UNITED STATES SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





Form 10-Q





(Mark One)





R
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934





For the quarterly period ended June 30, 2009





Or





£
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934





For 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.)411 Hackensack Avenue,10th Floor,Hackensack, NJ
07601(Address of principal executive offices)
(Zip Code)





Registrant’s telephone number, including area code:


(201) 651-5140





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 R  No£





Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).


Yes£No £





Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):





Large accelerated filer £
Accelerated filer £
Non-accelerated filer £
Smaller reporting company R(Do not check if a smaller reporting company)





Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes £ No R





The number of outstanding shares of the registrant’s common stock as of August 3, 2009 was 9,778,940







1


REGENBIOLOGICS, INC.





INDEX





Page No.PART I - FINANCIAL INFORMATIONItem 1. Financial Statements.
3Condensed Consolidated Balance Sheets at June 30, 2009 (unaudited) and December 31, 2008
3Condensed Consolidated Statements of Operations for the Three Months Ended June 30, 2009 (unaudited) and 2008 (unaudited), and the Six Months Ended June 30, 2009 (unaudited) and 2008 (unaudited)
4Consolidated Statement of Changes in Stockholders’ Equity (Deficit) and Series A and Series C Redeemable Convertible Preferred Stock for the Six Months Ended June 30, 2009 (unaudited)
5Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2009 (unaudited) and 2008 (unaudited)
6Notes to Condensed Consolidated Financial Statements (unaudited)
7Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
18Item 3. Quantitative and Qualitative Disclosures about Market Risk.
26Item 4T. Controls and Procedures.
26PART II - OTHER INFORMATIONItem 1. Legal Proceedings.
27Item 1A. Risk Factors.
27Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
27Item 3. Defaults Upon Senior Securities.
27Item 4. Submission of Matters to a Vote of Security Holders.
28Item 5. Other Information.
28Item 6. Exhibits.
28Signatures
33Certification


2
 Index




PARTI — FINANCIAL INFORMATION





Item 1. Financial Statements.





REGEN BIOLOGICS, INC.


CONDENSED CONSOLIDATED BALANCE SHEETS


(Dollars in thousands, except per share data)





June 30,
2009


December 31, 2008(unaudited)ASSETSCurrent assetsCash and cash equivalents

$
2,474


$
250Trade receivables, net of allowance for doubtful accounts of $19 and $20, at June 30, 2009 and December 31, 2008, respectively


260



233Inventory


803



400Prepaid expenses and other current assets


668



895Deferred financing costs


—



82Total current assets


4,205



1,860Property and equipment, net


336



328Other assets


106



103Total assets

$
4,647


$
2,291LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)Current liabilities:Accounts payable

$
928


$
720Accounts payable to related party


6



9Accrued expenses


644



731Other current liabilities


14



15Convertible notes payable, face value $171, less unamortized discount of $4, and including accrued interest of $6 at June 30, 2009; face value $3,039, less unamortized discount of $1,125, and including accrued interest of $92 at December 31, 2008


173



2,006Current portion of notes payable to related party, including accrued interest of $2,615 and $2,479 as of June 30, 2009 and December 31, 2008, respectively


8,657



8,522Total current liabilities


10,422



12,003Other liabilities


240



189Long-term portion of capital leases


1



7Total liabilities


10,663



12,199Series A redeemable convertible preferred stock, $.01 par value; 15,309,822 shares authorized; issued and outstanding 1,990,331 shares at liquidation preference of $892 at June 30, 2009 and December 31, 2008


892



892Series C redeemable convertible preferred stock, $.01 par value; 30,000,000 shares authorized; issued and outstanding 1,381,881 shares at liquidation preference of $619 at June 30, 2009, and 6,025,437 shares at liquidation preference of $2,700 at December 31, 2008


601



2,586Stockholders’ equity (deficit):Common stock, $.01 par value; 165,000,000 shares authorized; issued and outstanding 9,778,940 shares at June 30, 2009, and 6,018,152 shares at December 31, 2008


98



59Additional paid-in capital


107,513



92,041Accumulated deficit


(115,120
)


(105,486
)Total stockholders’ deficit


(7,509
)


(13,386
)Total liabilities and stockholders’ deficit

$
4,647


$
2,291


____________





See accompanying Notes to Condensed Consolidated Financial Statements.


3
 Index




REGENBIOLOGICS, INC.


CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


(Unaudited)


(Dollars in thousands, except per share data)





Three Months Ended
June 30


Six Months Ended
June 30,2009


2008


2009


2008Revenue:Sales

$
401


$
222


$
689


$
556Royalties


8



14



17



23Total revenue


409



236



706



579Expenses:Cost of goods sold


179



137



314



280Research and development


1,459



1,005



2,862



2,003Business development, general and administrative


2,842



1,313



5,719



2,782Total expenses


4,480



2,455



8,895



5,065Operating loss


(4,071
)


(2,219
)


(8,189
)


(4,486
)Interest and other income


5



13



12



45Interest and other expense


(98
)


(110
)


(1,361
)


(188
)Net loss


(4,164
)


(2,316
)


(9,538
)


(4,629
)Accretion of Series C Stock issuance cost


(4
)


(17
)


(96
)


(34
)Net loss attributable to common stockholders

$
(4,168)


$
(2,333)


$
(9,634
)

$
(4,663
)Basic and diluted net loss per share attributable to common stockholders

$
(0.43
)

$
(0.45
)

$
(1.13
)

$
(0.89
)Weighted average number of shares used for calculation of net loss per share


9,774,304



5,212,042



8,548,470



5,210,302


____________




See accompanying Notes to Condensed Consolidated Financial Statements.


4
 Index


ReGenBiologics, Inc.


CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT) AND SERIES


A AND SERIES C REDEEMABLE CONVERTIBLE PREFERRED STOCK


(Unaudited)


(Dollars in thousands, except per share data)





Series A


Series C


Stockholders’ Equity (Deficit)Redeemable
Convertible
Preferred
Stock


Redeemable
Convertible
Preferred
Stock


Common Stock


Additional
Paid-In


Accumulated


Total
Stockholders'
EquityShares


Amount


Shares


Amount


Shares


Amount


Capital


Deficit


(Deficit)Balance at December 31, 2008


1,990,331


$
892



6,025,437


$
2,586



6,018,152


$
59


$
92,041


$
(105,486
)

$
(13,386
)Stock-based compensation expense


























1,699







1,699Accretion of Series C Stock issuance cost














96















(96
)


(96
)Issuance of Common Stock-- services rendered


















9,376



—



43







43Issuance of common stock - common stock offering


















2,509,673



26



8,648







8,674Issuance of common stock - conversion of debt


















988,597



10



2,956







2,966Issuance of common stock - options exercised


















20,962



—



48







48Conversion of Series C Preferred Stock










(4,643,556
)


(2,081
)


232,180



3



2,078







2,081Net loss and comprehensive loss






























(9,538
)


(9,538
)Balance at June 30, 2009


1,990,331


$
892



1,381,881


$
601



9,778,940


$
98


$
107,513


$
(115,120
)

$
(7,509
)


____________





See accompanying Notes to Condensed Consolidated Financial Statements.


5
 Index


REGENBIOLOGICS, INC.


CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


(Unaudited)


(Dollars in thousands)




Six Months Ended June 30,2009


2008Operating ActivitiesNet loss

$
(9,538
)

$
(4,629
)Adjustments to reconcile net loss to net cash used in operating activities:Stock-based compensation


1,891



864Amortization of debt discount for warrants and beneficial conversion feature


1,197



—Depreciation and amortization


47



52Exchange loss (gain)


2



(46
)Changes in operating assets and liabilities:Other current assets and receivables


53



68Inventory


(403
)


19Other assets


(3
)


(298
)Accounts payable and accrued expenses


271



515Other liabilities


51



(72
)Net cash used in operating activities


(6,432
)


(3,527
)Investing ActivitiesPurchases of property and equipment


(55
)


(18
)Changes in investments


—



100Net cash (used in) provided by investing activities


(55
)


82Financing ActivitiesProceeds from issuance of common stock


8,720



—Repayment of capital lease obligations


(7
)


(7
)Net cash  provided by (used in) financing activities


8,713



(7
)Effect of exchange rate changes on cash


(2
)


46Net increase (decrease) in cash and cash equivalents


2,224



(3,406
)Cash and cash equivalents at beginning of period


250



4,008Cash and cash equivalents at end of period

$
2,474


$
602Supplemental Disclosure of Cash Flow InformationNon-cash disclosure:Conversion of bridge notes to common stock

$
2,966


$
—Conversion of Series C Preferred Stock to common stock


2,081



—Issuance of stock for services rendered


43



114Cash disclosure:Cash paid for interest


1



4


____________




See accompanying Notes to Condensed Consolidated Financial Statements.


6
 Index


REGENBIOLOGICS, INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)


(Dollars in thousands, except per unit and per share data)





(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





Principles of Consolidation and Basis of Presentation





The accompanying unaudited condensed consolidated financial statements of ReGen Biologics, Inc. (“ReGen” or the “Company”) include accounts of the Company and its wholly-owned subsidiaries, RBio, Inc. (“RBio”) and ReGen Biologics AG (“ReGen AG”). Intercompany transactions and balances are eliminated
in consolidation.





The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form10-Q and, as permitted by such instructions, 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 adjustments) necessary to present fairly the financial position and the results of operations for the periods presented.





To date the Company has not generated positive cash flow from operations and until revenues increase from the sale of its products, the Company will be dependent upon the availability of future debt and equity funding. 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. The Company’s receipt of additional capital cannot be assured. See “Risks and Going Concern Uncertainties” below, for further information.





ReGen currently operates as an orthopedic products company that develops, manufactures, and markets innovative tissue growth and repair products for U.S. and global markets. 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.





For further information, refer to the audited consolidated financial statements and notes included in ReGen’s Annual Report on Form 10-K for the year ended December 31, 2008.





Risks and Going Concern Uncertainties





The future operating results of the Company may be affected by a number of risks and certain other factors. The Company’s future operating results are highly dependent upon its ability to obtain and maintain regulatory clearance and approvals for its products. In December 2008, we received U.S. Food and Drug Administration, or FDA,
clearance to market the MenaflexTM collagen meniscus implant in the U.S. The Menaflex device was determined to be substantially equivalent to existing Class II devices through the 510(k) premarket notification process and is indicated for use in surgical procedures for the reinforcement and repair of soft tissue injuries of the medial meniscus. In the first quarter of 2009 we initiated U.S. marketing of our Menaflex product for the
medial meniscus indication. We market the Menaflex product in the European Union (the “EU”) and the Republic of South Africa for both the medial and lateral meniscus indications. We plan to seek expansion of the indication for use in the lateral meniscus through a new 510(k) application which we plan to submit to the FDA later this year. Through June 30, 2009, sales in the U.S. have not been significant. There can be no assurance as to the outcome of our efforts to expand the indication for use in
the lateral meniscus or the time frame to complete the 510(k) process.





On March 6, 2009, the Company received a letter from Senator Charles E. Grassley, Ranking Member of the Senate Committee on Finance, expressing concern about the Menaflex 510(k) clearance process and asking for the voluntary submission of certain documents and information pertaining to the clearance of the Menaflex.  The Company
understands that a letter was also sent by Senator Grassley to the FDA requesting information about the FDA’s interactions with ReGen.  ReGen cooperated with Senator Grassley’s document request, and completed its response to his March 6 letter recently.  On May 11, 2009, certain members of the House of Representatives Committee on Energy and Commerce wrote a letter to the FDA raising concerns regarding the FDA’s 510(k) clearance process involving the Menaflex device. The
authors of the letter state their understanding that the FDA may be reexamining its decision to clear the Menaflex for marketing; however, they also state that while they take no position on the ultimate outcome of the FDA’s investigation, they believe that the information they received raises questions about the clearance process and the data on which the FDA relied to clear the device.  On June 10, ReGen delivered a letter and corresponding materials to the FDA in response to the issues raised
in the May 11 House letter. The Company has also been made aware of a letter sent in May 2009 from the FDA in response to Senator Grassley regarding the clearance process of the Menaflex. That letter, and a June 29 letter received from the FDA in acknowledgement of ReGen’s June 10 letter, indicate that the FDA intends to conduct a preliminary internal review of the clearance process generally and for the Menaflex specifically and will, among other things, address whether to reconsider the clearance decision
of the Menaflex. Management believes it would be unusual for the FDA to revoke clearance of a device cleared through the 510(k) process, especially given the data provided on the Menaflex device and the input received from an independent Advisory Panel; however, there can be no assurance that the FDA will not decide to revoke clearance of the Menaflex for use in the medial meniscus.  If this occurs, ReGen would no longer be permitted to market the Menaflex in the U.S. and such developments would significantly
and negatively impact ReGen’s business.  Further, the FDA review and the congressional inquiries, if each continues, could (among other things) continue to adversely affect ReGen’s ability to raise additional capital to fund its business, adversely impact the timing of submission and the clearance process of ReGen’s 510(k) submission for expansion of the indication for use of the Menaflex in the lateral meniscus, prove a continued distraction for the Company’s management and
negatively impact our ability to generate revenue.


7
 Index




In addition to regulatory related hurdles, in order to approach a position of positive operating earnings and cash flow, the Company will need to effectively address other operating issues, including, for example, establishing distribution channels and assisting in establishment of third party reimbursement for the surgeons and facilities
that would be responsible for implanting the Menaflex device. The Company has initiated surgeon training programs, recruitment of independent sports medicine focused distributors and has begun to implement marketing and sales support strategies. While the Company is actively working to address distribution and other operational issues, there is no guarantee that the Company will be successful or able to effectively address these challenges in any given time frame.  On April 15, 2009, the first commercial
surgery in the U.S. utilizing the Menaflex was completed, and as of June 30, 2009, the Company has trained 84 sports medicine surgeons and over 47 sales representatives in the use of the Menaflex and entered into distribution agreements with five independent sales organizations.




As part of our Menaflex commercialization efforts in the U.S., the Company is working to achieve broad based third-party reimbursement for procedures involving the Menaflex device.  The Company has engaged the services of a reimbursement team to assist its customers by providing materials and help desk services in support of its
customers’ reimbursement efforts.  Based upon the Company’s experience to date, a majority of the Menaflex procedures conducted or scheduled have been pre-approved by several commercial and workers’ compensation insurance companies.  In some cases the procedure did not require pre-approval and in several others the procedure was billed directly to the patient. Two private insurance plans recently issued non-coverage policies for the use of the Menaflex.  Non-coverage
decisions are often issued by insurance plans for new medical technologies but may be overcome on a case-by-case basis through the surgeon appeal process.  Coverage policies may also be revised by the insurance plan upon further review of additional supporting scientific, clinical and cost-effectiveness data.  While there can be no assurance as to the outcome of the coverage decision of these or other insurance carriers, the Company believes existing clinical data showing the benefits of the
Menaflex device and the interest of surgeons who are adopting the procedures may be influential in reversing these non-coverage decisions and supporting broad third-party payment for the Menaflex and related surgical procedures.





All of the Company’s notes payable to a related party (balance of $8,657 at June 30, 2009) become due and payable on December 31, 2009. The Company’s Series A redeemable convertible preferred stock (“Series A Stock”) became redeemable in June 2009 and its Series C redeemable convertible preferred stock becomes redeemable
in September 2010 (liquidation preferences at June 30, 2009, of $892 and $619, respectively), each in one-third annual increments at the option of not less than a majority of the holders. As of this date, no shares of Series A Stock have been redeemed and no redemption notice from holders of Series A Stock has been received by the Company. In addition, the Company's convertible notes issued on either July 24, 2008 or December 4, 2008, with aggregate face value plus accrued interest of $177 at June 30, 2009, were
paid on July 24, 2009, the date on which such notes came due and payable, if not converted earlier at the option of the holders.





The Company will need to pursue additional financing in order to support ongoing operations, including U.S. launch of the Menaflex product and meeting future debt service and preferred stock redemption requirements. While the Company has been successful in the past in obtaining the necessary capital to support its operations, there is no
assurance that the Company will be able to obtain additional equity capital or other financing under commercially reasonable terms and conditions, or at all. In the six months ended June 30, 2009, the Company incurred a net loss of $9,538 and used $6,432 of cash in operating activities. At June 30, 2009, the Company had cash, cash equivalents and short-term investments of $2,474 and net working capital of $(6,217). In January and February 2009, the Company completed a two-staged common stock financing for aggregate
gross proceeds of $8,760 (see Note 6 for further information). Based upon current cash and investment balances, including proceeds from financings in the first quarter of 2009, and planned spending rates for 2009, management believes that the Company has adequate cash and investments on hand to support ongoing operations through August 31, 2009. Our estimate may change, however, if actual results differ significantly from our expectations. Key assumptions that may affect our estimate include (i) actual sales
that may vary significantly from our expectations; (ii) the actual timeline of events with respect to our new 510(k) submission to the FDA; (iii) the actual pace of spending associated with commercialization of the Menaflex product; (iv) costs associated with other business objectives; (v) costs associated with responding to regulatory or legal inquiries; and (vi) other developments in our business. The Company anticipates that additional cash will be required to support operations beyond August 31, 2009. However,
if unforeseen events occur, it is possible that additional cash may be needed before August 31, 2009 to support operations. The Company continues to seek financing in order to support operations and continue as a going concern. At this time the Company has received no commitments for additional financing. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. However, if additional capital is not obtained, the Company will not be able
to continue as a going concern. The Company’s financial statements do not include any adjustments relating to the recoverability or classification of assets or the amounts or classification of liabilities that might result from the outcome of this uncertainty.


8
 Index


Adoption of New Accounting Pronouncements





In May 2009, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 165, Subsequent Events (SFAS No. 165), which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued
or are available to be issued. In particular, SFAS No. 165 sets forth (i) the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements; (ii) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements and (iii) the disclosures that an entity should make about events or transactions
that occurred after the balance sheet date. SFAS No. 165 was effective for interim or annual financial periods ending after June 15, 2009. The Company adopted SFAS No. 165 effective for the quarter ended June 30, 2009, and consequently has added disclosure under Note 7, Subsequent Events.





In October 2008, the FASB issued FASB Staff Position (FSP) No. FAS 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active(FSP 157-3), which was effective upon issuance. FSP 157-3 clarifies the application of SFAS No. 157, Fair
Value Measurements (SFAS No. 157), in a market that is not active.  See below for a discussion of SFAS No. 157.





In February 2008, the FASB issued FSP No. FAS 157-2, Effective Date of FASB Statement No. 157 (FSP FAS 157-2), which was effective upon issuance and which delayed the effectiveness of SFAS No. 157 for all non-financial assets and non-financial liabilities, except for items that are
recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), to fiscal years beginning after November 15, 2008 and interim periods within those fiscal years. SFAS No. 157 provides enhanced guidance for using fair value to measure assets and liabilities and responds to investors’ requests for expanded information about the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value, and the effect of fair
value measurements on earnings. SFAS No. 157 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value but does not expand the use of fair value in any new circumstances. The Company adopted SFAS No. 157 as it applies to its financial instruments, effective January 1, 2008, and adopted FSP FAS 157-2 as it applies to its non-financial assets and liabilities, effective January 1, 2009. There were no gains or losses for the three and six month periods ended June 30,
2009 and 2008 included in earnings that are attributable to the change in unrealized gains or losses relating to those assets and liabilities still held at the reporting date. The Company’s money market funds are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices. Adoption of the provisions of FSP FAS 157-2 and SFAS No. 157 did not have a material effect on the Company’s consolidated financial statements.





Effective January 1, 2009, the Company adopted EITF 07-5, Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity's Own Stock (EITF 07-5), which provides guidance in assessing whether an equity-linked financial instrument (or embedded feature) is indexed to an
entity's own stock for purposes of determining whether the appropriate accounting treatment falls under the scope of SFAS No. 133, Accounting For Derivative Instruments and Hedging Activities, and/or EITF 00-19, Accounting For Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock. EITF 07-5 was effective for financial statements issued for fiscal years beginning
after December 15, 2008, and interim periods within those years. The adoption of EITF 07-5 did not have a material effect on the Company’s consolidated financial statements.





Effective January 1, 2009, the Company adopted FSP No. APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement) (FSP APB 14-1), which clarifies that convertible debt instruments that may be settled in
cash upon conversion (including partial cash settlement) are not addressed by paragraph 12 of APB Opinion No. 14, Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants. Additionally, FSP APB 14-1 specifies that issuers of such instruments should separately account for the liability and equity components in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent
periods. FSP APB 14-1 was effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The Company’s convertible debt instruments cannot be settled in cash upon conversion. The adoption of FSP APB 14-1 did not have a material effect on the Company’s consolidated financial statements.




Effective January 1, 2009, the Company adopted SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities an amendment of FASB Statement No. 133, which provides disclosure requirements for derivative instruments and hedging activities and applies to all derivative
instruments, including bifurcated derivative instruments (and nonderivative instruments that are designated and qualify as hedging instruments) and related hedged items accounted for under Statement No. 133. SFAS No. 161 amends and expands the previous disclosure requirements of Statement 133 and was effective for interim periods beginning after November 15, 2008. The Company does not have any derivative instruments outstanding at June 30, 2009 or December 31, 2008. The adoption of the provisions of SFAS No.
161 did not have a material effect on the Company’s consolidated financial statements.


9
 Index


Effective January 1, 2009, the Company adopted SFAS No. 141(R), Business Combinations, and SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements - an amendment of ARB No. 51. These new standards significantly
changed the financial accounting and reporting of business combinations and noncontrolling (or minority) interests in consolidated financial statements. SFAS No. 141(R) is required to be adopted concurrently with SFAS No. 160 and, with limited exceptions for certain income tax accounting changes, is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The adoption of SFAS No. 141(R) and SFAS
No. 160 did not have a material effect on the Company’s consolidated financial statements.





Effective January 1, 2009, the Company adopted FSP No. FAS 141(R)-1 (FSP FAS 141(R)-1), Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies, which amends and clarifies SFAS No. 141 (revised 2007), Business
Combinations, to address application issues raised by preparers, auditors, and members of the legal profession on initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination. FSP FAS 141 (R)-1 has the same effective date as SFAS No. 141(R). The adoption of FSP FAS 141 (R)-1 did not have a material effect on the Company’s consolidated financial statements.





In May 2008 the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles, which was effective November 13, 2008. SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial
statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (GAAP) in the United States (the GAAP hierarchy). The adoption of SFAS No. 162 did not have a material effect on the Company’s consolidated financial statements.





Effective January 1, 2008, the Company adopted SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities(SFAS No. 159). The standard allows entities to voluntarily choose, at specified election dates, to measure many financial assets and financial liabilities
(as well as certain non-financial instruments that are similar to financial instruments) at fair value (the “fair value option”). The guidance in SFAS No. 159 was effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. The Company did not elect the fair value option for any financial assets or liabilities and, therefore, adoption of the provisions of SFAS No. 159 did not have a material effect on the Company’s consolidated financial statements.





Accounting Principles Issued But Not Yet Adopted





On July 1, 2009, the FASB ratified EITF 09-1, Accounting for Own-Share Lending Arrangements in Contemplation of Convertible Debt Issuance or Other Financing. This issue addresses the accounting for an entity’s own-share lending arrangement initiated in conjunction with a convertible
debt or other financing offering and the effect a share-lending arrangement has on earnings per share. Additionally, EITF 09-1 addresses the accounting and earnings per share implications for defaults by the share borrower, both when a default becomes probable of occurring and when a default actually occurs. The consensus is effective for interim or annual periods beginning on or after June 15, 2009 for share-lending arrangements entered into in those periods. The Company did not enter into any share-lending
arrangements during the three months ended June 30, 2009 so adoption of these provisions of EITF 09-1 did not have a material effect on the Company’s consolidated financial statements. For all other arrangements within the scope of EITF 09-1, the consensus is applied retrospectively to share-lending arrangements that are outstanding as of the beginning of the fiscal year beginning on or after December 15, 2009. Additionally, arrangements that had been terminated as a result of counterparty default prior
to the effective date of EITF 09-1, but for which the entity had not reached a final settlement as of the effective date of this issue, would be within the scope of this issue. Early adoption is prohibited. The Company has not yet determined what, if any, effect adoption of the remaining provisions of EITF 09-1 will have on its consolidated financial statements.





On June 12, 2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial Assets, an amendment of FASB Statement No. 140, which is in response to the FASB’s concerns about how practice has developed under SFAS No. 140, Accounting
for Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, as well as concerns expressed by constituents that certain transfers of financial assets should not qualify as sales under SFAS No.140. SFAS No. 166 is effective as of the beginning of an enterprise’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. The Company has
not yet evaluated what, if any, effect adoption of SFAS No. 166 will have on its consolidated financial statements.





On June 12, 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R), which addresses the effects of eliminating the qualifying special-purpose entity (QSPE) concept from SFAS No. 140, Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities, and responds to concerns about the application of certain key provisions of FASB Interpretation No. 46(R), Consolidation of Variable Interest Entities, including concerns over the transparency of enterprises’ involvement with variable interest entities (VIEs). SFAS No. 167 is effective as of the beginning of an enterprise’s
first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. The Company does not expect adoption of SFAS No. 167 to have a significant impact on its consolidated financial statements.


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 Index


In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification(TM) and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162, which is effective for financial statements for interim or annual periods ending after September
15, 2009. SFAS No. 168 replaces SFAS No. 162 and establishes the FASB Accounting Standards Codification (Codification) as the source of authoritative U.S. generally accepted accounting principles (GAAP) recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the Securities and Exchange Commission (SEC) are also sources of authoritative GAAP for SEC registrants. Once the Codification is in effect, all of its content
will carry the same level of authority, effectively superseding SFAS No. 162. The Company does not expect adoption of SFAS No. 168 to have a significant effect on its consolidated financial statements.





Use of Estimates





The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, the reported amounts of revenues and expenses during the reporting period and related disclosures.
The Company’s consolidated financial statements include amounts that are based on management’s best estimates and judgments. Actual results could differ from those estimates.





Cash and Cash Equivalents and Investments





The Company considers all highly liquid investments purchased with a maturity of 90 days or less to be cash equivalents and as such has classified as cash equivalents cash held in a money market account, cash held in a sweep account, and investments in commercial paper and federal agency mortgage-backed securities that meet the Company’s
classification criteria for cash equivalents. The Company held cash equivalents of $2,390 and $182, in a money market account and $0 and $10 in a sweep account as of June 30, 2009 and December 31, 2008, respectively. At June 30, 2009 and December 31, 2008, respectively, the Company held cash of $53 and $28 in a foreign account.





Accounts Receivable





Accounts receivable are carried at estimated net realizable value. The Company records an allowance for doubtful accounts for all trade receivables that are not expected to be collected, usually those that are over 90 days past the invoice due date. The allowance for doubtful accounts was $19 and $20 at June 30, 2009 and December 31, 2008,
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. Abnormal amounts of idle facility expense, freight, handling costs, and spoilage are recognized as current-period charges and allocation of fixed production overhead to the costs of conversion is based on management’s estimate of the normal capacity of the Company’s production facility.





Inventory consists of the following:





June 30,
2009


December 31,
2008(In thousands)Raw material

$
40


$
31Work in process


133



41Finished goods


630



328$
803


$
400





The Company estimates market value of inventory based upon sales activity within its various distribution channels. The Company’s production process has a high degree of fixed costs and due to the early stage of market acceptance for its products, sales and production volumes may vary significantly from one period to another. Consequently,
in some periods sales and production volumes may not be adequate to provide for per unit costs that are lower than the current market price for the Company’s products.


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 Index


Management continually assesses the realizability of inventory based on its sales projections and business plans. Estimates of realizability could change in the future if certain events occur that would negatively impact the Company’s sales efforts and overall business plans (or sales are otherwise less than anticipated). See also “Risks
and Going Concern Uncertainties.”





Prepaid Expenses and Other Current Assets





Prepaid expenses and other current assets consist of the following:





June 30,
2009


December 31,
2008(In thousands)Prepaid expenses

$
338


$
553Escrow deposit


302



304Interest and other receivables


23



33Security deposit


5



5$
668


$
895





The escrow deposit was established to provide for payment of up to six months salary and benefits and related payroll taxes for three of the Company’s executive officers under certain termination scenarios. In accordance with the escrow agreement, any escrow funds not disbursed by December 31, 2009 will revert to the Company. The escrow
deposits also include amounts to cover estimated escrow administration fees. See Note 2 for further information about the escrow arrangement and related commitments.





Accrued Expenses





Accrued expenses consist of the following:





June 30,
2009


December 31,
2008(In thousands)Accrued professional fees

$
476


$
278Accrued wages and vacation


127



375Accrued printing cost


7



29Other accrued cost


34



49$
644


$
731





Foreign Currency Transactions





The Company has determined the functional currency of ReGen AG to be the U.S. dollar (USD). ReGen AG has cash accounts denominated in Swiss francs (CHF), Euros and USD and its books and records are maintained in CHF. The Company remeasures ReGen AG’s nonmonetary assets and liabilities and related revenue and expenses using historical
rates, other statement of operations accounts using average rates for the period, and monetary assets and liabilities using rates in effect at the balance sheet date. Foreign currency transaction gains or losses for the change in exchange rates between the USD and the foreign currency in which a transaction is denominated, including exchange gains and losses from remeasurement of ReGen AG’s monetary assets and liabilities, are recognized currently in results of operations. Foreign currency transaction (gains)
or losses included in the consolidated results of operations for the three month and six month periods ended June 30, 2009 approximated $(2) and $10, respectively, and $14 and $(10), respectively, for the same periods in 2008.





Basic and Diluted Net Loss Per Share





Basic net loss per share attributable to common stockholders is calculated by dividing net loss attributable to common stockholders by the weighted average number of common shares outstanding during the period. Shares that would be issued upon conversion of preferred stock or debt instruments are not included in the calculation of weighted
average number of common shares outstanding during the period due to the Company’s net operating loss position. Dividends on preferred stock are not added to the net loss attributable to common stockholders until such dividends are declared. Due to the Company’s net operating loss position, all options, warrants and contingently issuable shares are anti-dilutive. Therefore, dilutive and basic net loss per share are the same.


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 Index


Stock-Based Compensation





Under the fair value recognition provisions of SFAS No. 123R, the Company recognizes stock-based compensation net of an estimated forfeiture rate and only recognizes compensation cost for those shares expected to vest, generally, on a straight-line basis over the requisite service period of the award, usually the option vesting term of four
years. For performance-based awards, the Company recognizes the estimated expense based on the accelerated attribution method. For all awards for which vesting is based only on service conditions, the expense is recorded based on the straight-line attribution method.




The Company uses the Black-Scholes model to estimate grant date fair value. For expected volatility, the Company uses its historical realized volatility, calculated using historical stock prices of the Company. To estimate the expected term of options awarded after January 1, 2006, the Company uses the “short cut” approach described
in SAB 107, usually seven years, given the customary contractual term of 10 years and vesting period of four years. The interest rate used in the pricing model is based on the U.S. Treasury yield curve in effect at the time of the grant on issues with remaining terms equal to the estimated expected term used in the model. In addition, the Company has estimated a forfeiture rate based on historical data and current assumptions.





During the second quarter of 2009, the Company granted options to employees to purchase an aggregate of 93,500 shares of its common stock, with an estimated weighted average grant date fair value of $2.11 per share. During the first quarter of 2009, the Company granted options to employees to purchase an aggregate of 185,000 shares of its
common stock, with an estimated weighted average grant date fair value of $2.56 per share. In the second quarter of 2008, the Company granted employees and directors options to purchase 109,065 shares of Series E Stock (or 545,325 shares of common stock as a result of the reverse stock split and mandatory conversion of the Series E Stock that was effective November 29, 2008), with an estimated weighted average grant date fair value of $2.57 per share of common stock. Included in these grants were performance-based
options to purchase 98,865 shares of Series E Stock (or 494,325 shares of common stock as a result of the one-for-twenty reverse stock split and mandatory conversion of the Series E Stock that was effective November 29, 2008) with vesting that was contingent and began vesting upon FDA clearance of the Company’s collagen scaffold device, which occurred on December 18, 2008. During the first quarter of 2008, the Company did not grant any employee options.





During the second quarter of 2009, the Company granted options to non-employee consultants to purchase 27,500 shares of its common stock, with an estimated weighted average grant date fair value of $1.99 per share. During the second quarter of 2008, the Company granted options to non-employee consultants to purchase 8,445 shares of Series
E Stock (or 42,255 shares of common stock as a result of the one-for-twenty reverse stock split and mandatory conversion of the Series E Stock that was effective November 29, 2008), with an estimated weighted average grant date fair values of $2.47 per share of common stock. Included in these grants were performance-based options for 485 shares of Series E Stock (or 2,425 shares of common stock as a result of the one-for-twenty reverse stock split and mandatory conversion of the Series E Stock that was effective
November 29, 2008) with vesting that was contingent and began vesting upon FDA clearance of the Company’s collagen scaffold device, which occurred on December 18, 2008. Also, during the second quarter of 2008, the Company granted options to a non-employee consultant to purchase 5,000 shares of common stock, with an estimated weighted average grant date fair values of $2.47 per share. During the first quarter of both 2009 and 2008, the Company did not grant any non employee options.





In April 2009, the Company granted an officer of the Company 20,000 shares of its restricted common stock, which become fully vested and unrestricted on December 31, 2009. Related to this issuance the Company recorded expense of $22 in its results of operations for the three month period ended June 30, 2009.





For services rendered during 2009, the Company issued to a vendor 4,688 shares of its restricted common stock on each of June 30 and March 31, 2009. Related to this issuance the Company included the estimated fair value of $10 and $22 in its results of operations for the three and six month periods ended June 30, 2009, respectively.




For the three and six month periods ended June 30, 2008, for services rendered during 2008, the Company issued to a vendor 3,750 and 7,500 shares, respectively, of Series E Stock (18,750 and 37,500 shares of common stock, respectively, as a result of the one-for-twenty reverse stock split and mandatory conversion of the Series E Stock that
was effective November 29, 2008). Related to this issuance the Company included the estimated fair value of $56 and $114 in its results of operations for the three and six month periods ended June 30, 2008, respectively.


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 Index


(2) COMMITMENTS AND CONTINGENCIES





From time to time the Company may be a defendant in lawsuits incidental to the Company’s business. Further, the nature of the Company’s operations subjects it to the inherent business risk of financial exposure to product liability claims. Currently, the Company is not a party to any material legal proceedings.





Effective June 27, 2008, management entered into an escrow arrangement to provide for payment of up to six months salary and benefit continuation and related payroll taxes for three of the Company’s executive officers (approximately $300). In accordance with the escrow agreement, any funds not disbursed by December 31, 2009, will revert
to the Company. The executive salaries and benefits will be continued in the event employment is terminated without cause or upon the failure of the Company to pay in full the regularly scheduled salary, withholding taxes and benefits of the designated executives as services are rendered by such executives. For purposes of the escrow agreement “cause” is defined as the employee’s (i) commission of an action having a material adverse effect on ReGen which constitutes an act of fraud, dishonesty,
or moral turpitude, or which, if proven in a court of law, would constitute a violation of a criminal code or other law; (ii) divulging ReGen’s confidential information in a manner that has a material adverse effect on it; or (ii) material breach of any material duty or obligation imposed upon the employee by ReGen.





On November 16, 2006, following our announcement that our management voluntarily initiated and conducted, and the Audit Committee of the Board of Directors oversaw, a review of the Company’s historical stock option granting and accounting practices, the Company received a letter from the Division of Enforcement of the U.S. Securities
and Exchange Commission (the “SEC”) requesting that the Company preserve all documents concerning its granting of stock options to any of our executives or employees from January 2002 through the present and stating that the SEC intends to request production of such documents in the future. Subsequently, on November 20, 2006, the Company amended its quarterly and annual reports to include restated consolidated financial statements for the years ended December 31, 2005, 2004, 2003, the period from
December 21, 1989 (inception) to December 31, 2005, and the quarters ended March 31, 2006 and June 30, 2006. At this time, while the Company intends to cooperate with the SEC, management cannot predict what consequences the SEC inquiry will have on the Company. The Company may be subject to regulatory fines or penalties or other contingent liabilities at the conclusion of the SEC’s inquiry.





The Company’s operations are subject to rigorous regulation by the FDA and numerous other federal, state, and foreign governmental authorities. Our manufacturing facility and our products are subject to continual review and periodic inspection by regulatory agencies. Failure to comply with FDA or other governmental regulations can result
in fines, unanticipated compliance expenditures, recall or seizure of products, total or partial suspension of production and/or distribution, enforcement actions, injunctions, criminal prosecution, or other actions.





In April 2009, the Company entered into an employment agreement with an officer of the Company providing for minimum aggregate annual compensation of approximately $230, a signing bonus of $40, an initial stock option grant of 110,000 shares of the Company’s common stock and a grant of 20,000 restricted shares of the Company’s
common stock. The signing bonus was paid and the restricted stock was granted upon commencement of the officer’s employment with the Company, which occurred in February 2009. The stock option grant was made in the first quarter of 2009 (see Stock Based Compensation for further information). The officer is also eligible for an annual performance bonus of up to 25% of his annual base salary. The employment agreement provides for consecutive one year terms of employment which may be terminated by either party
upon ninety days prior written notice. The officer is entitled to certain benefits if his employment is terminated without cause or due to a change in control (with “cause” and change in control both as defined in the agreement). Also in April 2009, the Company entered into an indemnification agreement (the “Indemnification Agreement”) with this officer, pursuant to which, the officer will be indemnified by the Company to the fullest extent permissible under applicable law for the expenses
and liabilities described in such Indemnification Agreement. The terms of this Indemnification Agreement are the same as those of similar agreements between the Company and its directors and other senior officers, a form of which is filed as an exhibit to this quarterly report on Form 10-Q.





(3) CONCENTRATIONS OF RISK





The Company currently markets and sells two products. Our primary product, the Menaflex collagen meniscus implant, is a type I collagen implant designed to facilitate growth of new tissue to reinforce the existing meniscus tissue remaining after a partial meniscectomy procedure in the human knee. The Company also sells the SharpShooter, a
suturing device used to facilitate the surgical implantation of the Company’s collagen matrix products, as well as to perform other similar arthroscopic meniscal repair procedures.





Both the Menaflex and SharpShooter products are marketed in the U.S., EU, Switzerland, and the Republic of South Africa through non-exclusive distribution agreements with independent orthopedic marketing companies in those territories. The SharpShooter also is marketed through a worldwide non-exclusive distribution agreement with Linvatec
Corporation (Linvatec), a subsidiary of ConMed (NASDAQ: CNMD).


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 Index


The Company is subject to inherent risks associated with international sales, such as changes in the economic, political, legal and business environments in the foreign countries in which the Company does business. The Company does not require collateral from its customers.





Concentrations of receivables and revenue by geographic location as of and for the three and six month periods ended June 30, 2009 and 2008 are as follows:





Three Months Ended June 30,


Six Months Ended June 30,2009


2008


2009


2008Receivables:U.S. (Linvatec)


10
%


34
%


10
%


34
%U.S. (various, direct)


22
%


0
%


22
%


0
%Germany (various, direct)


37
%


22
%


37
%


22
%MEDC Ltd. (distributor, Greece)


12
%


0
%


12
%


0
%Italy (1 distributor)


1
%


2
%


1
%


2
%Spain (2 distributors)


1
%


0
%


1
%


0
%Austria (various, direct)


2
%


7
%


2
%


7
%Hospital Innovations (distributor, U.K.)


3
%


17
%


3
%


17
%Biocare (distributor, Poland)


3
%


11
%


3
%


11
%South Africa (1 distributor)


3
%


1
%


3
%


1
%Switzerland (various, direct)


4
%


2
%


4
%


2
%Belgium (various, direct)


2
%


4
%


2
%


4
%Sales revenue:U.S. (Linvatec)


16
%


28
%


20
%


14
%U.S. (various, direct)


18
%


0
%


11
%


0
%Germany (various, direct)


34
%


21
%


38
%


42
%Greece (1 distributor)


9
%


0
%


5
%


0
%Xmedica (distributor, Italy)


6
%


15
%


5
%


11
%Spain (2 distributors)


3
%


2
%


2
%


6
%Austria (various, direct)


1
%


12
%


3
%


9
%U.K. (1 distributor)


3
%


9
%


6
%


5
%Poland (1 distributor)


2
%


5
%


1
%


4
%South Africa (1 distributor)


3
%


3
%


3
%


3
%Switzerland (various, direct)


5
%


3
%


5
%


5
%Belgium (various, direct)


0
%


2
%


1
%


1
%Royalties:U.S. (Linvatec)


100
%


100
%


100
%


100
%





In several cases the Company relies on a single vendor to supply critical materials or components. Currently, all of these materials and components can be obtained from alternative suppliers, subject to the time and other resources required to establish new vendor relationships.





At June 30, 2009 and December 31, 2008, 2% and 10%, respectively, of the Company’s cash and cash equivalents balance was held in foreign currencies and 2% and 1%, respectively, of current liabilities related to unsettled obligations denominated in foreign currencies. For the three and six month periods ended June 30, 2009, 16% and 15%,
respectively, of the Company’s expenses resulted from transactions denominated in foreign currencies. For the three and six month periods ended June 30, 2008, 22% and 20%, respectively, of the Company’s expenses resulted from transactions denominated in foreign currencies.





(4) RELATED PARTY TRANSACTIONS





The Company’s consolidated balance sheets include the following amounts payable to related parties:





June 30,2009


December 31,2008(In thousands)Donations

$
5


$
—Royalties


1



9$
6


$
9


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 Index


The Company’s condensed consolidated statements of operations include the following amounts paid to or on behalf of related parties:





Three Months Ended June 30,

Six Months Ended June 30,2009

2008

2009


2008(In thousands)

(In thousands)Donations


5



—



5



—Royalties


1



4



5



5$
38


$
9


$
114


$
2




Royalties are paid to an individual who is a shareholder and director of the Company. Donations were made to a private foundation affiliated with this same individual.  Training services were provided by this same foundation ($19 in results of operations for the six months ended June 30, 2009) and by a second private foundation
affiliated with the Company’s CEO ($32 and $85 included in results of operations for the three and six months ended June 30, 2009, respectively).





(5) CONVERTIBLE NOTES PAYABLE





On July 24, 2008, the Company completed the private placement of $2,539 aggregate principal amount of the Company’s unsecured convertible notes (the “July 2008 Notes”), which accrued interest at an annual rate of 8% and became due and payable on July 24, 2009.  At the option of the holders, the July 2008 Notes
were convertible into common stock at an initial conversion price of $3.00 per share. If exercised, the conversion was to be settled fully in shares of the Company’s common stock. In connection with the financing, the Company issued warrants to purchase 211,615 shares of common stock at a price of $0.20 per share. The warrants were immediately exercisable and expire five years after the issuance date. Participants in the financing included certain officers and directors of the Company and certain beneficial
owners of more than 10% of the Company’s voting stock.





The July 2008 Notes were issued with a beneficial conversion feature, having an estimated intrinsic value of approximately $457. The intrinsic value of the beneficial conversion feature was determined under EITF No. 00-27, Application of Issue No. 98-5 to Certain Convertible Instruments,
by comparing the effective conversion price of the July 2008 Notes to the estimated fair value of the Series F Stock, into which the notes were initially convertible at July 24, 2008 (prior to the one-for-twenty reverse stock split of the Company’s common stock that was effective November 29, 2008, and the resulting mandatory conversion of the Series F Stock into common stock).  The effective conversion price of the July 2008 Notes was determined by assigning the proceeds of the offering between
the July 2008 Notes and the warrants on a relative fair value basis.





The July 2008 Notes were recorded net of a discount of $1,037 related to the estimated relative fair value of the warrants ($580) and the intrinsic value of the beneficial conversion feature associated with the July 2008 Notes ($457). The total discount is being amortized as additional interest over the term of the July 2008 Notes.  The
balance of the unamortized discount was $668 at December 31, 2008. As a result of the conversions concurrent with the January 16, 2009 offering (see below), $555 of the discount was recognized as additional interest expense in the Company’s results of operations for the six months ended June 30, 2009. Total amortization of the discount was $18 and $668 for the three and six months ended June 30, 2009, respectively.





On December 4, 2008, the Company completed the private placement of $499 aggregate principal amount of unsecured convertible notes (the “December 2008 Notes”), which accrued interest at an annual rate of 8% and became due and payable on July 24, 2009. At the option of the holders, the December 2008 Notes were convertible into
the Company’s common stock at a price of $3.00 per share. If exercised, the conversion was to be settled fully in shares of the Company’s common stock. In connection with the financing, the Company issued warrants to purchase 41,628 shares of common stock at an exercise price of $0.20 per share. The warrants were immediately exercisable and expire five years after the issuance date. Participants in the financing included certain officers and directors of the Company and certain beneficial owners of
more than 10% of the Company’s voting stock.





The December 2008 Notes were issued with a beneficial conversion feature, having an estimated intrinsic value of approximately $307. The intrinsic value of the beneficial conversion feature was determined under EITF No. 00-27, Application of Issue No. 98-5 to Certain Convertible Instruments,
by comparing the effective conversion price of the December 2008 Notes to the estimated fair value of the common stock at December 4, 2008.  The effective conversion price of the December 2008 Notes was determined by assigning the proceeds of the offering between the December 2008 Notes and the warrants on a relative fair value basis.


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 Index


The December 2008 Notes were recorded net of a discount of $464 related to the estimated relative fair value of the warrants ($157) and the intrinsic value of the beneficial conversion feature associated with the December 2008 Notes ($307). The total discount is being amortized as additional interest over the term of the December 2008 Notes.
The balance of the discount was $450 at December 31, 2008. As a result of the conversions concurrent with the January 16, 2009 offering (see below), $416 of the discount was recognized as additional interest expense in the Company’s results of operations for the six months ended June 30, 2009. Total amortization of the discount was $9 and $447 for the three and six months ended June 30, 2009, respectively.





The terms of the offering that closed on January 16, 2009 (See Note 6) effectively terminated all rights of first offer held by investors who held or who continue to hold July 2008 Notes.  In addition, the investors in the January 16, 2009 offering converted an aggregate face value of approximately $3,000 of July 2008 and December
2008 Notes held by such investors into approximately 989,000 shares of the Company’s common stock in accordance with the terms of such Notes.





(6) STOCKHOLDERS’ EQUITY AND REDEEMABLE CONVERTIBLE PREFERRED STOCK





As of June 30, 2009, the Company has 165,000,000 authorized shares of common stock, of which 9,778,940 shares of common stock were outstanding, 168,612 shares of common stock were reserved for conversion of outstanding Series A Redeemable Convertible Preferred Stock (“Series A Stock”) and Series C Redeemable Convertible Preferred
Stock (“Series C Stock”); 5,685,227 shares of common stock were reserved for exercise of stock options and warrants; 61,421 shares of common stock were reserved for conversion of convertible notes; 59,374 shares of common stock were reserved for issuance to vendors for services, and 20,000 shares were reserved for issuance to an officer.




Equity Financings





On January 16, 2009 and February 13, 2009, the Company closed the private placements of approximately 2,015,000 and 495,000 shares, respectively, of the Company’s common stock at $3.50 per share, for aggregate gross proceeds of approximately $8,760.  The investors in these offerings have certain terminable anti-dilution rights
if the Company consummates a subsequent financing below $3.20 per share of common stock.  In connection with the offerings, the Company issued an aggregate of 376,474 warrants to investors to purchase additional shares of common stock at an exercise price of $1.20 per share. The warrants were immediately exercisable and expire five years after the date of issuance.  The Company has agreed to use commercially reasonable efforts to register the common stock sold in the private placements as
well as the common stock issuable upon exercise of the warrants on a registration statement to be filed with the Securities and Exchange Commission. There are no liquidated damages for a failed registration and the warrants may be settled in unregistered shares. The Company filed a resale registration statement on Form S-1 on May 28, 2009 (the “S-1”) to register the shares issued in the private placements and will file an amendment to the S-1 shortly after filing this quarterly report on Form 10-Q
to update the financial information for the second quarter 2009 and to respond to the SEC’s comment to the initial filing. The January 16, 2009 offering effectively terminated all rights of first offer granted to investors who held or who continue to hold July 2008 Notes (see Note 5). In addition, the investors in the January 16, 2009 offering converted an aggregate face value of approximately $3,000 of July 2008 and December 2008 Notes (see Note 5) held by such investors into approximately 989,000 shares
of the Company’s common stock in accordance with the terms of such Notes.




Redeemable Convertible Preferred Stock





During the second quarter of 2009 there were no conversions of Preferred Stock. During the first quarter of 2009, holders of 4,643,556 shares of Series C Stock exercised their right to convert their shares into 232,180 shares of common stock. As a result of the Series C Stock conversions, $80 of unamortized issuance cost associated with the
Series C Stock was recognized in the three months ended March 31, 2009 as deemed dividends to preferred stockholders for purposes of determining net loss attributable to common stockholders. During the first and second quarters of 2008 there were no conversions of Preferred Stock.





(7) SUBSEQUENT EVENTS





As required by SFAS No. 165, the Company performed an evaluation of subsequent events through August 11, 2009, which is the date on which the accompanying condensed consolidated financial statements were issued.





Pursuant to the terms of the July 2008 and December 2008 Notes, on July 24, 2009 the Company paid an aggregate of approximately $185, which included the aggregate face value of such Notes plus accrued and unpaid interest thereon, to extinguish such Notes.


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 Index


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Dollars in thousands, except per share and per unit data).





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 and the more detailed information contained in our Annual Report on Form 10-K for the year ended December 31, 2007. 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 an orthopedic products company that develops, manufactures and markets innovative tissue growth and repair products for U.S. and global markets. ReGen’s Menaflex collagen meniscus implant employs proprietary biological collagen scaffold technology to facilitate tissue growth, thereby reinforcing and repairing the damaged meniscus
of the knee. Our Menaflex device (also known as the CMI(R)) is marketed for sale in the U.S., the European Union (the “EU”), Switzerland and the Republic of South Africa. We aim to improve the standard of surgical care through the use of our unique collagen scaffold technology and strong commitment to evidence-based medicine and surgeon training.





Our proprietary collagen matrix technology includes applications in orthopedics, general surgery, spine, cardiovascular and drug delivery. Our first approved product using our collagen matrix technology is the Menaflex collagen meniscus implant device, which was cleared for marketing in the U.S. by the FDA in December 2008. The Menaflex device
was determined to be substantially equivalent to existing Class II devices through the 510(k) premarket notification process and is indicated for use in surgical procedures for the reinforcement and repair of soft tissue injuries of the medial meniscus. In the first quarter of 2009 we initiated U.S. marketing of our Menaflex product for the medial meniscus indication. We market the Menaflex product in the EU and the Republic of South Africa for both the medial and lateral meniscus indications. In the U.S. we
plan to seek expansion of the indication for use in the lateral meniscus through a new 510(k) application which we plan to submit to the FDA later this year. There can be no assurance as to the outcome of our efforts to expand the indication for use in the lateral meniscus.




On March 6, 2009, the Company received a letter from Senator Charles E. Grassley, Ranking Member of the Senate Committee on Finance, expressing concern about the Menaflex 510(k) clearance process and asking for the voluntary submission of certain documents and information pertaining to the clearance of the Menaflex.  The Company
understands that a letter was also sent by Senator Grassley to the FDA requesting information about the FDA’s interactions with ReGen.  ReGen cooperated with Senator Grassley’s document request, and completed its response to his March 6 letter recently.  On May 11, 2009, certain members of the House of Representatives Committee on Energy and Commerce wrote a letter to the FDA raising concerns regarding the FDA’s 510(k) clearance process involving the Menaflex device. The
authors of the letter state their understanding that the FDA may be reexamining its decision to clear the Menaflex for marketing; however, they also state that while they take no position on the ultimate outcome of the FDA’s investigation, they believe that the information they received raises questions about the clearance process and the data on which the FDA relied to clear the device.  On June 10, ReGen delivered a letter and corresponding materials to the FDA in response to the issues raised
in the May 11 House letter. The Company has also been made aware of a letter sent in May 2009 from the FDA in response to Senator Grassley regarding the clearance process of the Menaflex. That letter, and a June 29 letter received from the FDA in acknowledgement of ReGen’s June 10 letter, indicate that the FDA intends to conduct a preliminary internal review of the clearance process generally and for the Menaflex specifically and will, among other things, address whether to reconsider the clearance decision
of the Menaflex. Management believes it would be unusual for the FDA to revoke clearance of a device cleared through the 510(k) process, especially given the data provided on the Menaflex device and the input received from an independent Advisory Panel; however, there can be no assurance that the FDA will not decide to revoke clearance of the Menaflex for use in the medial meniscus.  If this occurs, ReGen would no longer be permitted to market the Menaflex in the U.S. and such developments would significantly
and negatively impact ReGen’s business.  Further, the FDA review and the congressional inquiries, if each continues, could (among other things) continue to adversely affect ReGen’s ability to raise additional capital to fund its business, adversely impact the timing of submission and the clearance process of ReGen’s 510(k) submission for expansion of the indication for use of the Menaflex in the lateral meniscus, prove a continued distraction for the Company’s management and
negatively impact our ability to generate revenue.


We also sell the SharpShooter(R) Tissue Repair System, or SharpShooter, a suturing device used to facilitate the surgical implantation of the Menaflex device, as well as to perform other similar arthroscopic meniscus repair procedures. The SharpShooter is currently sold through a worldwide non-exclusive distribution agreement with ConMed
Linvatec (“Linvatec”) (NASDAQ: CNMD) and outside the U.S., through ReGen AG.




Our current strategic priorities are to: (i) effectively commercialize the Menaflex product through development of specialized distribution, marketing, and training programs in the U.S. and other markets and (ii) further advance selected product development opportunities. Our long-term strategy is to capitalize on our proven collagen matrix
technology by continuing to design, develop, manufacture and market our own products, as well as partner with others to develop and market products in targeted therapeutic areas. However, our ability to pursue these strategic priorities is subject to the constraints of our current liquidity position. See Liquidity and Capital Resources.


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As part of our Menaflex commercialization efforts in the U.S., we are working to achieve broad based third-party reimbursement for procedures involving the Menaflex device.  We have engaged the services of a reimbursement team to assist our customers by providing materials and help desk services in support of our customers’
reimbursement efforts.  Based upon our experience to date, a majority of the Menaflex procedures conducted or scheduled have been pre-approved by several commercial and workers’ compensation insurance companies.  In some cases the procedure did not require pre-approval and in several others the procedure was billed directly to the patient. Two private insurance plans recently issued non-coverage policies for the use of the Menaflex.  Non-coverage decisions are often issued
by insurance plans for new medical technologies but may be overcome on a case-by-case basis through the surgeon appeal process.  Coverage policies may also be revised by the insurance plan upon further review of additional supporting scientific, clinical and cost-effectiveness data.  While there can be no assurance as to the outcome of the coverage decision of these or other insurance carriers, we believe existing clinical data showing the benefits of the Menaflex device and the interest of
surgeons who are adopting the procedures may be influential in reversing these non-coverage decisions and supporting broad third-party payment for the Menaflex and related surgical procedures.





ReGen has exclusive worldwide rights to market the Menaflex device subject to relevant regulatory clearance in each market. Our wholly-owned subsidiary, ReGen AG, conducts our distribution activities outside the U.S. through local market distributors and a limited number of employees. Currently, we have distributorship agreements with independent
orthopedic device marketing organizations for distribution of our products in Italy, Spain, Andorra, Poland, the United Kingdom (U.K.), the Republic of South Africa and Greece.





During 2008, our international priority was market penetration in Italy, Spain, and Germany and opening new markets in other countries, such as the U.K. In the first half of 2009 we began to implement our U.S. launch plan to market our Menaflex and other products in the U.S. During the first half of 2009, we trained 84 sports medicine surgeons
in the use of our Menaflex device and over 47 sales representatives. Trainers include the Company’s own research team, along with experienced surgeons from Europe and the U.S.  Surgeons trained include key thought leaders and sports medicine surgeons from across the U.S., including surgeons who cover professional and prominent university sports teams and those who were investigators in the original multi-center clinical trial for the Menaflex device. We have also trained seven sports medicine
fellows who will begin their practices later this year. The sales representatives who were trained will provide ongoing sales and customer support functions as part of the Company’s independent U.S. product distribution network.  Limited U.S. sales of the Menaflex product began in the second quarter of 2009.





Critical Accounting Policies





The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. 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. For example, when we value work in process inventory we use estimates to determine, among other factors, the number of units that will be successfully converted to finished goods. This and other estimates we make are often based on complex judgments, probabilities and assumptions that we believe to be reasonable, but that are inherently uncertain and unpredictable. Assumptions may be incomplete or inaccurate and unanticipated events and circumstances may occur.
It is also possible that other professionals, applying reasonable judgments to the same facts and circumstances, could develop and support a range of alternative estimated amounts. We also are subject to risks and uncertainties that may cause actual results to differ from estimated amounts, such as changes in the healthcare environment, competition, foreign exchange, litigation, legislation and regulation. These and other risks and uncertainties are discussed in the section entitled “Item 1A. Risk Factors”
in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008. All of these could significantly and adversely affect our business, prospects, financial condition or results of operations.





An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, if different estimates reasonably could have been used, or if changes in the estimate that are reasonably likely to occur could materially impact the
financial statements. Management believes that there have been no significant changes during the three and six months ended June 30, 2009, to the items that we disclosed as our critical accounting policies and estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2008. For further discussion of our accounting policies see Note 1 “Organization and Summary of Significant Accounting Policies”
of the Notes to Condensed Consolidated Financial Statements (Unaudited) and Note 3 “Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.


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STOCK-BASED COMPENSATION EXPENSE: Under the fair value recognition provisions of SFAS No. 123R, we recognize stock-based compensation net of an estimated forfeiture rate and only recognize compensation cost for those shares expected to vest, generally on a straight-line basis over the
requisite service period of the award, usually the option vesting term of four years. For performance-based awards, the Company recognizes the estimated expense based on the accelerated attribution method. For all awards for which vesting is based only on service conditions, the expense is recorded based on the straight-line attribution method.





For stock issued to vendors for services, we recognize expense based on our stock price at the earlier of the date at which a performance commitment by the vendor exists or the date at which the vendor’s performance is complete. Expense recognized for non-employee options is measured based on management’s estimate of fair value
and recognized over the respective service period.





Determining the appropriate fair value model and calculating the fair value of share-based payment awards requires the input of highly subjective assumptions, including the expected life of the share-based payment awards and stock price volatility. Management determined that historical realized volatility calculated since the reverse merger
is a reasonable indicator of expected volatility and future stock price trends. The assumptions used in calculating the fair value of share-based payment awards represent management’s best estimates, but these estimates involve inherent uncertainties and the application of management’s judgment. As a result, if factors change and we use different assumptions, our stock-based compensation expense could be materially different in the future. In addition, we are required to estimate the expected forfeiture
rate and only recognize expense for those shares expected to vest. If our actual forfeiture rate is materially different from our estimate, the stock-based compensation expense could be significantly different from what we have recorded in the current period.





The Company uses the Black-Scholes model to estimate grant date fair value. For expected volatility, the Company uses its historical realized volatility, calculated using historical stock prices of the Company. The expected term of options granted after January 1, 2006, is generally estimated to be seven years, given the contractual term
of ten years and vesting period of four years. The interest rate used in the pricing model is based on the U.S. Treasury yield curve in effect at the time of the grant on issues with remaining terms equal to the estimated expected term used in the model. In addition, the Company has estimated a forfeiture rate based on historical data and current assumptions.





We believe it is difficult to accurately measure the value of an employee stock option (see “Use of Estimates” above). The key factors used in the Black-Scholes model rely on assumptions we make of future uncertain events. Actual events may differ from our assumptions. Moreover, the Black-Scholes model ignores significant characteristics
of compensatory options, such as their non-traded nature and lack of transferability. If the model permitted consideration of such unique characteristics the resulting estimate of fair value could be different.





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 June 30, 2009 and December 31, 2008, 1% and 10%, respectively, 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.





To date commercial sales of our products have been inconsistent and our production efforts have been directed primarily toward development. Given the inconsistent and generally low volumes of commercial production to date, estimates and assumptions related to factors such as labor inputs and yields are based on a limited amount of historical
data. Actual results may differ significantly from our estimates. We continually review the assumptions and estimates we use to value inventory and expect that our judgments regarding these estimates may change as commercial production volumes increase and additional data are available.





Certain components of inventory have limited shelf lives. Our 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, used
for demonstration or training, or used in research and development.


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Recent Accounting Pronouncements





In May 2009, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 165, Subsequent Events (SFAS No. 165), which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued
or are available to be issued. In particular, SFAS No. 165 sets forth (i) the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements; (ii) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements and (iii) the disclosures that an entity should make about events or transactions
that occurred after the balance sheet date. The Company adopted SFAS No. 165 effective for the quarter ended June 30, 2009 and consequently has added disclosure under Note 7, Subsequent Events, to the Notes to Condensed Consolidate Financial Statements.





On July 1, 2009, the FASB ratified EITF 09-1, Accounting for Own-Share Lending Arrangements in Contemplation of Convertible Debt Issuance or Other Financing. This issue addresses the accounting for an entity’s own-share lending arrangement initiated in conjunction with a convertible
debt or other financing offering and the effect a share-lending arrangement has on earnings per share. Additionally, EITF 09-1 addresses the accounting and earnings per share implications for defaults by the share borrower, both when a default becomes probable of occurring and when a default actually occurs. The consensus is effective for interim or annual periods beginning on or after June 15, 2009 for share-lending arrangements entered into in those periods. The Company did not enter into any share-lending
arrangements during the three months ended June 30, 2009 so adoption of these provisions of EITF 09-1 did not have a material effect on the Company’s consolidated financial statements. For all other arrangements within the scope of EITF 09-1, the consensus is applied retrospectively to share-lending arrangements that are outstanding as of the beginning of the fiscal year beginning on or after December 15, 2009. Additionally, arrangements that had been terminated as a result of counterparty default prior
to the effective date of EITF 09-1, but for which the entity had not reached a final settlement as of the effective date of this issue, would be within the scope of this issue. Early adoption is prohibited. The Company has not yet determined what, if any, effect adoption of the remaining provisions of EITF 09-1 will have on its consolidated financial statements.





On June 12, 2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial Assets, an amendment of FASB Statement No. 140, which is in response to the FASB’s concerns about how practice has developed under SFAS No. 140, Accounting
for Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, as well as concerns expressed by constituents that certain transfers of financial assets should not qualify as sales under SFAS No.140. SFAS No. 166 is effective as of the beginning of an enterprise’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. The Company has
not yet evaluated what, if any, effect adoption of SFAS No. 166 will have on its consolidated financial statements.





On June 12, 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R), which addresses the effects of eliminating the qualifying special-purpose entity (QSPE) concept from SFAS No. 140, Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities, and responds to concerns about the application of certain key provisions of FASB Interpretation No. 46(R), Consolidation of Variable Interest Entities, including concerns over the transparency of enterprises’ involvement with variable interest entities (VIEs). SFAS No. 167 is effective as of the beginning of an enterprise’s
first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. The Company does not expect adoption of SFAS No. 167 to have a significant impact on its consolidated financial statements.





In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification(TM) and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASF Statement No. 162, which is effective for financial statements for interim or annual periods ending after September
15, 2009. SFAS No. 162 replaces SFAS No. 162 and establishes the FASB Accounting Standards Codification (Codification) as the source of authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the SEC are also sources of authoritative GAAP for SEC registrants. Once the Codification is in effect, all of its content will carry the same level of authority, effectively superseding SFAS No.
162. The Company does not expect adoption of SFAS No. 168 to have a significant effect on its consolidated financial statements.


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Results of Operations





Three and Six Months Ended June 30, 2009 Compared to Three and Six Months Ended June 30, 2008





REVENUE.Total revenue for the three and six months ended June 30, 2009 increased by $173 (73%) and $127 (22%), respectively, over the same periods in 2008. The Company’s revenue from sales of our products approximated $401 and $689 for the three months and six months ended June
30, 2009, respectively, compared with $222 and $556, respectively, for the same periods in 2008. The approximate net increases of $179 (81%) and $134 (24%), respectively, resulted from increased sales of both our Menaflex and SharpShooter products. Although we expect that revenue from sales will increase as we continue to execute our U.S. launch plan, there can be no guaranty that the increase in sales during the second quarter of 2009 is indicative of a future trend. The remainder of our revenue is derived from
royalties, which generally are due under a license agreement when our distributor, Linvatec, sells the SharpShooter product to a third party. Royalty revenue decreased approximately $6 (43%) for the three months ended June 30, 2009 compared with the same period in 2008 and decreased approximately $6 (26%) for the six months ended June 30, 2009 compared with the same period in 2008. Historically, shipments of our products, and therefore our revenue, have been inconsistent for a number of reasons, including the
supply requirements of our distributors and their anticipated rate of sales. Title of product passes to our U.S. direct sales customers FOB destination; to our other direct sales customers, FOB origin; and to our distributors either FOB origin or FOB destination, depending upon the specific terms of the respective distributorship agreements. Our customers do not have a right to return the product other than for product defect issues.





Limited sales of our Menaflex product in the U.S. began in the second quarter of 2009. For the three months and six months ended June 30, 2009, Menaflex sales approximated $294 and $487, respectively, compared to approximately $144 and $452, respectively, for the same periods in 2008, increases of approximately 104% and 8%, respectively.
Selling prices for the Menaflex ranged from $1,050 to $2,600 per unit. Menaflex sales approximated 73% and 71%, respectively, of total sales for the three month and six month periods ended June 30, 2009, compared with approximately 65% and 81%, respectively, for the same periods in 2008. During the three and six months ended June 30, 2009, we sold 161 and 286 Menaflex units, respectively, at average selling prices of $1,741 and $1,646 per unit, respectively, compared with 87 and 280 units, respectively, sold
in the same periods of 2008 at average selling prices of $1,561 and $1,564 per unit, respectively.





SharpShooter sales in the three and six month periods ended June 30, 2009, approximated $107 and $202, respectively, compared with $78 and $104, respectively, for the same periods in 2008, representing increases of $29 (39%) and $98 (96%), respectively. For the three month and six month periods ended June 30, 2009, SharpShooter sales to Linvatec,
approximated $65 and $135, respectively, compared to $62 and $79, respectively, for the same periods in 2008, representing increases of $3 (5%) and $56 (71%), respectively. SharpShooter sales to ReGen AG customers for the three and six month periods ended June 30, 2009 approximated $41 and $66, respectively, compared with $16 and $25, respectively, for the same periods in 2008, representing increases of $25 (177%) and $41 (172%), respectively. In the first quarter of 2008, the Company initiated a transition to
a new vendor for assembly of a component of its SharpShooter product, which resulted in a shortage of supply for this component and negatively affected sales in the first half of 2008.





COST OF GOODS SOLD.For the three and six months ended June 30, 2009, cost of goods sold approximated $179 and $314, respectively, compared with approximately $137 and $280, respectively, for the same periods in 2008, representing increases of approximately $42 (31%) and $34 (12%), respectively.
The increases primarily relate to higher volumes of both Menaflex and SharpShooter sales. Menaflex cost of goods sold for the three and six months ended June 30, 2009 approximated $73 and $124 compared with approximately $43 and $165 for the same periods in 2008, an increase of approximately $30 (70%) and decrease of $41 (25%), respectively. The average per unit cost of Menaflex units sold in the first half of 2009 approximated $250 compared with approximately $461 for the first half of 2008. The higher average
per unit cost in 2008 is due to the number of units sold in 2009 with $0 carrying value per unit and to varying production volumes and manufacturing costs in the respective periods when the units were produced. In the three and six months ended June 30, 2009, 16% and 15%, respectively, of the units sold had been previously written down to an estimated net realizable value of $0 per unit. The value of these units had been written down in prior periods because the units had limited remaining shelf-life and management
had estimated that these units would not be sold before their respective expiration dates. All of the units sold in the first half of 2008 had been carried at cost.





For the three and six months ended June 30, 2009, approximately $105 and $185 of cost of goods sold related to SharpShooter units sold compared with approximately $89 and $108 for the same period in 2008, increases of approximate $16 (18%) and $77 (71%), respectively. The increases are primarily due to higher volumes of SharpShooter sales
in the respective periods.





The remainder of cost of goods sold relates to royalties. Due to a high degree of fixed costs in the production process, the early stage of market acceptance for our products, and the variability of commercial production volumes between periods, sales and commercial production volumes in a given period may not be adequate to provide for per
unit costs that are lower than the current market price for our products. The positive gross margin achieved in the first six months of 2009 may not be indicative of a future trend.


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RESEARCH AND DEVELOPMENT.Research and development expenses for the three and six months ended June 30, 2009 approximated $1,459 and $2,862, respectively, compared with approximately $1,005 and $2,003, respectively, for the same periods in 2008. Significant factors contributing to the
net increase of $454 (45%) for the comparative three month period include: (i) approximately $326 increase in fees for professional services and other costs, such as travel, related to clinical and regulatory matters, including maintenance of patents and other intellectual property, preparation of our 510(k) application to expand the indication of use for the Menaflex device in the lateral meniscus, and responses to Congressional inquiries; (ii) approximately $131 increase in non-cash compensation expense related
to stock options granted to employees and non-employees; (iii) approximately $53 increase in compensation expense related to new hires and planned salary increases; partially offset by (iv) approximately $56 net decrease in costs associated with development projects, including the cost of conducting our European post-market study of the lateral Menaflex device. Significant factors contributing to the net increase of $859 (43%) for the comparative six month periods include: (i) approximately $585 increase in fees
for professional services and other costs, such as travel, related to clinical and regulatory matters, including maintenance of patents and other intellectual property, preparation of our 510(k) application to expand the indication of use for the Menaflex device in the lateral meniscus, and responses to Congressional inquiries; (ii) approximately $298 increase in non-cash compensation expense related to stock options granted to employees and non-employees; (iii) approximately $34 increase in compensation expense
related to new hires and planned salary increases; partially offset by (iv) approximately $58 net decrease in costs associated with development projects, including the cost of conducting our European post-market study of the lateral Menaflex device.





Currently, our research and development spending is primarily for clinical and regulatory activities and maintenance of patents and other intellectual property. Previously, our research and development was focused largely on the conduct of our CMI Multicenter Clinical Trail and related activities in the U.S. However, we also made progress
on several other new product development efforts. We completed development of a CMI for the lateral meniscus and European regulatory authorities accepted an expanded CE mark for the CMI to include both the medial and lateral configurations. Our first sales of the lateral configuration occurred in the first quarter of 2007. Lastly, we conducted early research on potential extended applications of our collagen matrix technology.





We believe that our proprietary collagen matrix technology has the potential to be used for the treatment of various injuries and degeneration of other tissue structures, as well as use as a carrier matrix for therapeutic agents for hard and soft tissue repair and new tissue growth. These applications are in various stages of development
from proof of concept to preparation for submission to the FDA. We plan to continue to use outside resources for product research. We may, in the future, hire additional research and development employees. However, resource limitations have significantly curtailed our ability to conduct research and development in 2008 and 2009, and we expect those activities will continue to be limited or further impaired if we are not successful in obtaining sufficient additional financing. See “Liquidity and Capital
Resources.”





BUSINESS DEVELOPMENT, GENERAL AND ADMINISTRATIVE.Business development, general and administrative expenses for the three and six months ended June 30, 2009 approximated $2,842 and $5,719, respectively, compared with approximately $1,313 and $2,782, respectively, for the same periods
in 2008. Significant factors contributing to the approximately $1,529 (116%) increase for the comparative three month periods include: (i) approximately $664 increase in costs associated with our worldwide marketing and distribution initiatives, including consulting, advertising and promotion, and costs associated with programs to train surgeons and sales representatives, primarily in connection with U.S. launch of our Menaflex device; (ii) approximately $279 increase in non-cash compensation expense related
to stock options granted to employees and non-employees and restricted stock granted to vendors and an officer; and (iii) approximately $586 increase in other general and administrative costs associated with development of a marketing and business management infrastructure to support the U.S. launch of our Menaflex device (such costs include professional service fees, compensation, and travel). Significant factors contributing to the approximately $2,937 (106%) increase for the comparative six month periods include:
(i) approximately $1,391 increase in costs associated with our worldwide marketing and distribution initiatives, including consulting, advertising and promotion, and costs associated with programs to train surgeons and sales representatives, primarily in connection with U.S. launch of our Menaflex device; (ii) approximately $729 increase in non-cash compensation expense related to stock options granted to employees and non-employees and restricted stock granted to vendors and an officer; and (iii) approximately
$817 increase in other general and administrative costs associated with development of a marketing and business management infrastructure to support the U.S. launch of our Menaflex device (such costs include professional service fees, compensation, and travel). While we expect to continue controls over discretionary costs to conserve cash, we expect spending in this category to increase as a result of U.S. launch of our Menaflex product and costs associated with development of the marketing and business management
infrastructure needed to support U.S. launch.





NON-OPERATING INCOME (EXPENSE).Non-operating income (expense) consists of interest and other income, and interest and other expense. Interest and other income approximated $5 and $12 for the three and six month periods ended June 30, 2009, respectively, compared with $13 and $45, respectively,
for the same periods in 2008. The approximate decreases of $8 (62%) and $33 (73%), respectively, primarily related to lower cash and cash equivalent balances and interest rates during the first half of 2009 compared to 2008. Interest and other expense approximated $98 and $1,361 for the three and six months ended June 30, 2009, respectively, compared with $110 and $188, respectively, for the same periods in 2008. The decrease for the respective three month periods is primarily due to lower interest rates on debt
due to a related party. The increase for the comparative six month periods is due to interest and amortized discount recognized on the July 2008 and December 2008 Notes as well as compound interest on debt due to a related party.


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Liquidity and Capital Resources





Cash and cash equivalents





The Company considers all highly liquid investments purchased with a maturity of 90 days or less to be cash equivalents and as such has classified as cash equivalents cash held in money market accounts and a sweep account. At June 30, 2009 approximately 2% of our cash and cash equivalents balance is held in foreign currencies. The effect
on our 2009 condensed consolidated financial statements of re-measurement of the accounts of our Swiss subsidiary is immaterial.




Cash and cash equivalents and investments approximated $2,474 as of June 30, 2009 compared with approximately $250 as of December 31, 2008. The net increase in cash and cash equivalents and investments is a result of the January and February equity financings (further discussed below), partially offset by cash used for operations, for equipment
purchases, and for repayment of capital lease obligations.




Cash flows





The following table sets forth our sources and uses of cash for the six-month periods ended June 30, 2009 and 2008.





June 30,2009


2008(In thousands)Net cash used in operations

$
(6,432
)

$
(3,527
)Net cash (used in) provided by investing activities


(55
)


82Net cash provided by (used in) financing activities


8,713



(7
)Effect of exchange rate changes on cash


(2
)


46Net increase (decrease) in cash and cash equivalents

$
2,224


$
(3,406
)





Cash used in operating activities during the six months ended June 30, 2009 approximated $6,432, which resulted from the net loss of $9,538, adjusted to account for a net increase in accounts receivable, inventory and other assets of approximately $353, a net increase in accounts payable, accrued expenses and other liabilities of $322, together
with adjustments of $3,137 for non-cash items, including depreciation, stock-based compensation and exchange loss related to re-measurement of our Swiss subsidiary’s financial statements.





During the six months ended June 30, 2009, we invested $55 in property and equipment, and repaid approximately $7 of our capital lease obligations, and raised proceeds of $8,720 from financing activities.





Our future operating results may be affected by a number of risks and certain other factors. Our future operating results are highly dependent upon our ability to obtain and maintain regulatory clearance and approvals for our products. In December 2008 we received FDA clearance to market the Menaflex collagen meniscus implant in the U.S.
The Menaflex device was cleared through the 510(k) premarket notification process and is indicated for use in surgical procedures for the reinforcement and repair of soft tissue injuries of the medial meniscus. In the first quarter of 2009 we initiated U.S. marketing of our Menaflex product for the medial meniscus indication. Limited sales of the Menaflex product in the U.S. began in the second quarter of 2009. We plan to seek expansion of the indication for use in the lateral meniscus through a new 510(k) application
which we plan to submit to the FDA later this year. There can be no assurance that such clearance will be granted on a timely basis, if at all. We market the Menaflex device for sale and distribution in the EU, Switzerland, and the Republic of South Africa for both medial and lateral meniscus indications. As previously discussed, the House of Representatives Committee on Energy and Commerce and the office of Senator Grassley, have initiated separate inquiries about the 510(k) clearance process for the Menaflex.
Further, the FDA has indicated its intention to conduct a preliminary internal review of the approval process for the Menaflex. The Congressional inquiries and the FDA review, if each continues, could (among other things) continue to adversely affect ReGen’s ability to raise additional capital to fund its business, adversely impact the approval process of ReGen’s new 510(k) application for expansion of the indication for use of the Menaflex in the lateral meniscus, prove a continued distraction for
the Company’s management, and negatively impact our ability to generate revenue.





In addition to regulatory related hurdles, in order to approach a position of positive operating earnings and cash flow, we will need to effectively address other operating issues, including for example, establishing distribution channels and assisting in establishment of third party reimbursement, as discussed above under “Business,”
for the surgeons and facilities that would be responsible for implanting the Menaflex device. We have initiated recruitment of independent sports medicine focused distributors and have begun to implement marketing and sales support strategies. While we are actively working to address distribution, third-party reimbursement, governmental inquiry and other operational issues, there is no guarantee that we will be successful or able to effectively address these challenges in any given time frame.


24
 Index


All of our notes payable to a related party (balance of approximately $8,657 at June 30, 2009) become due and payable on December 31, 2009. Also, our Series A Stock became redeemable in June 2009 and our Series C Stock becomes redeemable in September 2010 (liquidation preferences at June 30, 2009 of $892 and $619, respectively), each in one-third
annual increments at the option of not less than a majority of the holders. As of this date, no shares of Series A Stock have been redeemed and no redemption notice from holders of Series A Stock has been received by us.  In addition, our July 2008 and December 2008 Notes, with aggregate face value plus accrued interest of $177 at June 30, 2009, were paid on July 24, 2009, the date on which they came due and payable.





We will need to pursue additional financing in order to support ongoing operations, including launching sales of the Menaflex device in the U.S. and meeting our future debt service requirements. While we have been successful in the past in obtaining the necessary capital to support our operations, there is no assurance that we will be able
to obtain additional equity capital or other financing under commercially reasonable terms and conditions, or at all. In January and February 2009, we completed a two-staged common stock financing for aggregate gross proceeds of approximately $8,760 (see “Financing Transactions” below for further information). Based upon current cash and cash equivalent balances, including proceeds from financings in the first quarter of 2009, and planned spending rates for the remainder of 2009 management believes
that we have adequate cash and cash equivalents on hand to support ongoing operations through August 31, 2009. Our estimate may change, however, if actual results differ significantly from our expectations.





Key assumptions that may affect our estimate include (i) actual sales that may vary significantly from our expectations; (ii) the actual timeline of events with respect to our new 510(k) submission to the FDA; (iii) the actual pace of spending associated with commercialization of the Menaflex product; (iv) costs associated with other business
objectives; (v) costs associated with responding to regulatory or legal inquiries; and (vi) other developments in our business. We anticipate that additional cash will be required to support operations beyond August 31, 2009. However, if unforeseen events occur, it is possible that additional cash may be needed before August 31, 2009 to support operations. We continue to seek financing in order to support operations and continue as a going concern. At this time we have received no commitments for additional financing.
The accompanying consolidated financial statements have been prepared assuming that we will continue as a going concern. However, if additional capital is not obtained, we will not be able to continue as a going concern. Our financial statements do not include any adjustments relating to the recoverability or classification of assets or the amounts or classification of liabilities that might result from the outcome of this uncertainty.





Financing Transactions





On January 16, 2009 and February 13, 2009, we closed the private placements of approximately 2,015,000 and 495,000 shares, respectively, of the Company’s common stock at $3.50 per share, for aggregate gross proceeds of approximately $8,760.  The investors in these offerings have certain terminable anti-dilution rights if the
Company consummates a subsequent financing below $3.20 per share of common stock.  In connection with the offerings, the Company issued an aggregate of 376,474 warrants to investors to purchase additional shares of common stock at an exercise price of $1.20 per share. The warrants were immediately exercisable and expire five years after the date of issuance.  The Company has agreed to use commercially reasonable efforts to register the common stock sold in the private placements as well as
the common stock issuable upon exercise of the warrants on a registration statement to be filed with the Securities and Exchange Commission. There are no liquidated damages for a failed registration and the warrants may be settled in unregistered shares. The Company filed a resale registration statement on Form S-1 on May 28, 2009 (the “S-1”) registering the shares issued in the private placements and will file an amendment to the S-1 shortly after filing this quarterly report on Form 10-Q to update
the financial information for second quarter 2009 and respond to the SEC’s comment to the initial filing.





On July 24, 2008 we completed the private placement of $2,539 aggregate principal amount of unsecured convertible notes (the “July 2008 Notes”). The July 2008 Notes accrue interest at an annual rate of 8% and become due and payable on July 24, 2009. At the option of the holders, the Notes are convertible into shares of the Company’s
common stock at an initial conversion price of $3.00 per share.  In connection with this financing, the Company issued detachable warrants that initially were exercisable for 211,615 shares of common stock, at a price of $0.20 per share. The warrants were immediately exercisable and expire five years from the date of issuance. The conversion rate of the July 2008 Notes is subject to the anti-dilution rights of the holders of each.  The Company has agreed to use commercially reasonable efforts
to register the common stock into which the July 2008 Notes and the warrants will convert on one or more registration statements to be filed with the Securities and Exchange Commission upon request by the investors. There are no liquidated damages for a failed registration and the warrants may be settled in unregistered shares. .  The Company filed the S-1 registering the shares of common stock underlying the July 2008 Notes and warrants and will file an amendment to the S-1 shortly after filing this
quarterly report on Form 10-Q to update the financial information for second quarter 2009 and respond to the SEC’s comment to the initial filing.  In the amendment to the S-1, the Company will remove the shares underlying the July 2008 Notes that were not previously converted, as such Notes were extinguished on July 24, 2009.


25
 Index


On December 4, 2008 the Company completed the private placement of $499 aggregate principal amount of unsecured convertible notes (the “December 2008 Notes”). The December 2008 Notes accrue interest at an annual rate of 8% and become due and payable on July 24, 2009. At the option of the holders, the December 2008 Notes may be
converted into the Company’s common stock at a price of $3.00 per share. In connection with the financing, the Company issued detachable warrants to purchase 41,628 shares of common stock, exercisable at a price of $0.20 per share. The warrants were immediately exercisable and expire five years after issuance. The conversion rate of the December 2008 Notes is subject to the anti-dilution rights of the holders. The Company has agreed to use commercially reasonable efforts to register the Common Stock into
which the December 2008 Notes and the warrants will convert on one or more registration statements to be filed with the Securities and Exchange Commission upon request by the investors. There are no liquidated damages for a failed registration and the warrants may be settled in unregistered shares. The Company filed the S-1 registering the shares of common stock underlying the December 2008 Notes and warrants and will file an amendment to the S-1 shortly after filing this quarterly report on Form 10-Q to update
the financial information for second quarter 2009 and respond to the SEC’s comment to the initial filing.  In the amendment to the S-1, the Company will remove the shares underlying the December 2008 Notes that were not previously converted, as such Notes were extinguished on July 24, 2009.





The January 16, 2009 offering effectively terminated all rights of first offer held by those investors who held or continue to hold July 2008 Notes.  In addition, the investors in the January 16, 2009 offering converted an aggregate face value of approximately $3,000 of July 2008 and December 2008 Notes held by such investors into
approximately 989,000 shares of the Company’s common stock in accordance with the terms of such Notes.





During the first quarter of 2009, holders of 4,643,556 shares of Series C Stock exercised their right to convert their shares into 232,180 shares of common stock.





Item3. Quantitative and Qualitative Disclosures about Market Risk.





Not required.





Item4T. 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 are designed to provide reasonable assurance that information required to be disclosed by the Company in the reports filed under the
Exchange Act, such as in 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 and procedures include controls and procedures designed to provide reasonable assurance 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 and procedures, 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 the 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. Included as Exhibits 32.1 and 32.2 to this Quarterly Report on Form 10-Q are certifications 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 Officer have concluded that, as of June 30, 2009, our disclosure controls and procedures were effective.





Changes in Internal Control over Financial Reporting.There has been no change in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the Company’s second quarter of
2009 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.


26
 Index


PART II – OTHER INFORMATION





Item1. Legal Proceedings.





On November 16, 2006, following our announcement that our management voluntarily initiated and conducted, and the Audit Committee of the Board of Directors oversaw, a review of the Company’s historical stock option granting and accounting practices, we received a letter from the Division of Enforcement of the SEC requesting that the
Company preserve all documents concerning its granting of stock options to any of our executives or employees from January 2002 through the present and stating that the SEC intends to request production of such documents in the future. Subsequently, on November 20, 2006, the Company amended its quarterly and annual reports to include restated consolidated financial statements for the years ended December 31, 2005, 2004, 2003, the period from December 21, 1989 (inception) to December 31, 2005, and the quarters
ended March 31, 2006 and June 30, 2006. At this time, while we intend to cooperate with the SEC inquiry, we cannot predict what consequences the SEC inquiry will have on the Company. The Company may be subject to regulatory fines or penalties or other contingent liabilities at the conclusion of the SEC’s inquiry.





Item1A. Risk Factors.





There have been no material changes in the risk factors previously disclosed in Item 1.A. Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2008, except for the following updates to the below risk factors.




There have been recent Congressional inquiries regarding the 510(k) approval process for the Menaflex, which may have an adverse impact on our business and possibly lead to revocation of the FDA’s clearance of the Menaflex.





On March 6, 2009, the Company received a letter from Senator Charles E. Grassley, Ranking Member of the Senate Committee on Finance, expressing concern about the Menaflex 510(k) clearance process and asking for the voluntary submission of certain documents and information pertaining to the clearance of the Menaflex.  The Company
understands that a letter was also sent by Senator Grassley to the FDA requesting information about the FDA’s interactions with ReGen.  ReGen cooperated with Senator Grassley’s document request, and completed its response to his March 6 letter recently.  On May 11, 2009, certain members of the House of Representatives Committee on Energy and Commerce wrote a letter to the FDA raising concerns regarding the FDA’s 510(k) clearance process involving the Menaflex device. The
authors of the letter state their understanding that the FDA may be reexamining its decision to clear the Menaflex for marketing; however, they also state that while they take no position on the ultimate outcome of the FDA’s investigation, they believe that the information they received raises questions about the clearance process and the data on which the FDA relied to clear the device.  On June 10, ReGen delivered a letter and corresponding materials to the FDA in response to the issues raised
in the May 11 House letter. The Company has also been made aware of a letter sent in May 2009 from the FDA in response to Senator Grassley regarding the clearance process of the Menaflex. That letter, and a June 29 letter received from the FDA in acknowledgement of ReGen’s June 10 letter, indicate that the FDA intends to conduct a preliminary internal review of the clearance process generally and for the Menaflex specifically and will, among other things, address whether to reconsider the clearance decision
of the Menaflex. Management believes it would be unusual for the FDA to revoke clearance of a device cleared through the 510(k) process, especially given the data provided on the Menaflex device and the input received from an independent Advisory Panel; however, there can be no assurance that the FDA will not decide to revoke clearance of the Menaflex for use in the medial meniscus.  If this occurs, ReGen would no longer be permitted to market the Menaflex in the U.S. and such developments would significantly
and negatively impact ReGen’s business.  Further, the FDA review and the congressional inquiries, if each continues, could (among other things) continue to adversely affect ReGen’s ability to raise additional capital to fund its business, adversely impact the timing of submission and the clearance process of ReGen’s 510(k) submission for expansion of the indication for use of the Menaflex in the lateral meniscus, prove a continued distraction for the Company’s management and
negatively impact our ability to generate revenue.





Item2. Unregistered Sales of Equity Securities and Use of Proceeds (dollars in thousands, except per share data).





On June 30, 2009, we issued 4,688 shares of our restricted common stock to a vendor in consideration for services rendered during the second quarter of 2009. The estimated fair value of these services is $10. The issuance of the foregoing securities was not registered in reliance on Section 4(2) of the Securities Act of 1933, as amended.





On March 31, 2009, we issued 4,688 shares of our restricted common stock to a vendor in consideration for services rendered during the first quarter of 2009. The estimated fair value of these services is $12. The issuance of the foregoing securities was not registered in reliance on Section 4(2) of the Securities Act of 1933, as amended.





Item3. Defaults upon Senior Securities.





None.


27
 Index


Item4. Submission of Matters to a Vote of Security Holders.





The 2009 annual meeting of stockholders was held on May 29, 2009. The matters on which the stockholders voted, in person or by proxy, were: (i) to elect six directors to serve until the Company’s next annual meeting of stockholders and until their successors are duly elected and qualified; (ii) to approve an amendment to the Company’s
Amended and Restated Certificate of Incorporation to provide for the classification of the Board of Directors into three classes of directors with staggered terms of office and to make certain related changes; and (iii) to ratify the appointment of Ernst & Young LLP as our independent accountants for the current fiscal year.





The results of the voting are shown below:





Election of directors:





Name of Nominee

Number of
Votes For


Number of
Votes WithheldDr. Gerald E. Bisbee, Jr.


8,283,983



19,951Dr. Abhi Acharya


8,294,018



9,916Mr. Alan W. Baldwin


8,292,146



11,788Dr. Robert G. McNeil


8,287,153



16,781Dr. J. Richard Steadman


8,286,322



17,612Mr. William R. Timken


8,285,428



18,506





Proposal to amend ReGen’s Amended and Restated Certificate of Incorporation to provide for the Classification of Board of Directors:





Number of Votes For


Number of Votes Against


Number of Votes Abstaining


Number of Non-Votes6,675,730



30,936



7,856



1,589,412





Ratification of the selection of Ernst &Young LLP as independent auditors for the fiscal year ending December 31, 2009:





Number of Votes For


Number of Votes Against


Number of Votes
Abstaining8,298,280



5,542



112





Item5. Other Information.





None.





Item6. Exhibits.





(a)
Exhibits.





The following Exhibits are filed herewith and made a part hereof:





Number

Description3.1

Amended and Restated Certificate of Incorporation (as amended)(27)3.2

Second Amended and Restated By-Laws (as adopted on September 21, 2007)(2)4.1

Specimen Common Stock Certificate(3)4.2

Certificate of Designations, Preferences and Rights of Series A Convertible Preferred Stock of the Company(21)4.3

Certificate of Designations, Preferences and Rights of Series C Convertible Preferred Stock of the Company(4)4.4

Certificate of Designations, Preferences and Rights of Series D Convertible Preferred Stock of the Company(5)4.5

Certificate of Designations, Preferences and Rights of Series E Convertible Preferred Stock of the Company (6)
  28
 Index




4.6

Certificate of Designations, Preferences and Rights of Series F Convertible Preferred Stock of the Company (7)4.7*

ReGen Biologics, Inc. Employee Stock Option Plan, Amended and Restated Effective April 1, 2004(8)4.8*

ReGen Biologics, Inc. Non-Employee Director Stock Option Plan, Amended and Restated Effective April 1, 2004(8)4.9*

ReGen Biologics, Inc. Non-Employee Director Supplemental Stock Option Plan Amended and Restated Effective January 31, 2003(9)4.10*

Form of Employee Incentive Stock Option Agreement for the Employee Stock Option Plan(1)4.11*

Form of Nonqualified Employee, Non-Employee Director or Consultant Stock Option Agreement for the Employee Stock Option Plan(1)4.12*

Form of Nonqualified Non-Employee Director Stock Option Agreement for the Non-Employee Director Stock Option Plan(1)4.13*

Form of Nonqualified Non-Employee Director Stock Option Agreement for the Non-Employee Director Supplemental Stock Option Plan(1)4.14*

Form of Nonqualified Employee or Consultant Stock Option Agreement(21)4.15*

Form of Nonqualified Non-Employee Director Stock Option Agreement(21)4.16

Second Amended and Restated Stockholders’ Agreement by and among the Company and the Stockholders named therein dated as of August 23, 2007(10)4.17

Amended and Restated Registration Rights Agreement between the Company and the Investors listed therein(4)4.18

Common Stock Registration Rights Agreement by and among the Company and the stockholders named therein, dated as of April 19, 2004(11)4.19

Form of Subscription Agreement by and between the Company and the Investors named therein, dated as of November 30, 2006 and December 1, 2006(12)4.20

Form of Subscription Agreement by and between the Company and the Investors named therein, dated as of March 2, March 30, and April 5 2007(5),(13)4.21

Form of Subscription Agreement by and among the Company and the Investors named therein, dated as of July 24, 2008(7)4.22

Form of Subscription Agreement by and among the Company and the Investors named therein, dated as of December 4, 2008(22)4.23

Form of Subscription Agreement by and among the Company and the Investors named therein, dated as of January 16, 2009(23)4.24

Form of Subscription Agreement by and among the Company and the Investors named therein, dated as of February 13, 2009(24)4.25

Form of Warrant Certificate by and between the Company and the Individuals named therein, dated as of July 14, 2005(14)4.26

Form of Warrant Certificate by and between the Company and the Individuals named therein, dated as of November 30 and December 1, 2006(12)4.27

Form of Warrant Certificate by and between the Company and the Individuals named therein, dated as of March 2, March 30, and April 5, 2007(5),(13)4.28

Warrant Certificate by and between the Company and Sanderling Ventures Management VI, dated as of March 2, 2007(13)4.29

Form of Warrant to Purchase Common Stock by and between the Company and Individual named therein, dated October 1, 2003(21)
  29
 Index
  4.30

Form of Placement Agent Warrant to Purchase Common Stock by and between the Company and Harris Nesbitt Gerard, Inc.(4)4.31

Form of Placement Agent Warrant to Purchase Common Stock by and between the Company and Vail Securities Investment, Inc.(4)4.32

Form of Warrant Certificate by and between the Company and the Individuals named therein, dated as of October 15, 2007(21)4.33

Form of Warrant Certificate by and between the Company and the Individuals named therein, dated as of October 15, 2007(21)4.34

Form of Warrant Certificate by and between the Company and the Individuals named therein, dated as of July 24, 2008 (7)4.35

Form of Warrant Certificate by and between the Company and the Individuals named therein, dated December 4, 2008 (22)4.36

Form of Warrant Certificate by and between the Company and the Individuals named therein, dated January 21, 2009(23)4.37

Form of Warrant Certificate by and between the Company and the Individuals named therein, dated February 13, 2009 (24)10.1

Form of Indemnification Agreement(15)10.2*

Employment Agreement by and between Gerald E. Bisbee, Jr., Ph.D. and the Company dated September 22, 119 and amended September 12, 2000(16)10.3*

First Amendment to Employment Agreement by and between Gerald E. Bisbee, Jr., Ph. D. and the Company dated March 23, 2004(17)10.4*

Second Amendment to Employment Agreement by and between Gerald E. Bisbee, Jr., Ph. D. and the Company dated November 28, 2008(25)10.5*

Employment Agreement by and between Brion D. Umidi and the Company dated March 23, 2004(17)10.6*

First Amendment to Employment Agreement by and between Brion D. Umidi and the Company dated November 28, 2008(25)10.7*

Employment Agreement by and between James Flounlacker and the Company dated April 30, 2009(26)10.8

License Agreement by and between the Company and Linvatec Corporation dated April 7, 2000(17)10.9*

Exclusive License Agreement by and between the Company and Dr. Shu-Tung Li dated August 24, 1995(17)10.10*

Assignment and Royalty Agreement by and among the Company, Modified Polymer Components, Inc. and Dr. J. Richard Steadman dated April 9, 1997(17)10.11

Credit Agreement by and between the Company and Sulzer Medica USA Holding Company dated November 30, 1998(18)10.12

Credit Agreement by and between the Company and Sulzer Medica USA Holding Company dated March 14, 2000(17)10.13

Agreement by and among Sulzer Medica USA Holding Co., Sulzer Biologics Inc. Sulzer Orthopedics Ltd. and the Company dated February 20, 2001(17)10.14

Letter Agreement by and between the Company and Sulzer Orthopedics AG, dated January 18, 2002(17)10.15

Distributor Agreement by and between the Company and XMedica effective as of October 24, 2005(19)10.16

Agreement by and between the Company and MedWork AG dated as of January 1, 2005(20)
  30
 Index
  10.17

Consulting Agreement by and between ReGen Biologics, Inc. and Sanderling Ventures Management VI, dated as of March 2, 2007(13)21.1

Subsidiaries of the Registrant(25)31.1

Section 302 Certification from Gerald E. Bisbee, Jr., dated August 11, 2009(27)31.2

Section 302 Certification from Brion D. Umidi, dated August 11, 2009(27)32.1

Section 906 Certification from Gerald E. Bisbee, Jr., dated August 11, 2009(27)32.2

Section 906 Certification from Brion D. Umidi, dated August 11, 2009(27)


____________




(1)
Incorporated herein by reference to the Company’s Report on Form 10-Q for the quarter ended June 30, 2005 (File No. 000-20805).(2)
Incorporated herein by reference to the Company’s Report on Form 8-K, filed on September 24, 2007 (File No. 000-20805).(3)
Incorporated herein by reference to the Company’s Registration Statement on Form S-3, filed on November 19, 2003 (File No. 333-110605).(4)
Incorporated herein by reference to the Company’s Report on Form 8-K, filed on September 25, 2003 (File No. 000-20805).(5)
Incorporated herein by reference to the Company’s Report on Form 8-K, filed on April 5, 2007 (File No. 000-20805).(6)
Incorporated herein by reference to the Company’s Report on Form 8-K, filed on October 19, 2007 (File No. 000-20805).(7)
Incorporated herein by reference to the Company’s Report on Form 8-K, filed on July 30, 2008 (File No. 000-20805).(8)
Incorporated herein by reference to the Company’s Proxy Statement on Schedule 14A, filed on April 29, 2004 (File No. 000-20805).(9)
Incorporated herein by reference to the Company’s Registration Statement on Form S-1/A, filed on January 14, 2004 (File No. 333-110605).(10)
Incorporated herein by reference to the Company’s Report on Form 8-K, filed on August 24, 2007 (File No. 000-20805).(11)
Incorporated herein by reference to the Company’s Registration Statement on Form S-1, filed on June 22, 2004 (File No. 333-114867).(12)
Incorporated herein by reference to the Company’s Report on Form 8-K, filed on December 6, 2006 (File No. 000-20805).(13)
Incorporated herein by reference to the Company’s Report on Form 8-K, filed on March 8, 2007 (File No. 000-20805).(14)
Incorporated herein by reference to the Company’s Report on Form 8-K, filed on July 18, 2005 (File No. 000-20805).(15)
Incorporated herein by reference to the Company’s Report on Form 8-K, filed on March 17, 2004 (File No. 000-20805).(16)
Incorporated herein by reference to the Company’s Report on Form 8-K/A, filed on September 4, 2002 (File No. 000-20805).(17)
Incorporated herein by reference to the Company’s Report on Form 10-K for the year ended December 31, 2003 (File No. 000-20805).(18)
Incorporated herein by reference to the Company’s Report on Form 10-Q for the quarter ended March 31, 2005 (File No. 000-20805).(19)
Incorporated herein by reference to the Company’s Report on Form 10-Q for the quarter ended September 30, 2005 (File No. 000-20805).
  31
 Index
  (20)
Incorporated herein by reference to the Company’s Report on Form 10-K for the year ended December 31, 2004 (File No. 000-20805).(21)
Incorporated herein by reference to the Company’s Report on Form 10-K for the year ended December 31, 2007 (File No. 000-20805).(22)
Incorporated herein by reference to the Company’s Report on Form 8-K, filed on December 8, 2008 (File No. 000-20805).(23)
Incorporated herein by reference to the Company’s Report on Form 8-K, filed on January 22, 2009 (File No. 000-20805).(24)
Incorporated herein by reference to the Company’s Report on Form 8-K, filed on February 18, 2009 (File No. 000-20805).(25)
Incorporated herein by reference to the Company’s Report on Form 10-K for the year ended December 31, 2008 (File No. 000-20805).(26)
Incorporated herein by reference to the Company’s Report on Form 10-Q for the quarter ended March 31, 2009 (File No. 000-20805).(27)
Included with this filing.




*
Management Contract or Compensatory Plan or Arrangement


32
 Index


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 August 11, 2009.





REGEN BIOLOGICS, INC.By:
/s/ Brion D. UmidiBrion D. UmidiSenior Vice President andChief Financial Officer







33