well as partner with key market leaders to develop and market
products in other targeted therapeutic areas. Our Core Technology Our core technology focuses on guided tissue regeneration. Conceptually,
if the body is provided with a suitable environment for cellular ingrowth, the
body has the ability to regenerate missing tissue. We have developed a
proprietary biologically active porous bovine type I collagen scaffold material
and various tissue matrix engineering processes as the basis of our tissue
re-growth product offerings. Our proprietary processes are capable of producing
implants with the various physical properties required for remodeling each
specific target tissue. Our initial application is a resorbable, collagen
matrix that guides the regeneration of medial meniscus cartilage in the knee,
the CMI. Collagen is a multifunctional family of proteins with unique structural
characteristics. To date, 19 different proteins can be classified as collagen,
making collagen the most abundant protein in the human body. Among the various
collagens, type I collagen is the most abundant and is the major constituent of
bone, skin, and tendon. The structure of animal type I collagen is highly similar to the structure
of human type I collagen. This finding is supported by data from our current
U.S. clinical trial. Based on the important functions of type I collagen in the
body and the biocompatibility of the animal type I collagen, this material has
become increasingly popular as a biomaterial for clinical applications,
particularly in the repair and regeneration of damaged or diseased tissue. 15




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Critical Accounting Policies The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates. We have identified below some of our more significant accounting policies
followed by the Company in preparing the accompanying consolidated financial
statements. For further discussion of our accounting policies see Note 1
Summary of Significant Accounting Policies of the Notes to Consolidated
Financial Statements. Revenue Recognition We recognize revenue in accordance with the provisions of Staff Accounting
Bulletin No. 101, Revenue Recognition in Financial Statements,whereby revenue
is not recognized until it is realized or realizable and earned. Revenue is
recognized when all of the following criteria are met: (1) persuasive evidence
of an arrangement exists; (2) delivery has occurred; (3) the sellers price to
the buyer is fixed or determinable; and (4) collection of such revenue is
reasonably assured. The Company generally recognizes revenue from product sales
upon the shipment of such products to its distributors. Title of product passes
to the customers FOB origin. The Company receives royalties from its licensees. Royalties are generally
due under the license agreements when the licensee sells the product to a third
party. If determinable at the time results are published by the Company,
royalties are recognized when the licensee has sold the product to the end user
and the Company has fulfilled its obligations under the applicable agreement.
If not determinable at the time results are published, royalties are recognized
in the period they become determinable. License fees represent payments received from distributors for exclusive
perpetual licenses to sell the Companys products in various geographic areas.
These fees are recognized as other income when all performance criteria in the
underlying agreement have been met. Generally, license fees for existing
license arrangements are not recurring. Inventory Valuation Inventory is valued at the lower of cost or market. Market is based on
current sales of product to existing customers reduced by an estimate of cost
to dispose. At March 31, 2004, 9% of our inventory was carried at market. Work
in process is calculated by estimating the number of units that will be
successfully converted to finished goods, based upon a build-up in the stage of
completion using estimated labor inputs for each stage, and historical yields
reduced by estimated usage for quality control testing and for research and
development. Certain components of inventory have limited shelf lives. The Companys
inventory control policies include procedures to identify, evaluate, segregate
and dispose of any nonconforming inventory, including materials or components
that have passed specified expiration dates. Nonconforming inventory may be
either scrapped for immediate disposal or used in research and development. During 2001 and 2002, the Company shipped certain components of the
SharpShooter that were later identified to have the potential to become
non-sterile. The Company instituted a recall of such product components during
2002 and agreed to take title of the returned product rather than issuing a
credit to the customer. The Company received the termination letter from the
FDA closing the recall on July 3, 2003. No additional costs are anticipated by
the Company. With the exception of the returns associated with the described
product recall, the Companys history of product returns has been
insignificant. Research and Development Costs Research and development costs are expensed as incurred. We will continue
to incur research and development costs as we continue our product development
activities and pursue regulatory approval to market our products. Research and
development costs have, and will continue to include, expenses for internal
development, personnel, clinical trials, regulatory compliance and filings,
validation of processes, start up costs to establish commercial manufacturing
capabilities and related facilities, supplies and other expenses. 16




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Stock Based Compensation The Company has accounted for its stock-based compensation in accordance
with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees.No expense is recognized for options issued to employees where the
exercise price is equal to or greater than the market value of the underlying
security. Expense is recognized in the financial statements for options issued
to employees where the option price is below the fair value of the underlying
security, for options issued to non-employees and for options and warrants
issued in connection with financing and equity transactions (collectively
referred to as compensatory options). Expense recognized in connection with
non-employee options and warrants in connection with equity transactions is
measured based on managements estimate of fair value and recognized on an
accelerated basis over the respective vesting period. Fair value is calculated
using the Black-Scholes method with the following assumptions at the date of
measurement; risk-free interest rate, dividend yield, expected lives and
expected volatility. For periods prior to the merger of the Company with RBio,
expense associated with compensatory options and warrants has been measured
based on managements estimate of the fair value of the underlying security
(which in turn is based on managements estimate of the fair value of the
RBio). Income Taxes The Company had net operating loss carryforwards at December 31, 2003 of
approximately $39,100 and a research and development tax credit of
approximately $410. The federal net operating loss and credit carryforwards
will begin to expire in 2004, if not utilized. The state net operating loss and
credit carryforwards will begin to expire in 2006, if not utilized. The
utilization of net operating loss carryforwards may be limited due to changes
in the ownership of the Company, and the effect of the reverse merger and
recapitalization completed on June 21, 2002. Results of Operations Three Months Ended March 31, 2004 Compared to Three Months Ended March 31, 2003 REVENUE.The Companys revenue for the three months ended March 31, 2004 was
$107 compared with $182 for the same period in 2003, a decrease of
approximately $75 or 41%, resulting from lower product sales to our
distributors and related royalties. CMI sales were $0 for the three months ended March 31, 2004 compared with
$68 for the same period in 2003, a decrease of $68 or 100%, due to the lower
number of CMI units ordered by and therefore shipped during the first quarter
of 2004 to Centerpulse. Unit shipments of the CMI during the three months ended
March 31, 2004 were 0 compared with 139 units shipped in the same period 2003,
a decrease of 139 units, or 100%. Shipments of the CMI, and therefore revenue
to the Company have been historically inconsistent. Effective April 17, 2004,
we elected to convert our distribution agreement with Centerpulse to
non-exclusive and are discussing with them potential future distribution
relationships. A pending order for 60 CMI units was shipped to Centerpulse in
April 2004 and the related revenue will be reflected in second quarter
operating results. SharpShooter sales in the three months ended March 31, 2004 approximated
$95 compared with $106 in the same period 2003, a net decrease of $11 or 10%.
SharpShooter sales to Centerpulse for the period ended March 31, 2004 was $3
compared to $58 for the same period in 2003, a decreased of $55 or 95%. This
decrease was partially offset by an increase in SharpShooter sales to Linvatec,
ReGens primary distributor for the SharpShooter. SharpShooter sales to
Linvatec for the period ended March 31, 2004 were $92 compared to $48 for the
same period in 2003, an increase of $44 or 92%. SharpShooter sales to Linvatec
accounted for approximately 97% of total SharpShooter sales for the three
months ended March 31, 2004 and 45% for the three months ended March 31, 2003. Royalties received from Linvatec for the three months ended March 31, 2004
approximated $12 compared with $8 in the same period 2003, an increase of $4 or
50%. In March and April 2003, Conmed, the parent company of Linvatec announced
that it had completed the acquisition of Bionx Implants, Inc. (Bionx) and
that it would be integrating the sale of the Bionx products with its orthopedic
subsidiary, Linvatec. As part of this integration, Conmed announced that it
would be reorganizing its 90 direct orthopedic sales representatives into 18
exclusive sales agent groups that would eventually manage 230 sales
professionals in the U.S. While shipments of the SharpShooter products have
been historically inconsistent, we believe that these corporate and operating
organizational matters have affected activities at Linvatec, such that recent
orders of our products have been negatively impacted. Linvatecs sales of the SharpShooter increased sequentially by 46% in the
third quarter of 2003, 40% in the fourth quarter of 2003 and 8% in the first
quarter 2004, suggesting that our sales and royalty revenue, driven by Linvatec
sales, will improve in 2004 if this trend continues. We will continue to
closely monitor the sales performance of Linvatec over the course of the next
several months. 17




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COST OF GOODS SOLD.Cost of goods sold approximated $59 for the three months
ended March 31, 2004 compared with $271 for the same period in 2003, a decrease
of $212, or 78%, directly correlated to the decrease in sales, particularly
sales of CMI, which have a higher per unit cost. For the three months ended
March 31, 2004 and 2003, respectively, CMI costs accounted for $0 and
approximately $89. For the three months ended March 31, 2004 and 2003,
respectively, SharpShooter costs accounted for approximately $59 and $174. At
March 31, 2004, 9% of the units in inventory are valued at below the Companys
cost. Due to a high degree of fixed costs in the production process, and the
early stage of market acceptance for its products, current sales and production
volumes are not adequate to provide for per unit costs that are lower than the
current market price for some of the Companys products. RESEARCH AND DEVELOPMENT.Research and development expenses for the three
months ended March 31, 2004 approximated $785 compared with $410 for the same
period in 2003, an increase of approximately $375, or 91% The increase results
from (i) the higher proportion of CMI units produced for development and
quality control purposes versus those produced for commercial resale during the
three months ended March 31, 2004 as compared with the same period in 2003, and
(ii) increased development cost, primarily for consulting services, in
connection with the Pre-market Approval submission for the CMI. Management
expects these trends to continue through 2004, as we prepare our PMA for
submission to the FDA. BUSINESS DEVELOPMENT, GENERAL AND ADMINISTRATIVE.Business development, general
and administrative expenses approximated $807 for the three months ended March
31, 2004 compared with $556 for the same period in 2003, an increase of
approximately $251, or 45%, resulting primarily from (i) an increase of
approximately $192 in professional services including stock transfer and
exchange services, legal representation and accounting services, (ii) an
increase of approximately $22 in employee compensation and (iii) an increase of
approximately $34 in investor relations. Management expects these trends to
continue through 2004. COMPENSATION EXPENSE ASSOCIATED WITH STOCK OPTIONS AND WARRANTS.Compensation
expense associated with stock options and warrants for the three months ended
March 31, 2004 approximated $119, compared to $0 for the same period in 2003.
Stock based compensation expense for the three months ended March 31, 2004
consisted of (i) $6 for non-employees and ii) $113 for employees. NON-OPERATING INCOME (EXPENSE).Non-operating income (expense) consists of
interest and other income, rental income, rental expense, interest expense and
license fees. Interest and other income approximated $9 for the three months
ended March 31, 2004 compared with $5 for the same period in 2003, an increase
of approximately $4, related to higher balances of cash and cash equivalents
during that period. Net rental income, which is sub-lease rental revenue less
operating expenses related to the sub-leased portion of the Companys Redwood
City, CA facility, approximated $1 for the three months ended March 31, 2004
compared with $22 for the same period in 2003. Sub-lease rent was reduced
pursuant to amendments to the sub-lease agreement, which became effective June
1, 2003. Interest expense for the three months ended March 31, 2004
approximated $29 compared with $36 for the same period in 2003, a decrease of
approximately $7, primarily due to lower interest rates. Liquidity and Capital Resources Cash and cash equivalents were approximately $6,880 as of March 31, 2004
compared with approximately $8,323 as of December 31, 2003. The decrease in
cash and cash equivalents is a result of cash used to support the normal
operations of ReGen. Cash used in operating activities of approximately $1,468 resulted from
the net loss of approximately $1,682, adjusted to account for a net increase in
accounts receivables, inventory and other assets of approximately $60, a net
increase in accounts payable, accrued expenses and other liabilities of $98
together with an increase in non-cash items, depreciation, compensation and
interest expense, of $176. During the three months ended March 31, 2004, ReGen invested approximately
$5 to purchase property and equipment. During the three months ended March 31, 2004 ReGens financing activities
provided approximately $30, including approximately $31 in proceeds from the
exercise of 69,930 common stock warrants, net of $1 repayment of capital lease
obligations. 18




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Through March 31, 2004, the Company has incurred cumulative net operating
losses of approximately $49,200 and used approximately $37,700 in cash for
operating activities. ReGen anticipates that it will continue to incur net
losses that will require additional financing at least until ReGen receives FDA
approval for its CMI product and is able to market the CMI product in the
United States. Such additional financing could be in the form of debt
financing, equity financing, or both. Due primarily to incremental spending
necessary for the preparation and submission of the Pre-market Approval
Application for the CMI (the PMA), cash required to support operating
activities is expected to increase by approximately $2,000 in 2004 and is
expected to further increase in future periods as the Company begins to incur
additional expenses associated with the preparation for and launch of the CMI
product in the U.S., if approved by the FDA. On April 19, 2004, the Company completed a private placement for
12,074,595 shares of restricted common stock at a price per share of $0.85,
resulting in proceeds net of issuance costs of approximately $9,781, which the
Company has deposited into its money market account. The common stock sold in
the private placement may be registered by the Company on one or more
registration statements to be filed with the SEC, and will be subject to
lock-up provisions for a period of 150 days after the completion of the private
placement. On April 26, 2004, the Company filed a preliminary registration
statement with the SEC on Form S-1 for registration of 47,624,409 common shares
to be sold at the election of the selling stockholders. The shares being
registered include common shares registered pursuant to the Registration Rights
Agreements with the holders of Series A Stock and Series C Stock (issuable upon
the conversion of certain shares of Series A Stock and Series C Stock) and the
common shares issued pursuant to the April financing. The Registration
Statement had not yet been declared effective. The Company may pursue additional permanent equity capital in order to
support ongoing operations at least until the date it receives FDA approval for
the CMI and is able to market the CMI in the United States. While the Company
has been successful in the past in obtaining the necessary capital to support
its operations, there is no guarantee that the Company will be able to obtain
additional equity capital under commercially reasonable terms and conditions,
or at all. Based upon current cash reserves, net proceeds received from the
April Financing, and planned spending rates, management believes the Company
has adequate cash on hand to support ongoing operations through the expected
date of the FDA decision regarding U.S. marketing of our CMI product in 2006. SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS Cautionary Note Regarding Forward-Looking Statements Statements in this filing, which are not historical facts, are
forward-looking statements under provisions of the Private Securities
Litigation Reform Act of 1995. All forward-looking statements involve risks and
uncertainties. Such statements are based on the current expectations and
beliefs of the managements of ReGen and RBio and are subject to a number of
factors and uncertainties that could cause actual results to differ materially
from those described in the forward-looking statements, including those
discussed in the Risk Factors section of the Form S-1 filed April 26, 2004. We
wish to caution readers that the following important factors, among others, in
some cases have affected, and in the future could affect our actual results and
could cause our actual results in fiscal 2004 and beyond to differ materially
from those expressed in any forward-looking statements made by us or on our
behalf. Important factors that could cause actual results to differ materially
include but are not limited to our ability to complete the CMI clinical trial
and obtain FDA approval, our ability to obtain additional financing, the
ability of our distribution partners to effectively market and sell our
products, our ability to procure product components and effectively produce
products for resale, our ability to control production quantities and inventory
in order to avoid unanticipated costs such as outdated inventory, the timely
collection of our accounts receivable, our ability to attract and retain key
employees, our ability to timely develop new products and enhance existing
products, the occurrence of certain operating hazards and uninsured risks, our
ability to protect proprietary information and to obtain necessary licenses on
commercially reasonable terms, the impact of governmental regulations, changes
in technology, marketing risks, other unforeseen events that may impact our
business and our ability to adapt to economic, political and regulatory
conditions affecting the healthcare industry. Our quarterly revenues and operating results have varied significantly in
the past and are likely to vary from quarter to quarter in the future. 19




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Quarterly revenues and operating results may fluctuate as a result of a
variety of factors, including the ability of our distribution partners to
market and sell our products, variable customer demand for our products and
services, our investments in research and development or other corporate
resources, our ability to effectively and consistently manufacture our
products, and avoid costs associated with the recall of defective or
potentially defective products, the ability of our vendors to effectively and
timely deliver necessary materials and product components, acquisitions of
other companies or assets, the timing of new product introductions, changes in
distribution channels, sales and marketing promotional activities and trade
shows and general economic conditions. Further, due to the relatively fixed
nature of most of our costs, which primarily include personnel, facilities and
related costs, any unanticipated shortfall in revenue in any fiscal quarter
would have an adverse effect on our results of operations in that quarter.
Accordingly, our operating results for any particular quarterly period may not
necessarily be indicative of results for future periods. Our filings with the SEC are available to the public from commercial
document retrieval services and at the Web site maintained by the SEC at
http://www.sec.gov. Item 3. Quantitative and Qualitative Disclosures about Market Risk For information regarding ReGens exposure to certain market risks, see
Item 7A, Quantitative and Qualitative Disclosures About Market Risk, in the
Companys Annual Report on Form 10-K for the year ended December 31, 2003.
Except as described in the Managements Discussion and Analysis of Financial
Condition and Results of Operations, there have been no significant changes in
our financial instrument portfolio or market risk exposure since December 31,
2003. Item 4. Controls and Procedures We maintain disclosure controls and procedures within the meaning of
Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended, or the
Exchange Act. Our disclosure controls and procedures (Disclosure Controls),
are designed to ensure that information required to be disclosed by the Company
in the reports filed under the Exchange Act, such as this Quarterly Report on
Form 10-Q, is recorded, processed, summarized and reported within the time
periods specified in the U.S. Securities and Exchange Commissions rules and
forms. Our Disclosure Controls are also designed to ensure that such
information is accumulated and communicated to our management, including our
Chief Executive Officer and Chief Financial Officer, as appropriate, to allow
for timely decisions regarding required disclosure. In designing and evaluating
our Disclosure Controls, management recognized that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and
management necessarily was required to apply its judgment in evaluating and
implementing possible controls and procedures. Evaluation of Disclosure Controls and Procedures. As of the end of the
period covered by this Quarterly Report on Form 10-Q, we evaluated the
effectiveness of the design and operation of the Companys disclosure controls
and procedures, which was done under the supervision and with the participation
of our management, including our Chief Executive Officer and our Chief
Financial Officer. Immediately following the Signatures section of this
Quarterly Report on Form 10-Q are certification of our Chief Executive Officer
and Chief Financial Officer, which are required in accordance with Rule 13a-14
of the Exchange Act. This Controls and Procedures section includes the
information concerning the controls evaluation referred to in the
certifications and it should be read in conjunction with the certifications for
a more complete understanding of the topics presented. Based on the controls
evaluation, our Chief Executive Officer and Chief Financial Office have
concluded that, as of the date of their evaluation, our Disclosure Controls and
Procedures were effective to ensure that material information is made known to
management, including our Chief Executive Officer and Chief Financial Officer,
particularly during the period when our periodic reports are being prepared. Changes in Internal Control Over Financial Reporting. There has been no
change in the Companys internal control over financial reporting that occurred
during the Companys first fiscal quarter of 2004 that has materially affected,
or is reasonably likely to materially affect, the registrants internal control
over financial reporting. PART II Item 1. Legal Proceedings We are a defendant from time to time in lawsuits incidental to our
business. We are not currently subject to any material legal proceedings. 20




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Item 2. Changes in Securities and Use of Proceeds None. Item 3. Defaults upon Senior Securities None. Item 4. Submission of Matters to a Vote of Security Holders None. Item 5. Other Information None. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits. The following Exhibits are filed herewith and made a part hereof: Number
    
    Description2.1
    
    Agreement and Plan of Merger by and among ReGen Biologics,
Inc., Aros Corporation and Aros Acquisition Corporation
dated as of June 7, 2002(1)2.2
    
    Agreement and Plan of Merger among the Company, NHA
Acquisition Corporation, National Health Advisors, Ltd.,
Scott A. Mason and Donald W. Seymour dated as of June 2,
1997(5)2.3
    
    Agreement and Plan of Merger among the Company and
MetaContent, Inc. dated as of March 21, 2001(2)2.4
    
    Asset Purchase Agreement between Cerner Corporation and the
Company dated as of April 7, 2001(3)2.5
    
    Amendment No. 1 to Asset Purchase Agreement by and between
Cerner Corporation and the Company dated as of June 11,
2001(3)3.1
    
    Amended and Restated Certificate of Incorporation(5)3.2
    
    Certificate of Amendment to the Certificate of
Incorporation(6)3.3
    
    Amended and Restated By-Laws(4)3.4
    
    Certificate of Amendment of the Amended and Restated
Certificate of Incorporation(17)4.1
    
    Specimen Common Stock Certificate(7)4.2
    
    Rights Agreement between the Company and First Chicago Trust
Company of New York, dated as of May 6, 1997(9)4.3
    
    ReGen Biologics, Inc. Employee Stock Option Plan, Amended
and Restated Effective January 31, 2003(12)4.4
    
    ReGen Biologics, Inc. Non-Employee Director Stock Option
Plan, Amended and Restated Effective January 31, 2003(12)4.5
    
    Registration Rights Agreement between the Company and the
Investors listed therein(8)4.6
    
    Registration Agreement between the Company and Certain
Stockholders, dated December 28, 1995(18)4.7
    
    Amendment No. 1 to Rights Agreement between the Company and
EquiServe Trust Company, N.A. dated as of June 7, 2002(10)4.8
    
    Nonqualified Stock Option Agreement between the Company and
The Cleveland Clinic Foundation, dated August 19, 1994(18)
 21




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Number
    
    Description4.9
    
    Registration Agreement between the Company and each of Iowa
Health Centers, P.C. d/b/a Iowa Heart Center, P.C., Mercy
Hospital Medical Center, Mark A. Tannenbaum, M.D. and Iowa
Heart Institute dated January 7, 1997(14)4.10
    
    Nonqualified Stock Option Agreements between the Company and
each of Iowa Health Centers, P.C. d/b/a Iowa Heart Center,
P.C., Mercy Hospital Medical Center and Mark A. Tannenbaum,
M.D., dated January 7, 1997(19)4.11
    
    Form of Nonqualified Director Stock Option Agreement(11)4.12
    
    Stockholders Agreement by and among the several
stockholders named therein, dated as of June 21, 2002(15)4.13
    
    Amendment to Stockholders Agreement by and among Allen &
Company Incorporated and the several stockholders named
therein, dated as of December 4, 2002(16)4.14
    
    ReGen Biologics, Inc. Non-Employee Director Supplemental
Stock Option Plan Amended and Restated Effective January 31,
2003(21)10.1
    
    Employment agreement by and between Gerald E. Bisbee, Jr.,
Ph. D. and ReGen Biologics, Inc. dated September 22, 1998
and amended September 12, 2000(13)10.2
    
    Form of Indemnification Agreement(4)10.3
    
    Distributorship Agreement by and between ReGen Biologics,
Inc. and Sulzer Orthopedics AG dated February 16, 1996(20)10.4
    
    Employment agreement by and between Brion D. Umidi and ReGen
Biologics, Inc. dated March 23, 2004(20)10.5
    
    Amendment to Distributorship Agreement by and between ReGen
Biologics, Inc. and Sulzer Orthopedics AG dated January 18,
2002(20)10.6
    
    License Agreement by and between ReGen Biologics, Inc. and
Linvatec Corporation dated April 7, 2000(20)10.7
    
    Credit Agreement by and between ReGen Biologics, Inc. and
Sulzer Medica USA Holding Company dated March 14, 2000(20)10.8
    
    Agreement by and among Sulzer Medica USA Holding Co., Sulzer
Biologics Inc. Sulzer Orthopedics Ltd. and ReGen Biologics,
Inc. dated February 20, 2001(20)10.9
    
    Assignment and Royalty Agreement by and among ReGen
Biologics, Inc. Modified Polymer Components, Inc. and Dr. J.
Richard Steadman dated April 9, 1997(20)10.10
    
    Exclusive License Agreement by and between ReGen Biologics,
Inc. and Dr. Shu-Tung Li dated August 24, 1995(20)10.11
    
    First Amendment to Employment Agreement by and between
Gerald E. Bisbee, Jr., Ph. D. and ReGen Biologics, Inc.
dated March 23, 2004(20)31.1
    
    Section 302 Certification from Gerald E. Bisbee, Jr., dated
June 18, 2004(22)31.2
    
    Section 302 Certification from Brion Umidi, dated June 18,
2004(22)32.1
    
    Section 906 Certification from Gerald E. Bisbee, Jr., dated
June 18, 2004(22)32.2
    
    Section 906 Certification from
Brion Umidi, dated June 18,
2004(22)
  
 (1)
    
    Incorporated herein by reference to the Companys Report on Form 10-Q for
the quarter ended June 30, 2002 (File No. 000-20805).(2)
    
    Incorporated herein by reference to the Companys Report on Form 10-Q/ A
for the quarter ended March 31, 2001 (File No. 000-20805).(3)
    
    Incorporated herein by reference to the Companys Report on Form 8-K
filed on July 18, 2001 (File No. 000-20805). 22




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(4)
    
    Incorporated herein by reference to the Companys Report on Form 8-K
filed on March 17, 2004 (File No. 000-20805).(5)
    
    Incorporated herein by reference to the Companys Report on Form 10-Q for
the quarter ended June 30, 1997 (File No. 000-20805).(6)
    
    Incorporated herein by reference to the Companys Report on Form 10-Q for
the quarter ended June 30, 2001 (File No. 000-20805).(7)
    
    Incorporated herein by reference to the Companys Registration Statement
on Form S-3, filed on November 19, 2003 (File No. 333-110605).(8)
    
    Incorporated herein by reference to the Companys Report on Form 8-K,
filed on September 25, 2003 (File No. 000-20805).(9)
    
    Incorporated herein by reference to the Companys Report on Form 8-K
filed on June 4, 1997 (File No. 000-20805).(10)
    
    Incorporated herein by reference to the Companys Report on Form 10-Q for
the quarter ended June 30, 2002 (File No. 000-20805).(11)
    
    Incorporated herein by reference to the Companys Report on Form 10-K for
the year ended December 31, 1997 (File No. 000-20805).(12)
    
    Incorporated herein by reference to the Companys Proxy Statement on
Schedule 14A filed on April 14, 2003 (File No. 000-20805).(13)
    
    Incorporated herein by reference to the Companys Report on Form 8-K/A,
filed on September 4, 2002 (File No. 000-20805).(14)
    
    Incorporated herein by reference to the Companys Current Report on Form
8-K filed on January 14, 1997 (File No. 000-20805).(15)
    
    Incorporated herein by reference to the Companys Report on Form SC 13D
filed on March 24, 2003 (File No. 005-49089).(16)
    
    Incorporated herein by reference to the Companys Report on Form SC 13D/A
filed on October 3, 2003 (File No. 005-49089).(17)
    
    Incorporated herein by reference to the Companys Report on Form 8-K,
filed on January 6, 2003 (File No. 000-20805).(18)
    
    Incorporated herein by reference to the Companys Registration Statement
on Form S-1, filed on June 4, 1996 (File No. 333-04106).(19)
    
    Incorporated herein by reference to the Companys Report on Form 10-Q for
the quarter ended March 31, 1997 (File No. 000-20805).(20)
    
    Incorporated herein by reference to the Companys Report on Form 10-K for
the year ended December 31, 2003 (File No. 000-20805)(21)
    
    Incorporated herein by reference to the Companys Registration Statement
on Form S-1/A, filed on January 14, 2004 (File No. 333-110605).(22)
    
    Included with this filing. 23




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(b) Reports on Form 8-K. A Current Report on Form 8-K was filed on January 12, 2004 to announce
that ReGen changed its corporate address and telephone number. A Current Report on Form 8-K was filed on March 17, 2004 announcing that
the board of directors: (1) approved an amendment to the bylaws of ReGen
authorizing indemnification of directors, officers, employees and agents of
ReGen for expenses, losses and liabilities reasonably incurred or sustained as
a result of such service to ReGen; and (2) authorized ReGen to enter into an
indemnification agreement (the Indemnification Agreement) with each director
and certain officers of ReGen whereby such directors and officers would be
indemnified by ReGen to the fullest extent permissible under applicable law for
the expenses and liabilities described in such Indemnification Agreement. 24




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SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized on June 18, 2004. REGEN BIOLOGICS, INC
By: /s/ BRION D. UMIDI
Brion D. UmidiSenior Vice President and
Chief Financial Officer 25