##### 



SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 Form 10-Q (Mark One) þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2005
 Or o
    
    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
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)509 Commerce Street,1st Floor, East Wing,Franklin Lakes, NJ
    
    07417(Address of principal executive offices)
    
    (Zip Code)
 Registrants telephone number, including area code: (201) 651-5140 Securities registered pursuant to Section 12(b) of the Act:
None Securities registered pursuant to Section 12(g) of the Act:Title of Class Common Stock $.01 par value per share Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act). Yes o No þ The number of outstanding shares of the registrants common stock as of April 30, 2005 was
53,396,717




---



##### 



REGEN BIOLOGICS, INC. INDEX Page No.PART I  Financial Information
    3Item 1.
    
    Financial Statements
    3Condensed Consolidated Balance Sheets at March 31, 2005 (unaudited) and December 31, 2004
    3Condensed Consolidated Statements of Operations for the Three Months Ended March 31,
2005 (unaudited) and 2004 (unaudited), and the Period from December 21, 1989 to March
31, 2005 (unaudited)
    4Consolidated Statement of Changes in Stockholders Equity (Deficit) and Series A &
Series C Redeemable Convertible Preferred Stock for the Period from December 21, 1989
(inception) to March 31, 2005 (unaudited)
    5Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31,
2005 (unaudited) and 2004 (unaudited) and the Period from December 21, 1989 (inception)
to March 31, 2005 (unaudited)
    15Notes to Condensed Consolidated Financial Statements (unaudited)
    17Item 2.
    
    Managements Discussion and Analysis of Financial Conditions and Results of Operations
    22Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    39Item 4.
    
    Controls and Procedures
    39PART II  Other Information
    40Item 1.
    
    Legal Proceedings
    40Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    40Item 3.
    
    Defaults upon Senior Securities
    40Item 4.
    
    Submission of Matters to a Vote of Security Holders
    40Item 5.
    
    Other Information
    40Item 6.
    
    Exhibits
    40Signatures
    
    
    44Certification
 2




---



##### 



PART I  Financial Information Item 1. Financial Statements REGEN BIOLOGICS, INC.
(A Development Stage Company) CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data) March 31, 2005
    
    
    December 31, 2004(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    10,206
    
    
    $
    12,190Trade receivables
    
    
    66
    
    
    
    7Receivables from related party
    
    
    25
    
    
    
    37Inventory
    
    
    85
    
    
    
    76Prepaid expenses and other current assets
    
    
    234
    
    
    
    236Total current assets
    
    
    10,616
    
    
    
    12,546Property and equipment, net
    
    
    119
    
    
    
    55Other assets
    
    
    116
    
    
    
    123Total assets
    
    $
    10,851
    
    
    $
    12,724LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)Current liabilities:Accounts payable
    
    $
    454
    
    
    $
    378Accounts payable to related parties
    
    
    21
    
    
    
    7Accrued expenses
    
    
    455
    
    
    
    639Pension liability
    
    
    163
    
    
    
    163Current portion of capital leases
    
    
    16
    
    
    
    7Total current liabilities
    
    
    1,109
    
    
    
    1,194Other liabilities
    
    
    20
    
    
    
    19Long-term portion of capital leases
    
    
    54
    
    
    
    4Long-term portion of notes payable to related party,
including accrued interest of $1,140 and $1,094 as of March
31, 2005 and December 31, 2004, respectively
    
    
    7,182
    
    
    
    7,136Total liabilities
    
    
    8,365
    
    
    
    8,353Series A redeemable convertible preferred stock, $.01 par
value; 30,000,000 shares authorized; issued and outstanding
14,655,628 shares at liquidation preference of $6,567 as of
March 31, 2005 and December 31, 2004
    
    
    6,567
    
    
    
    6,567Series C redeemable convertible preferred stock, $.01 par
value; 30,000,000 shares authorized; issued and outstanding
11,269,801 shares at liquidation preference of $5,050 as of
March 31, 2005 and 12,943,533 shares at liquidation
preference of $5,800 as of December 31, 2004
    
    
    4,409
    
    
    
    5,033Stockholders equity (deficit):Common stock
    
    
    534
    
    
    
    517Accumulated other comprehensive loss
    
    
    
    
    
    
    (58
    )Additional paid-in capital
    
    
    52,520
    
    
    
    51,750Deficit accumulated during development stage
    
    
    (61,544
    )
    
    
    (59,438
    )Total stockholders equity (deficit)
    
    
    (8,490
    )
    
    
    (7,229
    )Total liabilities and stockholders equity (deficit)
    
    $
    10,851
    
    
    $
    12,724
 See accompanying Notes to Condensed Consolidated Financial Statements. 3




---



##### 



REGEN BIOLOGICS, INC.
(A Development Stage Company) CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data) Period fromThree Months Ended March 31,
    
    
    December 21, 1989(Inception) to2005
    
    
    2004
    
    
    March 31, 2005(unaudited)
    
    
    (unaudited)
    
    
    (unaudited)Revenue:Sales
    
    $
    138
    
    
    $
    95
    
    
    $
    2,994Royalties
    
    
    17
    
    
    
    12
    
    
    
    201Grant and other revenue
    
    
    
    
    
    
    
    
    
    
    433Total revenue
    
    
    155
    
    
    
    107
    
    
    
    3,628Expenses:Costs of goods sold
    
    
    224
    
    
    
    59
    
    
    
    3,526Research and development
    
    
    904
    
    
    
    785
    
    
    
    32,027Business development, general and administrative
    
    
    889
    
    
    
    807
    
    
    
    17,635Recognition of expense for the minimum pension liability component of
accumulated other comprehensive loss upon termination of defined benefit
pension plan
    
    
    58
    
    
    
    
    
    
    
    58Stock-based compensation
    
    
    65
    
    
    
    119
    
    
    
    6,649Total expenses
    
    
    2,140
    
    
    
    1,770
    
    
    
    59,895Operating loss
    
    
    (1,985
    )
    
    
    (1,663
    )
    
    
    (56,267
    )Merger cost
    
    
    
    
    
    
    
    
    
    
    (515
    )Interest and other income
    
    
    57
    
    
    
    9
    
    
    
    1,429Rental income
    
    
    78
    
    
    
    79
    
    
    
    1,975Rent expense
    
    
    (77
    )
    
    
    (78
    )
    
    
    (1,837
    )Interest and other expense
    
    
    (53
    )
    
    
    (29
    )
    
    
    (3,149
    )License fees
    
    
    
    
    
    
    
    
    
    
    2,050Net loss
    
    $
    (1,980
    )
    
    $
    (1,682
    )
    
    $
    (56,313
    )Deemed dividend to Series C Preferred Stockholders upon issuance of Series
C Preferred Stock with a beneficial conversion and amortization of related
issuance costs
    
    
    (126
    )
    
    
    (52
    )
    
    
    (5,231
    )Net loss attributable to common stockholders
    
    $
    (2,106
    )
    
    $
    (1,734
    )
    
    $
    (61,544
    )Basic and diluted net loss per share attributable to common stockholders
    
    $
    (0.04
    )
    
    $
    (0.06
    )
    
    $
    (3.06
    )Weighted average number of shares used for calculation of net loss per share
    
    
    53,238
    
    
    
    29,322
    
    
    
    20,126
 See accompanying Notes to Condensed Consolidated Financial Statements. 4




---



##### 



ReGen Biologics, Inc.
(A Development Stage Company)
Consolidated Statement of Changes in Stockholders Equity (Deficit) and Series
A and Series C Redeemable Convertible Preferred Stock
Period from December 21, 1989 (inception) to March 31, 2005 (unaudited)(In thousands, except share and per share data) Stockholders Equity (Deficit)Series A
    
    
    Series CRedeemable
    
    
    Redeemable
    
    
    Series A - F
    
    
    Series BConvertible
    
    
    Convertible
    
    
    Convertible
    
    
    ConvertiblePreferred
    
    
    Preferred
    
    
    Preferred
    
    
    PreferredStock
    
    
    Stock
    
    
    Stock
    
    
    
    
    
    
    StockShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Shares
    
    
    AmountIssuance of common stock at $0.03127
per share for net assets contributed
by founders in May 1990
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    Issuance of common
stock at $0.005 per
share for cash in
November 1991
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Issuance of Series
A convertible
preferred stock at
$1.00 per share for
cash in April 1991,
net of offering
costs of $44
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    725,000
    
    
    
    1Issuance of Series
B convertible
preferred stock at
$3.00 per share for
cash and in
exchange for notes
payable in January,
March, May, and
July 1992, net of
offering costs of
$29
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,226,338
    
    
    
    Net loss from
inception (December
21, 1989) through
December 31, 1992
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance at December 31, 1992
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,951,338
    
    
    
    1Issuance of Series
C convertible
preferred stock at
$4.50 per share for
cash in December
1993, net of
offering costs of
$29
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    550,552
    
    
    
    Exercise of common
stock options at
$0.30 per share for
cash in February
1993
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Issuance of common
stock at $0.30 per
share in 1993 in
exchange for
services to a
consultant
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance at December 31, 1993
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,501,890
    
    
    
    1Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance at December 31, 1994
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,501,890
    
    
    
    1Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance at December 31, 1995
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,501,890
    
    
    $
    1
 [Additional columns below] 5




---



##### 



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




---



##### 



ReGen Biologics, Inc.
(A Development Stage Company)
Consolidated Statement of Changes in Stockholders Equity (Deficit) and Series
A and Series C Redeemable Convertible Preferred Stock
Period from December 21, 1989 (inception) to March 31, 2005 (unaudited)(In thousands, except share and per share data) Stockholders Equity (Deficit)Series A
    
    
    Series CRedeemable
    
    
    Redeemable
    
    
    Series A - F
    
    
    Series BConvertible
    
    
    Convertible
    
    
    Convertible
    
    
    ConvertiblePreferred
    
    
    Preferred
    
    
    Preferred
    
    
    PreferredStock
    
    
    Stock
    
    
    Stock
    
    
    StockShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Shares
    
    
    AmountBalance at December 31, 1995 (carried forward)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,501,890
    
    
    $
    1Issuance of Series D convertible preferred stock at
$7.25 per share for cash in March and April 1996, net
of offering costs of $536
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,191,321
    
    
    
    Exercise of common stock options at $0.10, $0.30, and
$0.45 per share in August and October 1996
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance at December 31, 1996
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,693,211
    
    
    
    1Issuance of Series E convertible preferred stock at
$7.25 per share for cash in August and September 1997,
net of offering costs of $53
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    335,314
    
    
    
    Exercise of common stock options at $0.10, $0.30, and
$0.45 per share in April, August, and September 1997
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance at December 31, 1997
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,028,525
    
    
    
    1Exercise of common stock options at $0.10, $0.20,
$1.27, and $1.45 per share in May, July, November and
December 1998, respectively
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Compensation expense associated with stock option
modifications
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance at December 31, 1998
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,028,525
    
    
    
    1Exercise of common stock options at $.725 and $1.45 per
share in April, June and August 1999
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Issuance of Series F convertible preferred stock at
$8.73 per share for cash
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    453,310
    
    
    
    Compensation expense associated with stock option grants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance at December 31, 1999
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,481,835
    
    
    $
    1
 [Additional columns below] 7




---



##### 



[Continued from above table, first column(s) repeated] Stockholders Equity (Deficit)DeficitAccumulated
    
    
    Accumulated
    
    
    TotalAdditional
    
    
    Deferred
    
    
    During
    
    
    Other
    
    
    StockholdersPaid-In
    
    
    Stock
    
    
    Development
    
    
    Comprehensive
    
    
    EquityCommon Stock
    
    
    Capital
    
    
    Compensation
    
    
    Stage
    
    
    Loss
    
    
    (Deficit)Shares
    
    
    AmountBalance at December
31, 1995 (brought forward)
    
    
    2,105,200
    
    
    $
    1
    
    
    $
    6,828
    
    
    $
    
    
    
    $
    (7,240
    )
    
    
    
    
    
    $
    (410
    )Issuance of Series D
convertible preferred
stock at $7.25 per share
for cash in March and
April 1996, net of
offering costs of $536
    
    
    
    
    
    
    
    
    
    
    8,101
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,101Exercise of common stock
options at $0.10, $0.30,
and $0.45 per share in
August and October 1996
    
    
    163,333
    
    
    
    
    
    
    
    43
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    43Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,931
    )
    
    
    
    
    
    
    (1,931
    )Balance at December 31, 1996
    
    
    2,268,533
    
    
    
    1
    
    
    
    14,972
    
    
    
    
    
    
    
    (9,171
    )
    
    
    
    
    
    
    5,803Issuance of Series E
convertible preferred
stock at $7.25 per share
for cash in August and
September 1997, net of
offering costs of $53
    
    
    
    
    
    
    
    
    
    
    2,378
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,378Exercise of common stock
options at $0.10, $0.30,
and $0.45 per share in
April, August, and
September 1997
    
    
    32,111
    
    
    
    
    
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,868
    )
    
    
    
    
    
    
    (3,868
    )Balance at December 31, 1997
    
    
    2,300,644
    
    
    
    1
    
    
    
    17,355
    
    
    
    
    
    
    
    (13,039
    )
    
    
    
    
    
    
    4,318Exercise of common stock
options at $0.10, $0.20,
$1.27, and $1.45 per
share in May, July,
November and December
1998, respectively
    
    
    159,879
    
    
    
    
    
    
    
    108
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    108Compensation expense
associated with stock
option modifications
    
    
    
    
    
    
    
    
    
    
    56
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    56Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,815
    )
    
    
    
    
    
    
    (3,815
    )Balance at December 31, 1998
    
    
    2,460,523
    
    
    
    1
    
    
    
    17,519
    
    
    
    
    
    
    
    (16,854
    )
    
    
    
    
    
    
    667Exercise of common stock
options at $.725 and
$1.45 per share in April,
June and August 1999
    
    
    42,396
    
    
    
    
    
    
    
    32
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    32Issuance of Series F
convertible preferred
stock at $8.73 per share
for cash
    
    
    
    
    
    
    
    
    
    
    3,956
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,956Compensation expense
associated with stock
option grants
    
    
    
    
    
    
    
    
    
    
    3,436
    
    
    
    (3,247
    )
    
    
    
    
    
    
    
    
    
    
    189Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,458
    )
    
    
    
    
    
    
    (5,458
    )Balance at December 31, 1999
    
    
    2,502,919
    
    
    $
    1
    
    
    $
    24,943
    
    
    $
    (3,247
    )
    
    $
    (22,312
    )
    
    
    
    
    
    $
    (614
    )
 See accompanying Notes to Condensed Consolidated Financial Statements 8




---



##### 



ReGen Biologics, Inc.
(A Development Stage Company)
Consolidated Statement of Changes in Stockholders Equity (Deficit) and Series
A and Series C Redeemable Convertible Preferred Stock
Period from December 21, 1989 (inception) to March 31, 2005 (unaudited)(In thousands, except share and per share data) Stockholders Equity (Deficit)Series A
    
    
    Series CRedeemable
    
    
    Redeemable
    
    
    Series A - F
    
    
    Series BConvertible
    
    
    Convertible
    
    
    Convertible
    
    
    ConvertiblePreferred
    
    
    Preferred
    
    
    Preferred
    
    

    PreferredStock
    
    
    Series C
    
    
    Stock
    
    
    StockShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Shares
    
    
    AmountBalance at December 31, 1999 (brought forward)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,481,835
    
    
    $
    1Compensation expense associated with stock option grants
in prior year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Compensation expense associated with stock option grants
in current year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock options cancelled during 2000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance at December 31, 2000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,481,835
    
    
    
    1Exercise of common stock options at $.10 per share in 2001
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercise of common stock options at $1.45 per share in 2001
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Compensation expense associated with stock option grants
in prior years
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Compensation expense associated with stock option grants
in current year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock options cancelled during 2001
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Deferred stock compensation associated with stock option
grants to non-employees in 2001
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance at December 31, 2001
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,481,835
    
    
    $
    1
 [Additional columns below] 9




---



##### 



[Continued from above table, first column(s) repeated] Stockholders Equity (Deficit)DeficitAccumulated
    
    
    Accumulated
    
    
    TotalAdditional
    
    
    Deferred
    
    
    During
    
    
    Other
    
    
    StockholdersPaid-In
    
    
    Stock
    
    
    Development
    
    
    Comprehensive
    
    
    EquityCommon Stock
    
    
    Capital
    
    
    Compensation
    
    
    Stage
    
    
    Loss
    
    
    (Deficit)Shares
    
    AmountBalance at December 31, 1999
(brought forward)
    
    
    2,502,919
    
    
    $
    1
    
    
    $
    24,943
    
    
    $
    (3,247
    )
    
    $
    (22,312
    )
    
    
    
    
    
    $
    (614
    )Compensation expense associated
with stock option grants in prior
year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    738
    
    
    
    
    
    
    
    
    
    
    
    738Compensation expense associated
with stock option grants in
current year
    
    
    
    
    
    
    
    
    
    
    2,124
    
    
    
    (1,642
    )
    
    
    
    
    
    
    
    
    
    
    482Stock options cancelled during 2000
    
    
    
    
    
    
    
    
    
    
    (1,089
    )
    
    
    1,089
    
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,229
    )
    
    
    
    
    
    
    (5,229
    )Balance at December 31, 2000
    
    
    2,502,919
    
    
    
    1
    
    
    
    25,978
    
    
    
    (3,062
    )
    
    
    (27,541
    )
    
    
    
    
    
    
    (4,623
    )Exercise of common stock options
at $.10 per share in 2001
    
    
    25,000
    
    
    
    
    
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3Exercise of common stock options
at $1.45 per share in 2001
    
    
    125
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Compensation expense associated
with stock option grants in prior
years
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    935
    
    
    
    
    
    
    
    
    
    
    
    935Compensation expense associated
with stock option grants in
current year
    
    
    
    
    
    
    
    
    
    
    1,010
    
    
    
    (833
    )
    
    
    
    
    
    
    
    
    
    
    177Stock options cancelled during 2001
    
    
    
    
    
    
    
    
    
    
    (161
    )
    
    
    161
    
    
    
    
    
    
    
    
    
    
    
    Deferred stock compensation
associated with stock option
grants to non-employees in 2001
    
    
    
    
    
    
    
    
    
    
    228
    
    
    
    (131
    )
    
    
    
    
    
    
    
    
    
    
    97Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,330
    )
    
    
    
    
    
    
    (4,330
    )Balance at December 31, 2001
    
    
    2,528,044
    
    
    $
    1
    
    
    $
    27,058
    
    
    $
    (2,930
    )
    
    $
    (31,871
    )
    
    
    
    
    
    $
    (7,741
    )
 See accompanying Notes to Condensed Consolidated Financial Statements 10




---



##### 



ReGen Biologics,
Inc.
(A Development Stage Company)
Consolidated Statement of Changes in Stockholders Equity (Deficit) and Series
A and Series C Redeemable Convertible Preferred Stock
Period from December 21, 1989 (inception) to March 31, 2005 (unaudited)(In thousands, except share and per share data) Stockholders Equity (Deficit)Series A
    
    
    Series CRedeemable
    
    
    Redeemable
    
    
    Series A - F
    
    
    Series BConvertible
    
    
    Convertible
    
    
    Convertible
    
    
    ConvertiblePreferred
    
    
    Preferred
    
    
    Preferred
    
    
    PreferredStock
    
    
    Stock
    
    
    Stock
    
    
    StockShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Shares
    
    
    AmountBalance at December 31, 2001 (brought
forward)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,481,835
    
    
    $
    1Issuance of Common StockIssuance of Convertible Preferred Stock for
cash and conversion of bridge financing net
of issuance costs of $138
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,564,047
    
    
    
    1Deferred stock compensation associated with
stock option grants in 2002Compensation expense associated with stock
options outstandingEffect of reverse merger and recapitalization:Valuation of warrants associated with bridge
financingValuation of beneficial conversion associated
with bridge financingCompensation expense associated with stock
options outstanding recognized as a result of
the reverse mergerConversion of convertible preferred shares to
Redeemable Convertible Preferred Series A at
liquidation / redemption value
    
    
    15,298,351
    
    
    $
    6,855
    
    
    
    
    
    
    
    
    
    
    
    (5,564,047
    )
    
    
    (1
    )Conversion of convertible preferred shares to
Common Stock and Series B Preferred Shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,481,835
    )
    
    
    (1
    )
    
    
    12,025,656
    
    
    $
    120Conversion of Subsidiary Common Stock into
Company Common Stock and Series B Preferred
Shares:Elimination of Subsidiary Common Stock
Issuance of Company Common StockCompany Common Stock and related equity held
by existing shareholders (net of 18,115
shares held treasury)Conversion of Convertible Preferred Series B
Stock to Company Common Stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12,025,656
    )
    
    
    (120
    )Minimum Pension Liability AdjustmentNet lossNet loss and comprehensive lossBalance at December 31, 2002
    
    
    15,298,351
    
    
    
    6,855
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Compensation expense associated with stock
options outstandingIssuance of Redeemable Convertible Preferred
Series C Stock, net of issuance costs of
$612, which include the issuance of non-cash
consideration in the form of warrants
    
    
    
    
    
    
    
    
    
    
    22,246,153
    
    
    $
    9,357Issuance of Common Stock warrants to Series
C Stockholders
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (969
    )Valuation of beneficial conversion associated
with Series C Stock financing
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,292
    )Accretion of beneficial conversion associated
with Series C Stock financing
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,292Issuance of Common Stock  warrants exercisedAccretion of Series C Stock issuance cost
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    51Net loss and comprehensive lossBalance at December 31, 2003
    
    
    15,298,351
    
    
    $
    6,855
    
    
    
    22,246,153
    
    
    $
    8,439
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
 [Additional columns below] 11




---



##### 



[Continued from above table, first column(s) repeated] Stockholders Equity (Deficit)DeficitAccumulated
    
    
    Accumulated
    
    
    TotalAdditional
    
    
    Deferred
    
    
    During
    
    
    Other
    
    
    StockholdersPaid-In
    
    
    Stock
    
    
    Development
    
    
    Comprehensive
    
    
    EquityCommon Stock
    
    
    Capital
    
    
    Compensation
    
    
    Stage
    
    
    Loss
    
    
    (Deficit)Shares
    
    
    AmountBalance at December 31, 2001
(brought forward)
    
    
    2,528,044
    
    
    $
    1
    
    
    $
    27,058
    
    
    $
    (2,930
    )
    
    $
    (31,871
    )
    
    
    
    
    
    $
    (7,741
    )Issuance of Common Stock
    
    
    301,930
    
    
    
    1
    
    
    
    104
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    105Issuance of Convertible Preferred Stock
for cash and conversion of bridge
financing net of issuance costs of $138
    
    
    
    
    
    
    
    
    
    
    6,716
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,717Deferred stock compensation associated
with stock option grants in 2002
    
    
    
    
    
    
    
    
    
    
    370
    
    
    
    (370
    )Compensation expense associated with
stock options outstanding
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    452
    
    
    
    
    
    
    
    
    
    
    
    452Effect of reverse merger and
recapitalization:Valuation of warrants associated with
bridge financing
    
    
    
    
    
    
    
    
    
    
    657
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    657Valuation of beneficial conversion
associated with bridge financing
    
    
    
    
    
    
    
    
    
    
    843
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    843Compensation expense associated with
stock options outstanding recognized as a
result of the reverse merger
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,848
    
    
    
    
    
    
    
    
    
    
    
    2,848Conversion of convertible preferred
shares to Redeemable Convertible
Preferred Series A at liquidation /
redemption value
    
    
    
    
    
    
    
    
    
    
    (6,854
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,855
    )Conversion of convertible preferred
shares to Common Stock and Series B
Preferred Shares
    
    
    297,146
    
    
    
    3
    
    
    
    (122
    )Conversion of Subsidiary Common Stock
into Company Common Stock and Series B
Preferred Shares:Elimination of Subsidiary Common Stock
    
    
    (2,829,974
    )
    
    
    (1
    )
    
    
    1Issuance of Company Common Stock
    
    
    7,781,018
    
    
    
    78
    
    
    
    (78
    )Company Common Stock and related equity
held by existing shareholders (net of
18,115 shares held treasury)
    
    
    8,966,966
    
    
    
    89
    
    
    
    2,678
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,767Conversion of Convertible Preferred
Series B Stock to Company Common Stock
    
    
    12,025,656
    
    
    
    120Minimum Pension Liability Adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (58
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,951
    )Net loss and comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,009
    )Balance at December 31, 2002
    
    
    29,070,786
    
    
    
    291
    
    
    
    31,373
    
    
    
    
    
    
    
    (41,822
    )
    
    
    (58
    )
    
    
    (10,216
    )Compensation expense associated with
stock options outstanding
    
    
    
    
    
    
    
    
    
    
    405
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    405Issuance of Redeemable Convertible
Preferred Series C Stock, net of issuance
costs of $612, which include the issuance
of non-cash consideration in the form of
warrants
    
    
    
    
    
    
    
    
    
    
    97
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    97Issuance of Common Stock warrants to
Series C Stockholders
    
    
    
    
    
    
    
    
    
    
    969
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    969Valuation of beneficial conversion
associated with Series C Stock financing
    
    
    
    
    
    
    
    
    
    
    4,292
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,292Accretion of beneficial conversion
associated with Series C Stock financing
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,292
    )
    
    
    
    
    
    
    (4,292
    )Issuance of Common Stock  warrants
exercised
    
    
    230,000
    
    
    
    2
    
    
    
    113
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    115Accretion of Series C Stock issuance costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (51
    )
    
    
    
    
    
    
    (51
    )Net loss and comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,730
    )
    
    
    
    
    
    
    (5,730
    )Balance at December 31, 2003
    
    
    29,300,786
    
    
    $
    293
    
    
    $
    37,249
    
    
    $
    
    
    
    $
    (51,895
    )
    
    $
    (58
    )
    
    $
    (14,411
    )
 See accompanying Notes to Condensed Consolidated Financial Statements. 12




---



##### 



ReGen Biologics, Inc.
(A Development Stage Company)
Consolidated Statement of Changes in Stockholders Equity (Deficit) and Series
A and Series C Redeemable Convertible Preferred Stock
Period from December 21, 1989 (inception) to March 31, 2005 (unaudited)(In thousands, except share and per share data) Stockholders Equity (Deficit)Series A
    
    
    Series CRedeemable
    
    
    Redeemable
    
    
    Series A - F
    
    
    Series BConvertible
    
    
    Convertible
    
    
    Convertible
    
    
    ConvertiblePreferred
    
    
    Preferred
    
    
    Preferred
    
    
    PreferredStock
    
    
    Stock
    
    
    Stock
    
    
    StockShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Shares
    
    
    AmountBalance at December 31, 2003 (brought forward)
    
    
    15,298,351
    
    
    $
    6,855
    
    
    
    22,246,153
    
    
    $
    8,439
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    Compensation expense associated with stock options
outstandingAccretion of Series C Stock issuance cost
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    173Recognition of Series C Stock issuance cost upon
conversion
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    589Issuance of Common Stock  warrants exercised net
of 8,901 shares held treasuryIssuance of Common Stock  options exercisedIssuance of Common Stock  common stock offeringConversion of Series A Stock to Common Stock
    
    
    (642,723
    )
    
    
    (288
    )Conversion of Series C Stock to Common Stock
    
    
    
    
    
    
    
    
    
    
    (9,302,620
    )
    
    
    (4,168
    )Net loss and comprehensive lossBalance at December 31, 2004
    
    
    14,655,628
    
    
    
    6,567
    
    
    
    12,943,533
    
    
    
    5,033
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock-based compensation expenseAccretion of Series C Stock issuance cost
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    28Recognition of Series C Stock issuance cost upon
conversion
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    98Conversion of Series C Stock to Common Stock
    
    
    
    
    
    
    
    
    
    
    (1,673,732
    )
    
    
    (750
    )Recognition of expense for the minimum pension
liability upon termination of defined benefit
pension planNet lossNet loss and comprehensive lossBalance at March 31, 2005 (unaudited)
    
    
    14,655,628
    
    
    $
    6,567
    
    
    
    11,269,801
    
    
    $
    4,409
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
 [Additional columns below] 13




---



##### 



[Continued from above table, first column(s) repeated] Stockholders Equity (Deficit)DeficitAccumulated
    
    
    Accumulated
    
    
    TotalAdditional
    
    
    Deferred
    
    
    During
    
    
    Other
    
    
    StockholdersCommon Stock
    
    
    Paid-In
    
    
    Stock
    
    
    Development
    
    
    Comprehensive
    
    
    EquityShares
    
    
    Amount
    
    
    Capital
    
    
    Compensation
    
    
    Stage
    
    
    Loss
    
    
    (Deficit)Balance at December 31, 2003 (brought forward)
    
    
    29,300,786
    
    
    $
    293
    
    
    $
    37,249
    
    
    $
    
    
    
    $
    (51,895
    )
    
    $
    (58
    )
    
    $
    (14,411
    )Compensation expense associated with stock options
outstanding
    
    
    
    
    
    
    
    
    
    
    264
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    264Accretion of Series C Stock issuance costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (173
    )
    
    
    
    
    
    
    (173
    )Recognition of Series C Stock issuance costs upon
conversion
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (589
    )
    
    
    
    
    
    
    (589
    )Issuance of Common Stock  warrants exercised net
of 8,901 shares held treasury
    
    
    141,152
    
    
    
    1
    
    
    
    58
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    59Issuance of Common Stock  options exercised
    
    
    261,109
    
    
    
    3
    
    
    
    77
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    80Issuance of Common Stock  common stock offering
    
    
    12,074,595
    
    
    
    121
    
    
    
    9,745
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,866Conversion of Series A Stock to Common Stock
    
    
    642,723
    
    
    
    6
    
    
    
    282
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    288Conversion of Series C Stock to Common Stock
    
    
    9,302,620
    
    
    
    93
    
    
    
    4,075
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,168Net loss and comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,781
    )
    
    
    
    
    
    
    (6,781
    )Balance at December 31, 2004
    
    
    51,722,985
    
    
    
    517
    
    
    
    51,750
    
    
    
    
    
    
    
    (59,438
    )
    
    
    (58
    )
    
    
    (7,229
    )Stock-based compensation expense
    
    
    
    
    
    
    
    
    
    
    37
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    37Accretion of Series C Stock issuance costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (28
    )
    
    
    
    
    
    
    (28
    )Recognition of Series C Stock issuance costs upon
conversion
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (98
    )
    
    
    
    
    
    
    (98
    )Conversion of Series C Stock to Common Stock
    
    
    1,673,732
    
    
    
    17
    
    
    
    733
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    750Recognition of expense for the minimum pension
liability upon termination of defined benefit
pension plan
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    58Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,980
    )Net loss and comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,922
    )Balance at March 31, 2005 (unaudited)
    
    
    53,396,717
    
    
    $
    534
    
    
    $
    52,520
    
    
    $
    
    
    
    $
    (61,544
    )
    
    $
    
    
    
    $
    (8,490
    )
 See accompanying Notes to Condensed Consolidated Financial Statements. 14




---



##### 



REGEN BIOLOGICS, INC.
(A Development Stage Company)CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) Period fromDecember 21, 1989Three Months Ended March 31,
    
    
    (Inception) to2005
    
    
    2004
    
    
    March 31, 2005(unaudited)
    
    
    (unaudited)
    
    
    (unaudited)Operating ActivitiesNet loss
    
    $
    (1,980
    )
    
    $
    (1,682
    )
    
    $
    (56,313
    )Adjustments to reconcile net loss to net cash used in operating activities:Stock-based compensation
    
    
    65
    
    
    
    119
    
    
    
    6,649Amortization of debt discount for warrant and beneficial conversion
feature
    
    
    
    
    
    
    
    
    
    
    1,500Depreciation and amortization
    
    
    8
    
    
    
    28
    
    
    
    2,187Loss on disposal of property and equipment
    
    
    
    
    
    
    
    
    
    
    9Recognition of expense for the minimum pension liability component of
accumulated other comprehensive loss upon termination of defined
benefit pension plan
    
    
    58
    
    
    
    
    
    
    
    58Exchange loss
    
    
    4
    
    
    
    
    
    
    
    4Changes in operating assets and liabilities:Other current assets and receivables
    
    
    (72
    )
    
    
    (51
    )
    
    
    (236
    )Inventory
    
    
    (9
    )
    
    
    (16
    )
    
    
    (85
    )Other assets
    
    
    7
    
    
    
    7
    
    
    
    (66
    )Accounts payable and accrued expenses
    
    
    (48
    )
    
    
    118
    
    
    
    1,957Other liabilities
    
    
    1
    
    
    
    9
    
    
    
    39Net cash used in operating activities
    
    
    (1,966
    )
    
    
    (1,468
    )
    
    
    (44,297
    )Investing ActivitiesPurchases of property and equipment
    
    
    (11
    )
    
    
    (5
    )
    
    
    (2,013
    )Changes in short-term investments
    
    
    
    
    
    
    
    
    
    
    2,945Net cash provided by (used in) investing activities
    
    
    (11
    )
    
    
    (5
    )
    
    
    932Financing ActivitiesIssuance of common stock to founders for contributed patents
    
    
    
    
    
    
    
    
    
    
    42Issuance of Series B preferred stock upon conversion of interest payable
    
    
    
    
    
    
    
    
    
    
    6Reduction in payable to stockholder
    
    
    
    
    
    
    
    
    
    
    (76
    )Proceeds from issuance of convertible preferred stock, net of offering
costs paid in cash
    
    
    
    
    
    
    
    
    
    
    34,221Proceeds from issuance of common stock
    
    
    
    
    
    
    31
    
    
    
    10,420Repayment of capital lease obligations
    
    
    (3
    )
    
    
    (1
    )
    
    
    (126
    )Proceeds from notes payable
    
    
    
    
    
    
    
    
    
    
    11,410Payments on notes payable
    
    
    
    
    
    
    
    
    
    
    (2,323
    )Net cash provided by (used in) financing activities
    
    
    (3
    )
    
    
    30
    
    
    
    53,574Effect of exchange rate changes on cash
    
    
    (4
    )
    
    
    
    
    
    
    (4
    )Net increase (decrease) in cash
    
    
    (1,984
    )
    
    
    (1,443
    )
    
    
    10,205Cash and cash equivalents at beginning of period
    
    
    12,190
    
    
    
    8,323
    
    
    
    1Cash and cash equivalents at end of period
    
    $
    10,206
    
    
    $
    6,880
    
    
    $
    10,206
 15




---



##### 



Supplemental Disclosure of Cash Flow InformationNon-cash disclosure:Issuance of Series B convertible preferred stock upon conversion of notes payable
    
    $
    
    
    
    $
    
    
    
    $
    300Equipment purchased pursuant to capital leases
    
    
    61
    
    
    
    4
    
    
    
    194Cancellation of stock options associated with deferred stock compensation
    
    
    
    
    
    
    
    
    
    
    1,250Net assets assumed in merger
    
    
    
    
    
    
    
    
    
    
    2,733Conversion of bridge financing to equity
    
    
    
    
    
    
    
    
    
    
    2,860Beneficial Conversion of Series C Stock
    
    
    
    
    
    
    
    
    
    
    4,292Warrants associated with Series C Stock
    
    
    
    
    
    
    
    
    
    
    969Warrants associated with Series C Stock private placement agent fee
    
    
    
    
    
    
    
    
    
    
    97Conversion of Series A Preferred Stock
    
    
    
    
    
    
    
    
    
    
    288Warrants exercised, cashless transaction
    
    
    
    
    
    
    
    
    
    
    10Conversion of Series C Preferred Stock
    
    
    750
    
    
    
    
    
    
    
    4,918Cash disclosure:Cash paid for interest
    
    
    2
    
    
    
    
    
    
    
    318
 See accompanying Notes to Condensed Consolidated Financial Statements. 16




---



##### 



REGEN BIOLOGICS, INC.
(A Development Stage Company)NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Dollars in thousands, except per share data) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 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. and ReGen Biologics 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 Form 10-Q and do not include all the information and notes
required by accounting principles generally accepted in the United States for complete financial
statements. In the opinion of management, the accompanying condensed consolidated financial
statements contain all adjustments (consisting of normal recurring accruals) necessary to present
fairly the financial position and the results of operations for the interim periods. ReGen will continue to require additional capital to further develop its products and further
develop sales and distribution channels for its products around the world. Accordingly, the Company
is still considered a development stage enterprise. Management believes that ReGen will emerge from
the development stage when the Collagen Meniscus Implant, or CMI, product is available for sale in
the U.S. or the Company begins to earn significant revenue from its principal operations. For further information, refer to the consolidated financial statements and notes included in
ReGens Annual Report on Form 10-K for the year ended December 31, 2004. ReGen currently operates in one business segment, 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. Reclassifications Certain prior year and inception to March 31, 2005 balances have been reclassified to conform
to the current periods presentation. Cash and Cash Equivalents The Company considers all highly liquid investments purchased with a maturity of 90 days or
less at the date of acquisition to be cash equivalents and as such has classified cash held in a
money market account and sweep account as cash equivalents. The Company held cash equivalents of
$8,963 and $11,009 in money market accounts and $336 and $680 in a sweep account as of March 31,
2005 and December 31, 2004, 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. 17




---



##### 



Inventory consists of the following: March 31,
    
    
    December 31,2005
    
    
    2004(In thousands)Raw material
    
    $
    39
    
    
    $
    29Work in process
    
    
    26
    
    
    
    10Finished goods
    
    
    20
    
    
    
    37$
    85
    
    
    $
    76
 Inventory was adjusted down $126 and $30 as of March 31, 2005 and December 31, 2004,
respectively, to reflect values at the lower of cost or market. At March 31, 2005, and December 31,
2004, 27% and 12%, respectively, of total inventory is valued at below the Companys cost. 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 are not adequate to provide for
per unit costs that are lower than the current market price for the Companys products. Accrued Expenses Accrued expenses consist of the following: March 31,
    
    
    December 31,2005
    
    
    2004(In thousands)Accrued professional fees
    
    $
    250
    
    
    $
    313Accrued wages and vacation
    
    
    60
    
    
    
    210Accrued printing cost
    
    
    94
    
    
    
    52Other accrued cost
    
    
    51
    
    
    
    64$
    455
    
    
    $
    639
 Defined Benefit Plan The Company previously sponsored a defined benefit pension plan (Pension Plan) covering all
former employees of National Health Advisors, a former subsidiary of the Company acquired in 1997.
The Pension Plan was amended to freeze benefit accruals and the entry of new participants effective
October 31, 1997. The sale of the Companys APACHE business in 2001 resulted in the termination of
all remaining participants in the Pension Plan. The Company previously disclosed in its financial statements for the year ended December 31,
2004, that it had elected to terminate this pension plan effective March 31, 2005. At the
termination date, the Company recognized as expense $58 which was the minimum pension liability
component of accumulated other comprehensive loss. During 2005, the Company expects to make a cash
contribution from its existing cash resources to fully fund all benefits. The amount of the cash
contribution, which the Company expects to approximate the accrued pension liability of $163 at
March 31, 2005, will be determined by the Pension Plans actuaries as of the date of termination
and is dependent upon the actual performance of the plan assets through the termination date. Other
pension expense during the three month periods ending March 31, 2005 and 2004 was not material. Foreign Currency Transactions The Company has determined the functional currency of its Swiss subsidiary to be the U.S.
dollar (USD). The Swiss subsidiarys cash account is held in Swiss francs (CHF) and its books and
records are maintained in CHF. The Company remeasures the Swiss subsidiary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. Exchange gains and losses from intercompany
transactions of a long-term investment nature are reported in other comprehensive income. 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 the Swiss subsidiarys monetary assets and liabilities, are recognized currently
in results of operations. Foreign currency transaction losses included in the consolidated results
of operations for the three months ended March 31, 2005, approximated $5. Before 2005 the Company
had no foreign currency transaction gains or losses. 18




---



##### 



Rental Activities The Company subleases space in one of its facilities to an unrelated third party. Rental
income and expense associated with this sublease are recorded below operating loss. Rental expense
includes an allocation of building related expenses based on the ratio of subleased space to total
space. Basic and Diluted 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 antidilutive. Therefore, dilutive and basic net loss attributable
to common shareholders are the same. Stock Based Compensation The Company accounts for its stock-based compensation in accordance with Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees(APB No. 25), and related
interpretations. No expense is recognized for options issued to employees where the exercise price
is equal to or greater than the market value of the underlying security. Expense is recognized in
the financial statements for options issued to employees where the option price is below the fair
value of the underlying security, for options issued to non-employees, for options and warrants
issued in connection with certain financing and equity transactions, and for common stock to be
issued to a vendor in consideration for consulting services. Expense recognized for nonemployee
options and for warrants issued in connection with equity transactions is measured based on
managements estimate of fair value and recognized on an accelerated basis over the respective
vesting period. Fair value is calculated using the Black-Scholes method with the following
assumptions at the date of measurement: risk-free interest rate, dividend yield, expected lives and
expected volatility. The Company has adopted the disclosure only provisions of SFAS No. 123. Accordingly, if the
exercise price of the Companys employee stock options equals or exceeds the estimated fair value
of the underlying stock on the date of grant, no compensation expense is generally recognized. Had
compensation costs for the Companys stock options been determined based on SFAS No. 123 as amended
by SFAS No. 148, the Companys net loss attributable to common stockholders and net loss per share
attributable to common stockholders would have been as follows (in thousands, except per share
data): Three Months EndedMarch 31,2005
    
    
    2004Net loss attributable to common stockholders, as reported
    
    $
    (2,106
    )
    
    $
    (1,734
    )Add: Total stock-based employee compensation expense as
reported under intrinsic value method (APB No 25) for all
awards, net of related tax effects
    
    
    35
    
    
    
    113Deduct: Total stock-based employee compensation expense
determined under fair value based method (SFAS No. 123) for
all awards, net of related tax effects
    
    
    (191
    )
    
    
    (253
    )Pro forma net loss attributable to common stockholders
    
    $
    (2,262
    )
    
    $
    (1,874
    )Net loss per share attributable to common stockholders:Basic and diluted  as reported
    
    $
    (0.04
    )
    
    $
    (0.06
    )Basic and diluted  pro forma
    
    $
    (0.04
    )
    
    $
    (0.06
    )Shares
    
    
    53,238
    
    
    
    29,322
 19




---



##### 



Accounting Principles Issued But Not Yet Adopted On December 16, 2004, the Financial Accounting Standards Board (FASB) issued FASB Statement
No. 123 (revised 2004), Share-Based Payment, which is a revision of FASB Statement No. 123,
Accounting for Stock-Based Compensation. Statement 123(R) supersedes APB Opinion No. 25, Accounting
for Stock Issued to Employees, and amends FASB Statement No. 95, Statement of Cash Flows.
Generally, the approach in Statement 123(R) is similar to the approach described in Statement 123.
However, Statement 123(R) requires all share-based payments to employees, including grants of
employee stock options, to be recognized in the income statement based on their fair values. Pro
forma disclosure is no longer an alternative. In April 2005, the SEC delayed the effective date for Statement 123(R) to the beginning of any
annual period after June 15, 2005 so that Statement 123(R) will be effective for us beginning on
January 1, 2006. Statement 123(R) permits public companies to adopt its requirements using one of two methods: 1. A modified prospective method in which compensation cost is recognized beginning with the
effective date (a) based on the requirements of Statement 123(R) for all share-based payments
granted after the effective date and (b) based on the requirements of Statement 123 for all awards
granted to employees prior to the effective date of Statement 123(R) that remain unvested on the
effective date. 2. A modified retrospective method which includes the requirements of the modified
prospective method described above, but also permits entities to restate based on the amounts
previously recognized under Statement 123 for purposes of pro forma disclosures either (a) all
prior periods presented or (b) prior interim periods of the year of adoption. The Company plans to adopt Statement 123(R) using the modified-prospective method. As permitted by Statement 123, the company currently accounts for share-based payments to
employees using Opinion 25s intrinsic value method and, as such, generally recognizes no
compensation cost for employee stock option grants with exercise prices equal to or greater than
the fair value of the underlying stock at the grant date. Accordingly, the adoption of Statement
123(R)s fair value method will have a significant impact on our results of operations, although it
will have no impact on our overall financial position. The impact of adoption of Statement 123(R)
cannot be predicted at this time because it will depend on levels of share-based payments granted
in the future. However, had we adopted Statement 123(R) in prior periods, the impact of that
standard using the same methods and assumptions as those used in the pro-forma disclosure required
by Statement 123, would have approximated the impact of Statement 123 as disclosed above. Upon
adoption of SFAS No 123(R), the Company may select a different valuation method and different
assumptions which could have a significant impact on the amount of expense recognized. Statement
123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be
reported as a financing cash flow, rather than as an operating cash flow as required under current
literature. This requirement will reduce net operating cash flows and increase net financing cash
flows in periods after adoption. While the Company cannot estimate what those amounts will be in
the future (because they depend on, among other things, when employees exercise stock options),
previously the Company has not recognized operating cash flows for such excess tax deductions. In November 2004, the FASB issued FASB Statement No. 151, Inventory Costs, which amends the
guidance in Accounting Research Bulletin (ARB) No. 43, Chapter 4, Inventory Pricing, to clarify
that abnormal amounts of idle facility expense, freight, handling costs, and spoilage should be
recognized as current-period charges. In addition Statement 151 requires that allocation of fixed
production overheads to the costs of conversion be based on the normal capacity of the production
facilities. The Company is required to adopt the provisions of Statement 151 for inventory costs
incurred beginning January 1, 2006. The Company is currently evaluating what effects, if any,
adoption of the provisions of Statement 151 will have on the consolidated financial statements. (2) CONCENTRATIONS OF RISK The Company currently has two principal customers, which market and sell the Companys two
current products. Linvatec has a license to sell the Sharp Shooter product. The Centerpulse unit
(Centerpulse) of Zimmer Holdings, Inc. (NYSE: ZMH) (Zimmer), which is also a shareholder of the
Company, has, pursuant to a distribution agreement, a non-exclusive license to sell the CMI product
outside of the United States and a license to sell the SharpShooter product in a limited manner in
connection with the sale of the CMI. The distributorship agreement with Centerpulse will terminate
effective August 11, 2005, at which time ReGen will have exclusive worldwide rights to market the
CMI. Effective March 23, 2005, the Company has formed a Swiss subsidiary, ReGen Biologics AG, to
conduct its marketing and distribution activities in Europe. 20




---



##### 



Concentrations of receivables and revenue by customer as of and for the periods ended March
31, 2005 and 2004 are as follows: Three Months Ended
    
    Year endedMarch 31,
    
    December 31,2005
    
    2004
    
    2004Receivables:Trade (Linvatec)
    
    
    72
    %
    
    
    99
    %
    
    
    16
    %Related party
(Centerpulse)
    
    
    28
    %
    
    
    1
    %
    
    
    84
    %Sales revenue:Linvatec
    
    
    80
    %
    
    
    97
    %
    
    
    54
    %Centerpulse
    
    
    20
    %
    
    
    3
    %
    
    
    46
    %Royalties:Linvatec
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
 In several cases the Company relies on a single vendor to supply critical materials or
components. All of these materials and components can currently be obtained by alternative
suppliers, subject to the time and other resources required to initiate new vendor relationships. At March 31, 2005, less than 1% of the Companys cash and cash equivalents balance was held in
Swiss francs (CHF) and 6% of accrued expenses related to unsettled obligations denominated in CHF.
For the three month period ended March 31, 2005, 3% of the Companys expenses resulted from
transactions denominated in CHF. Before 2005 the Company did not have cash and cash equivalents
balances held in foreign currency or material transactions denominated in foreign currency. (3) RELATED PARTY TRANSACTIONS At March 31, 2005 and December 31, 2004, accounts payable due to related parties includes
amounts due to a shareholder for reimbursable expenses. The March 31, 2005 balance also includes
royalties due to an individual who is a shareholder and director. (4) CAPITAL TRANSACTIONS In the first quarter of 2005, holders of 1,673,732 shares of Series C Redeemable Convertible
Preferred Stock exercised their right to convert their shares to an equal number of shares of
common stock. As a result of this conversion, during the first quarter of 2005, $98 of unamortized
issuance costs associated with the Series C Stock was immediately recognized as a deemed dividend
to preferred stockholders for purposes of determining net loss attributable to common stockholders.
The Common Stock issued upon conversion is included in the shares registered in July 2004. (5) COMMITMENTS AND CONTINGENCIES From time to time the Company may be a defendant to lawsuits incidental to the Companys
business. Further, the nature of the Companys operations subject 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. The Companys operations are under rigorous regulation by the U.S. Food and Drug
Administration (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. In the second quarter of 2005 the FDA initiated an inspection, or audit, of
the Companys records relating to the CMI clinical trial. At the conclusion of such audits, the FDA
generally issues a notice listing the investigators observations or, in some cases, the FDA may
issue a more formal warning letter. Responding to FDA inquiries and providing the FDA with
information is time consuming for management and could cause a delay in the submission of our PMA
to the FDA. 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, suspension of the FDAs review of our PMA for the CMI,
enforcement actions, injunctions, and criminal prosecution. (6) SUBSEQUENT EVENTS Subsequent to March 31,
2005, the Companys Board of Directors and stockholders
authorized an amendment to the Companys Amended and Restated
Certificate of Incorporation to increase the number of authorized
shares of common stock from 130,000,000 to 165,000,000 shares
and approved a 1 for 7 reverse stock split of the Companys
issued and outstanding common stock. The reverse split may be
effected at the Boards discretion during a period of up to six
months after May 13, 2005. 21




---



##### 



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(dollars in thousands, except per share 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. This
section of the Form 10-Q contains forward-looking statements that involve risks and uncertainties,
such as statements about our plans, objectives, expectations and intentions. We use words such as
anticipate, believe, expect, future and intend and similar expressions to identify
forward-looking statements. Our actual results could differ materially from those anticipated in
these forward-looking statements for many reasons. You should not place undue reliance on these
forward-looking statements, which apply only as of the date of this Form 10-Q. Business We are a development stage orthopedic products company that develops, manufactures, and
markets innovative tissue growth and repair products for U.S. and global markets. Our primary
product, the Collagen Meniscus Implant, or CMI, is an implant designed to facilitate growth of new
tissue to replace removed or missing meniscus tissue in the human knee. A damaged meniscus is
frequently treated with an arthroscopic surgical procedure known as a partial meniscectomy. During
this procedure, surgeons remove damaged meniscus tissue leaving less meniscus tissue to support the
knee and protect the patient from further degeneration or injury. Currently we are not aware of any other product that has been cleared for sale outside the
U.S. or has entered pivotal human clinical trials in the U.S. with the potential to facilitate the
growth of new tissue in the space created when meniscus tissue is removed through a partial
meniscectomy procedure. ReGen is conducting a Multicenter Pivotal Clinical Trial (the MCT). The MCT is a two-arm,
controlled, and randomized study comparing the CMI to the current standard of care, the partial
meniscectomy. Initially, 288 patients were enrolled in the trial. At the request of surgeons
participating in the trial, additional patients were added resulting in a total of 313 patients
enrolled in the trial. The study was randomized on a one-to-one basis at each of the centers
participating in the MCT, resulting in a total of 162 patients receiving the CMI. One arm of the
trial consists of patients with no prior surgery to the meniscus (the acute patients) and the
other arm consists of patients with one to three prior surgeries to
the involved meniscus (the chronic patients). In
November 2002, we completed the required enrollment and
surgeries in the large-scale clinical
trial of the CMI. The additional 25 patients were enrolled and surgeries completed by early 2003.
All patients included in the trial are expected to complete two years of follow-up prior to ReGens
submission of the results in its Pre-market Approval application, or PMA, to the FDA. In July 2004,
we submitted the manufacturing module, the first of three modules, of the PMA for the CMI. In the
second quarter of 2005, the two-year clinical follow-up exams were completed on the last of the
patients in the MCT. We expect to complete our submission of the PMA to the FDA in the second half
of 2005, with submission of the clinical module, the third and final module of the PMA for the CMI. The MCT is comprised of two separate protocols, one for acute patients and one for chronic
patients. Both clinical protocols for the CMI specify a composite analysis of multiple endpoints.
In particular, there are three primary endpoints for the clinical trial of the CMI: i) pain; ii)
function; and iii) patient self-assessment (i.e. the patients self assessment of the condition of
the knee). There are three secondary endpoints for the CMI trial: i) tissue growth; ii) histology;
and iii) radiology. In each of these sets of three endpoints, success is defined as superiority in
two out of three of the endpoints. There is an additional endpoint, activity level, measured by
the Tegner Score, that has a specific success criteria specified in the protocol. This endpoint is
defined to include an analysis of the pre-injury, pre-operative and post-operative activity levels
measured by the Tegner Index, which measures the return of activity lost due to the patients
injury. There are a number of other variables provided for in the MCT protocols, including patient
satisfaction. 22




---



##### 



Our preliminary data analysis is based on a review of data from approximately 70% of the
patients, all of whom have completed their two-year follow-up exam. Based on preliminary results of
the MCT, the greatest measured benefits from implantation of the CMI to the patient at the two-year
follow-up examination are seen in the chronic patients. For acute patients, who generally have a
smaller amount of meniscus loss, as we expected, preliminary observations demonstrate that, for
most of the endpoints, the results of implantation of the CMI were approximately equivalent at
the two-year follow-up examination to the results for patients in the control group. While data
analysis on the patients is ongoing, preliminary observations on the chronic patients indicate that
for certain endpoints the results have been superior to the results for patients in the control
group, while for other endpoints the results have been approximately equivalent to the results for
patients in the control group. In no cases have the results been worse than the results for
patients in the control group. Although the preliminary results of the MCT do not match all of the endpoints in the clinical
protocol, we are encouraged by these preliminary observations. We have seen positive results in
tissue growth, the primary goal of the CMI. We believe that the tissue growth may delay future
degenerative problems in the knee. Positive results in activity level mean that patients are better
able to return to their pre-injury lifestyles. Finally, the preliminary results indicate that the
CMI is safe and that patient satisfaction levels are higher with the MCT than the control group.
We will continue to evaluate data as the remaining results of the two-year follow-up examinations
become available. The preliminary observations presented above are for informational purposes only and should
not be construed as providing conclusive evidence regarding the results to be expected from the
clinical trials. We are continuing to analyze the data in order to more completely interpret the
preliminary observations. The preliminary observations presented above are not in any way
indicative of the likelihood for FDA approval of the CMI. The FDA has not yet approved the CMI and
there is no guarantee that we will obtain such approval. If we were to obtain FDA approval, we believe the following trends may be relevant to the
sales of the CMI in the U.S. The number of partial meniscectomy procedures is expected to grow by
approximately 5% per year for the foreseeable future due to the aging population, the growing
proportion of weekend warriors and the lack of viable alternatives. The number of patients that
would be eligible for a medial CMI implant in the U.S., if the CMI were approved by the FDA, is
expected to increase to approximately 40% of all partial meniscectomy procedures, or approximately
500,000 patients, by 2011. We estimate that, based on the expected average sales price of the CMI
in the U.S. if the CMI had been approved by the FDA, the U.S. market for the medial CMI in 2004
would have been approximately $1.2 billion, and is expected to increase to approximately $1.8
billion by 2011 if the CMI is approved by the FDA. This estimate is based on an assumed average
reimbursed sales price of $3,500 for the CMI, and does not include surgeon and other facility
costs. Sales of the CMI in the U.S. will not occur until it has been approved for sale in the U.S.
by the FDA. In addition to FDA approval of the CMI, in order to achieve positive operating earnings and
cash flow, ReGen will need to effectively address various other operating issues, including, but
not limited to, gaining reimbursement for the surgeons and facilities that will be responsible for
implanting ReGens CMI or other future products, if developed and approved. While ReGen is actively
working to address these issues, there is no guarantee that ReGen will be able to obtain an
attractive reimbursement level, obtain it in any given time frame, or adequately address other
operating issues. Although the CMI is cleared for sale and distributed in Europe, Australia and certain other
countries, it is not approved for sale in the U.S., and ReGen is making no claim regarding its
safety, effectiveness or its potential for FDA approval. We now distribute the CMI outside the
U.S. on a non-exclusive basis pursuant to a distributorship agreement with the Centerpulse unit
(Centerpulse) of Zimmer Holdings, Inc. (NYSE: ZMH) (Zimmer). The primary business of
Centerpulse is the development, production and marketing of joint replacement products for the
knee, hip and other joints. We do not believe that Centerpulse has committed the necessary
resources to building a marketing and sales initiative for sports medicine products in general or
the CMI in particular. Pursuant to the distributorship agreement, Centerpulse was the exclusive
distributor of the CMI outside the U.S. as long as certain minimum sales were realized. Because
Centerpulse failed to satisfy certain minimum sales obligations, in 2004 we elected to exercise our
right to amend the agreement to make the distribution rights to the CMI nonexclusive. This election
took effect as of April 17, 2004. We have received notice from Centerpulse of its intent to
terminate the distributorship agreement, effective August 11, 2005. The distributorship agreement
permits termination by Centerpulse at any time upon six months prior written notice to us. The
distributorship agreement also contains cost reimbursement provisions whereby Centerpulse is
obligated to reimburse the Company for certain expenses and a non-compete by which each party
agreed not to conduct or participate in research, development, distribution or commercialization of
any collagen-based meniscus implant competing with the CMI, except jointly as set forth in the
agreement. The cost reimbursement agreement will also terminate effective August 11, 2005. Upon termination of the distributorship agreement with Centerpulse, effective August 11, 2005,
ReGen will have exclusive worldwide rights to market the CMI. Effective March 23, 2005, we have
created a Swiss subsidiary to conduct our European distribution activities through local market
distributors and a limited number of employees. 23




---



##### 



We also sell the SharpShooter Tissue Repair System, or SharpShooter, a suturing device used to
facilitate the surgical implantation of the CMI, as well as to perform other similar arthroscopic
meniscal repair procedures. The SharpShooter is currently marketed through a worldwide distribution
agreement with Linvatec Corporation (Linvatec), a subsidiary of ConMed (NASDAQ: CNMD). The
SharpShooter is cleared for sale in the U.S., Europe, Canada, Australia, Chile and Japan. Our current strategy is to focus on the following initiatives:  
    Obtaining FDA approval of the CMI;
    Developing our distribution and marketing capabilities for the CMI in the U.S., Europe and certain other countries;
    Launching the CMI in the U.S.; and
    Conducting further research on select product opportunities within our research and development pipeline. Our long-term strategy is to capitalize on our proven collagen scaffold technology by
continuing to design, develop, manufacture, and market our own products, as well as partner with
key market leaders to develop and market products in other targeted therapeutic areas. There can
be no assurance that we will successfully implement all or any of these strategies. Critical Accounting Policies The preparation of financial statements in conformity with accounting principles generally
accepted in the United States requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates. For further discussion of our
accounting policies see Note 1 Summary of Significant Accounting Policies of the Notes to
Condensed Consolidated Financial Statements (Unaudited). Results of Operations Three Months Ended March 31, 2005 Compared to Three Months Ended March 31, 2004 REVENUE.Our revenue for the three months ended March 31, 2005 was $155 compared with $107 for the
same period in 2004 an increase of approximately $48 or 45%, resulting from higher SharpShooter
sales to our distributors and related royalties. We had no CMI sales in either of the three month periods ended March 31, 2005 or 2004. Shipments of
the CMI to Centerpulse, our distributor of the CMI outside the U.S., and therefore our revenue have
been historically inconsistent. Effective April 17, 2004, we elected to convert our distributorship
agreement with Centerpulse to non-exclusive and in February 2005, Centerpulse notified us of their
intention to terminate the distributorship agreement effective August 11, 2005. We do not
anticipate future shipments of the CMI to Centerpulse after the first quarter of 2005. Therefore,
until new distribution channels are established, we do not expect to earn future revenue from CMI
sales. Upon termination of our distribution relationship with Centerpulse we will have exclusive
worldwide rights to market the CMI and we have created a Swiss subsidiary to conduct our European
marketing and distribution activities. SharpShooter sales in the three months ended March 31, 2005 approximated $138 compared with $95 for
the same period in 2004, an increase of $43 or 45%. The first quarter 2005 increase in Sharp
Shooter sales is partially due to backorders from the fourth quarter of 2004. Fourth quarter 2004
SharpShooter sales approximated $29 compared to average sales of approximately $89 per quarter and
$87 per quarter for the first three quarters of 2004 and for the period from January 1, 2004
through March 31, 2005, respectively. SharpShooter sales to Centerpulse for the period ended March
31, 2005 were $28 compared to $3 for the same period in 2004, an increase of $25 or 833%. In
connection with termination of the Centerpulse distributorship agreement we do not anticipate
significant future shipments of SharpShooter products to Centerpulse after the first quarter of
2005. For the period ended March 31, 2005, SharpShooter sales to Linvatec, our primary distributor
for the SharpShooter, approximated $110 compared to $92 for the same period in 2004, an increase of
$18 or 20%. SharpShooter sales to Linvatec accounted for approximately 80% of total SharpShooter
sales for the three months ended March 31, 2005 and 97% for the same period in 2004. Royalties received from Linvatec for the three months ended March 31, 2005 approximated $17
compared with $12 in the same period 2004, an increase of $5 or 42%. COST OF GOODS SOLD.For the three months ended March 31, 2005 cost of goods sold approximated $224,
of which $98 related to SharpShooter units sold compared with $59 for SharpShooter units sold in
the same period in 2004, an increase of $39, or 66%. The remaining $126 of first quarter 2005 cost
of goods sold results from the write-down to net realizable value of CMI units produced 24




---



##### 



during the period and included in work-in-process inventory at March 31, 2005. The percentage of
inventory valued at below the Companys cost at March 31,
2005 and December 31, 2004, was 27% and 12%,
respectively. 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. RESEARCH AND DEVELOPMENT.Research and development expenses for the three months ended March 31,
2005 approximated $904 compared with $785 for the same period in 2004, an increase of approximately
$119, or 15%. The increase primarily results from (i) $40 increased salaries and benefits related
to new hires and planned wage increases; (ii) $165 higher consulting, legal, and other professional
fees related to our PMA submission to the FDA for the CMI; (iii) $16 increase in costs related to
the CMI clinical trial; partially offset by (iv) $103 reduction of development costs related to a
lower proportion of CMI units produced for development purposes versus those produced for
commercial resale during the three months ended March 31, 2005 as compared with the same period in
2004. Management expects continued higher levels of spending for professional fees through 2005 as
we prepare our PMA for submission to the FDA. BUSINESS DEVELOPMENT, GENERAL AND ADMINISTRATIVE.Business development, general and administrative
expenses approximated $889 for the three months ended March 31, 2005 compared with $807 for the
same period in 2004, an increase of approximately $82, or 10%, resulting primarily from (i) $104
increased consulting fees for marketing and distribution associated with establishing our Swiss
subsidiary and with preparation of marketing plans for Europe and the U.S.; (ii) $43 increase in
salary and benefits related to new hires and planned wage increases; partially offset by (iii) $69
decrease in professional fees, primarily for legal, accounting, and printing charges incurred in
2004 associated with preparation and filing of a registration statement with the Securities and
Exchange Commission on Form S-1. RECOGNITION OF EXPENSE FOR THE MINIMUM PENSION LIABILITY. We previously disclosed in our financial
statements for the year ended December 31, 2004, that we had elected to terminate, effective March
31, 2005, a defined benefit pension plan covering former employees of a former subsidiary. At the
termination date we recognized as expense the minimum pension liability component of accumulated
other comprehensive loss. STOCK-BASED COMPENSATION EXPENSE.Stock-based compensation expense for the three months ended March
31, 2005 approximated $65, compared to $119 for the same period in 2004 and included $31 for
non-employees and $34 for employees for the three months ended March 31, 2005 compared with $6 for
non-employees and $113 for employees for the same period in 2004. In addition to compensation
expense associated with stock options and warrants, stock-based compensation expense for the first
quarter of 2005 includes $26 associated with common stock to be issued to a vendor for consulting
services. NON-OPERATING INCOME (EXPENSE).Non-operating income (expense) consists of interest and other
income, rental income, rental expense, and interest and other expense. Interest and other income
approximated $57 for the three months ended March 31, 2005 compared with $9 for the same period in
2004, an increase of approximately $48, related to higher balances of cash and cash equivalents
during 2005. Net rental income, which is sub-lease rental revenue less rent and operating expenses
related to the sub-leased portion of the Companys Redwood City, CA facility, approximated $1 for
each of the three month ended March 31, 2005 and 2004. Interest and other expense for the three
months ended March 31, 2005 approximated $53 compared with $29 for the same period in 2004, an
increase of approximately $24, primarily due to (i) $19 increase resulting from higher interest
rates and compounding of interest and (ii) $5 increase related to foreign currency transaction
losses. Liquidity and Capital Resources Cash and cash equivalents were approximately $10,206 as of March 31, 2005 compared with
approximately $12,190 as of December 31, 2004. The decrease in cash and cash equivalents is a
result of cash used to support our normal operations, for equipment purchases, and for repayment of
capital lease obligations. During the first quarter of 2005 we formed a Swiss subsidiary to conduct our European
marketing and distribution activities. At March 31, 2005 less than 1% of our cash and cash
equivalents balance is held in Swiss francs. The effect on our first quarter 2005 financial
statements of remeasurement of the accounts of our Swiss subsidiary is immaterial. 25




---



##### 



Cash used in operating activities of approximately $1,966 resulted from the net loss of
$1,980, adjusted to account for a net increase in accounts receivables, inventory and other assets
of approximately $74, a net decrease in accounts payable, accrued expenses and other liabilities of
$47 together with an increase of $135 for non-cash items, including depreciation, stock-based
compensation, recognition as expense of the minimum pension liability component of accumulated
other comprehensive loss upon termination of the defined benefit pension plan and exchange loss
related to re-measurement of our Swiss subsidiarys financial statements. During the three months ended March 31, 2005, we used approximately $11 to invest in property
and equipment and approximately $3 for the repayment of capital lease obligations. Through March 31, 2005, we have incurred
cumulative net losses of approximately
$56,313 and used approximately $44,297 in cash for operating activities. Management anticipates
that the Company will continue to incur net losses that will require additional financing at least
until we receive FDA approval for our CMI product and we are able to market the CMI product in the
United States. We anticipate that additional funds will be required to satisfy expenses associated
with the preparations for and, if approved by the FDA, marketing and distribution of the CMI in the
U.S., as well as for continued product development. Such additional financing
could be in the form of debt financing, equity financing, or both. While we have been successful in
the past in obtaining the necessary capital to support operations, there is no assurance that we
will be able to obtain additional equity capital under commercially reasonable terms and
conditions, or at all. Based upon current cash reserves, current spending rates, and expected costs
associated with development of a distribution network in Europe, management believes we have
adequate cash on hand to support ongoing operations through the first quarter of 2006. Our estimate may
change, however, based on decisions with respect to our clinical
trials related to the CMI and other developments in our business.
We
anticipate that additional equity capital will be required to support ongoing operations, including
continuation of our marketing and distribution activities in Europe, beyond the first quarter of
2006; to further develop our tissue growth technology for other orthopedic applications; and to
satisfy expenses associated with the preparation for and, if approved by the FDA, launch of the CMI
in the U.S. We continue to sponsor a defined benefit pension plan for certain former employees of a former
subsidiary. This pension plan was frozen and closed to new participants in October of 1997. Pension
expense for 2004 was comprised principally of interest on the accrued pension liability. At March
31, 2005 and December 31, 2004, the pension plan had an unfunded liability of approximately $163.
In December of 2004 we elected to terminate this pension plan effective March 31, 2005. During 2005
we expect to make a cash contribution from our existing cash resources to fully fund all benefits.
The amount of the cash contribution, which we expect to approximate the accrued pension liability
of $163, will be determined by the plans actuaries as of the termination date and is dependent
upon the actual performance of the plans assets through the termination date. The actuaries have
not yet completed their calculation of the funded status of the plan as of the termination date. At
the termination date, March 31, 2005, we recognized as expense the minimum pension liability
component of accumulated other comprehensive income which approximated $58. RISK FACTORS Our business faces significant risks. We may face risks in addition to the risks and
uncertainties described below. Additional risks that we do not yet know of or that we currently
think are immaterial may also impair our business operations. Any of the risks described below
could significantly and adversely affect our business, prospects, financial condition or results of
operations. You should carefully consider and evaluate the risks and uncertainties listed below, as
well as the other information set forth in this Quarterly Report on Form 10-Q. We have a history of losses, and we expect to continue to incur losses and may not achieve or
maintain profitability. The extent of our future losses and the timing of profitability are highly uncertain, and we
may never achieve profitable operations. As of March 31, 2005, we had an inception to date net loss
of approximately $56.3 million, and total stockholders deficit of approximately $8.5 million.
Historically, our net sales have varied significantly. We will need to generate additional revenue
to achieve profitability in the future. The Company likely will not achieve profitability, if at
all, unless the CMI is approved by the FDA and becomes commercially available in the U.S. We do not
expect to submit the third and final, clinical, module of the PMA for the CMI until the second half
of 2005 and would be unlikely to receive approval, if at all, until late 2006, at the earliest. Should the FDA approve
the CMI for sale in the U.S., sales of the CMI in the U.S. are not expected to occur until, at the
earliest, the first quarter of 2007. If we are unable to achieve profitability, or to maintain profitability if
achieved, it may have a material adverse effect on our business and stock price and we may be
unable to continue operations at current levels, if at all. The Company cannot assure that it will
generate additional revenues or achieve profitability. 26




---



##### 



We are a development stage company and have no significant operating history with which investors
can evaluate our business and prospects. We are a development stage company and have no significant operating history and are operating
in a new, specialized and highly competitive field. Our ability to successfully provide the
guidance and management needed to continue and grow the business on an ongoing basis has not yet
been established and cannot be assured. Our business is subject to all of the risks inherent in our
type of business, including, but not limited to, potential delays in the development of products,
the need for FDA or other regulatory approvals of certain of our products and devices, including
the CMI, uncertainties of the healthcare marketplace and reimbursement levels of insurers and
similar governmental programs, unanticipated costs and other uncertain market conditions. Our debt level could adversely affect our financial health and affect our ability to run our
business. As of March 31, 2005, our debt was approximately $7.3 million, of which $16 was the current
portion of capital lease obligations. This level of debt could have important consequences to you
as a holder of shares. Below are some of the material potential consequences resulting from this
significant amount of debt:  
    We may be unable to obtain additional financing for working capital, capital
expenditures, acquisitions and general corporate purposes.
    Our ability to adapt to changing market conditions may be hampered. We may be more
vulnerable in a volatile market and at a competitive disadvantage to our competitors that
have less debt.
    Our operating flexibility is more limited due to financial and other restrictive
covenants, including restrictions on incurring additional debt, creating liens on our
properties, making acquisitions and paying dividends.
    We are subject to the risks that interest rates and our interest expense will increase.
    Our ability to plan for, or react to, changes in our business is more limited. Under certain circumstances, we may be able to incur additional indebtedness in the future. If
we add new debt, the related risks that we now face could intensify. Product introductions or modifications may be delayed or canceled if we are unable to obtain
FDA
approval and we are unable to sell the CMI in the U.S. The U.S. Food and Drug Administration, or FDA, and numerous other federal, state and foreign
governmental authorities rigorously regulate the medical devices we manufacture and market. Our
failure to comply with such regulations could lead to the imposition of injunctions, suspensions or
loss of regulatory approvals, product recalls, termination of distribution, or product seizures. In
the most egregious cases, we could face criminal sanctions or closure of our manufacturing
facility. The process of obtaining regulatory approvals to market a medical device, particularly
from the FDA, can be costly and time-consuming. There can be no assurance that such approvals will
be granted on a timely basis, if at all. An ongoing risk exists that the FDAs policies, both
formal and informal, may change, or be applied in new ways, or that additional government
regulations may be enacted which could prevent or delay regulatory approval of potential products.
In addition, recent safety issues related to certain FDA approved products already on the market
may have increased the FDAs scrutiny of safety concerns and has caused the FDA to heighten its
scrutiny of clinical trial data submitted in support of PMA applications. As a result the Companys
ongoing and future clinical studies may receive increased scrutiny which could adversely affect our
ability to obtain approval of the CMI. In particular, the FDA has not yet approved the CMI and
there is no guarantee that we will obtain such approval. There is no assurance that our management
and administration of the clinical trials, the strength of the clinical outcomes, patient
compliance and surgeon documentation will be sufficient to meet the stringent demands necessary for
FDA approval. Sales of the CMI in the U.S. will not occur until it has been approved for sale in
the U.S. by the FDA. FDA approval of the CMI is dependent, in part, on its review of the results of
the two-year clinical follow-up data for patients who are enrolled in the Multicenter Pivotal
Clinical Trial. In the second quarter of 2005, the two-year clinical follow-up exams were completed
on the last of the patients in the MCT. FDA approval, if received, is not expected until, at the
earliest, late 2006. 27




---



##### 



The regulatory process may delay the marketing of new products for lengthy periods and impose
substantial additional costs or it may prevent the introduction of new products altogether. In
particular, the FDA permits commercial distribution of a new medical device only after the device
has met the established regulatory compliance guidelines. The FDA will clear marketing of a medical
device through the 510k process if it is demonstrated that the new product is substantially
equivalent to other 510k-cleared products. The Pre-market Approval Application process is more
costly, lengthy and uncertain than the 510k pre-market notification process. There can be no
assurance that any new products we develop will be subject to the shorter 510k clearance process;
therefore, significant delays in the introduction of any new products that we develop may occur. If
we are required to go through the Pre-market Approval Application process for new products, there
will be significant costs and delays in the introduction of our new products and they may not be
approved at all. Moreover, foreign governmental authorities have become increasingly stringent and we may be
subject to more rigorous regulation by such authorities in the future. Any inability or failure of
our foreign independent distributors to comply with the varying regulations or new regulations
could restrict such distributors ability to sell our products internationally and this could
adversely affect our business. All products and manufacturing facilities are subject to continual
review and periodic inspection by regulatory agencies. Following these periodic inspections, or
audits, the FDA may issue a Form 483 notice of inspection observations or, in some cases, a more
formal warning letter that could cause us to modify certain activities identified during the
inspection. A Form 483 notice is generally issued at the conclusion of an FDA inspection and lists
conditions the FDA investigators believe may violate good manufacturing practices or other FDA
regulations. In April, 2005, one of the clinical trial sites was audited. As a result of that
audit, the site received a Form 483 notice. The site is currently preparing a response to the FDAs
notice. In the second quarter of 2005, the FDA initiated an audit of the Companys records relating
to the clinical trial. As a result of this audit, the FDA may issue a Form 483 notice, or a more
formal warning letter. Responding to FDA inquiries and audits and providing the FDA with
information is time consuming for management and could cause a delay in the submission of the PMA
to the FDA. 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, suspension of the FDAs review of our PMA, enforcement actions,
injunctions and criminal prosecution. In addition, the FDA actively enforces regulations
prohibiting the promotion of medical devices for unapproved indications. The CMI is a novel product and it contains biologic materials and so may face additional obstacles
to FDA approval. To complete successful clinical trials, a product must meet the criteria for clinical
approval, or endpoints, established in the clinical study. These endpoints are established in
consultation with the FDA, following its clinical trial design guidelines to establish the safety
and effectiveness for approval of Class III medical devices. However, in the case of products which
are novel or which target parts of the human body for which there are no FDA approved products, the
scientific literature may not be as complete and there may not be established guidelines for the
design of studies to demonstrate the effectiveness of such products. As a result, clinical trials
considering such products may take longer than average and obtaining approval may be more
difficult. Additionally, the endpoints established for such a clinical trial might be inadequate to
demonstrate the safety and efficacy levels required for regulatory approval because they do not
measure the clinical benefit of the product being tested. In certain cases additional data
collected in the clinical trial or further clinical trials may be required by the FDA. To our knowledge, the FDA has not to date approved or established endpoints for any other
product with the potential to facilitate the growth of new tissue in the space created when
meniscus tissue is removed through a partial meniscectomy procedure. It is possible that the FDA or
the Company could determine that the endpoints established for the CMI clinical trial should be
modified because they are inadequate to demonstrate the safety and efficacy levels required for
regulatory approval of the CMI or that such endpoints fail to measure the benefit of the CMI. If
this were to occur, we may be required to collect additional patient data or to re-design our
clinical trial using different measures. If we are required to identify new measures to test our
endpoints, we will face substantial delays in our current timeline to commercialize and launch the
CMI in the U.S. and will incur additional costs associated with these activities. Any delays in
regulatory approval will delay commercialization of the CMI in the U.S., which would harm our
business prospects. The FDA regulates human therapeutic products in one of three broad categories: drugs,
biologics or medical devices. The FDAs scrutiny of products containing biologic materials may be
heightened. We use a biologic material, bovine tendon, in the production of the CMI. Use of this
biological material in the CMI may result in heightened scrutiny of our product which may result in
further delays in, or obstacles to, obtaining FDA approval. 28




---



##### 



Sales of our products are largely dependent upon third party reimbursement and our performance may
be harmed by health care cost containment initiatives. In the U.S. and other markets, health care providers, such as hospitals and physicians, that
purchase health care products, such as our products, generally rely on third party payers to
reimburse all or part of the cost of the health care product. Such third party payers include
Medicare, Medicaid and other health insurance and managed care plans. Reimbursement by third party
payers may depend on a number of factors, including the payers determination that the use of our
products is clinically useful and cost-effective, medically necessary and not experimental or
investigational. Also, third party payers are increasingly challenging the prices charged for
medical products and services. Since reimbursement approval is required from each payer
individually, seeking such approvals can be a time consuming and costly process. In the future,
this could require us or our marketing partners to provide supporting scientific, clinical and
cost-effectiveness data for the use of our products to each payer separately. Significant
uncertainty exists as to the reimbursement status of newly approved health care products. Third
party payers are increasingly attempting to contain the costs of health care products and services
by limiting both coverage and the level of reimbursement for new therapeutic products and by
refusing, in some cases, to provide coverage for uses of approved products for disease indications
for which the FDA has not granted marketing approval. There can be no assurance that third party
reimbursement coverage will be available or adequate for any products or services that we develop. We may be subject to product liability claims and our limited product liability insurance may not
be sufficient to cover the claims, or we may be required to recall our products. We manufacture medical devices that are used on patients in surgical procedures and we may be
subject to product liability claims. During 2001 and 2002, the Company shipped certain components
of the SharpShooter that were later identified to have the potential to become non-sterile. After
becoming aware of this potential in 2002, the Company voluntarily instituted a recall of such
product components. The Company reworked the packaging design to correct the issue that led to the
recall. This reworked packaging required FDA approval before the reworked products could be
returned to the customer. The Company received a termination letter from the FDA closing the recall
on July 3, 2003. We may be subject to other product recalls in the future. The medical device
industry has been historically litigious and we face an inherent business risk of financial
exposure to product liability claims. Since our products are often implanted in the human body,
manufacturing errors, design defects or packaging defects could result in injury or death to the
patient. This could result in a recall of our products and substantial monetary damages. Any
product liability claim brought against us, with or without merit, could result in a diversion of
our resources, an increase in our product liability insurance premiums and/or an inability to
secure coverage in the future. We would also have to pay any amount awarded by a court in excess of
our policy limits. In addition, any recall of our products, whether initiated by us or by a
regulatory agency, may result in adverse publicity for us that could have a material adverse effect
on our business, financial condition and results of operations. Our product liability insurance
policies have various exclusions; therefore, we may be subject to a product liability claim or
recall for which we have no insurance coverage. In such a case, we may have to pay the entire
amount of the award or costs of the recall. Finally, product liability insurance is expensive and
may not be available in the future on acceptable terms, or at all. Negative publicity or medical research regarding the health effects of the types of products used
in the CMI could affect us. In late December 2003, the U.S. Department of Agriculture announced a diagnosis of bovine
spongiform encephalopathy, also known as mad cow disease, in an adult cow from Washington State.
This could raise public concern about the safety of using certain other animal-derived products,
including the bovine tendon based material used in the CMI. The U.S. Department of Agriculture has
indicated that human transmission of mad cow disease is limited to nervous system tissue such as
the brain, spinal cord, retina, dorsal root ganglia (nervous tissue located near the backbone),
distal ileum and the bone marrow. Additionally, the literature indicates that certain steps used in
the manufacture of the CMI have a high probability of destroying any of the prions, or protein
particles, believed to be responsible for mad cow disease, even if they were present in the tendon
tissue. Currently, we obtain our supply of bovine tissue from the achilles tendon of U.S. cows that
are 24 months or younger in age and source the tendon material from a third-party supplier.
However, we are still subject to risks resulting from public perception that the bovine collagen
may be affected by mad cow disease. To date, we have not, as a result of concerns about mad cow
disease, suffered any negative financial results or received any indication that such concerns
could delay or prevent approval of the CMI by the FDA. However, should public concerns about the
safety of bovine collagen or other cow-derived substances increase, as a result of further
occurrences of mad cow disease or for any other reason, we could suffer a loss of sales or face
increased risks to obtaining FDA approval. This could have a material and adverse affect on our
financial results. 29




---



##### 



To be commercially successful, we will have to convince physicians that using our products to
repair damaged menisci is an effective alternative to existing therapies and treatments. We believe that physicians will not widely adopt our products unless they determine based on
experience, clinical data and published peer reviewed journal articles, that the use of the CMI,
the SharpShooter or any future products we develop provides an effective alternative to
conventional means of treating a damaged meniscus or other injury. To date, we have completed only
limited clinical studies of the CMI and the SharpShooter. Clinical experience may not indicate that
treatment with our products provides patients with sustained benefits. In addition, we believe that
continued recommendations and support for the use of the CMI and the SharpShooter by influential
physicians are essential for widespread market acceptance of these products. If our products do not
continue to receive support from these physicians or from long-term data, surgeons may not use, and
the facilities may not purchase, our products. Moreover, our competitors may develop and
successfully commercialize medical devices that directly or indirectly accomplish what our products
are designed to accomplish in a superior and less expensive manner. If our competitors products
prove to be more successful than ours, our products could be rendered obsolete. As a result, we may
not be able to produce sufficient sales to obtain or maintain profitability. We are dependent on a few products. We anticipate that most of our revenue growth in the future, if any, will come from our tissue
re-growth technology products including the CMI and other supporting products, including the
SharpShooter. We may not be able to successfully increase sales of our current product offering.
Additionally, our efforts to develop new products, including enhancements to our existing products
may not be successful. If our development efforts are successful, we may not be successful in
marketing and selling our new products. We will need to obtain financing in the future which may be difficult and may result in dilution to
our stockholders. In the future, we will need to raise additional funds through equity or debt financing,
collaborative relationships or other methods. Our future capital requirements depend upon many
factors, including:  
    Our ability to increase revenues, which depends on whether we and our distribution
partners can increase sales of our products;
    Our ability to complete the CMI clinical trial and obtain FDA approval;
    Our ability to effectively produce our products and adequately control the cost of production;
    The extent to which we allocate resources toward development of our existing or new products;
    The timing of, and extent to which, we are faced with unanticipated marketing or medical
challenges or competitive pressures;
    Our ability to successfully transfer liability for or restructure long-term facility
leases for facilities that exceed our present capacity needs;
    The amount and timing of leasehold improvements and capital equipment purchases; and
    The response of competitors to our products. Because of our potential long-term capital requirements, we may access the public or private
equity markets whenever conditions appear to us to be favorable, even if we do not have an
immediate need for additional capital at that time. To the extent we access the equity markets, the
price at which we sell shares may be lower than the current market prices for our common stock. Our
stock price has historically experienced significant volatility, which may make it more difficult
to price a transaction at then current market prices. There can be no assurance that any such
additional funding will be available when needed or on terms favorable to us, if at all. 30




---



##### 



The Board of Directors and the shareholders of the Company have approved a 1 for 7 reverse
stock split of ReGens issued and outstanding common stock to be effected, at the Boards
discretion, during a period of up to six months after May 13, 2005. The Board also has the
authority not to effect the reverse stock split in such timeframe. If effected, the reverse stock
split would result in a reduction in the number of shares of our common stock issued and
outstanding and an associated increase in the number of authorized shares which would be unissued
and available for future issuance after the reverse stock split. Such shares could be used for any
proper corporate purpose including, among others, future financing transactions. If effected, the
reverse stock split would result in a reduction in the number of shares of our common stock issued
and outstanding and an associated increase in the number of authorized shares which would be
unissued and available for future issuance after the reverse stock split. Such shares could be used
for any proper corporate purpose including, among others, future financing transactions. Additionally, the Board of Directors and the shareholders authorized an amendment to the
Companys Amended and Restated Certificate of Incorporation to increase the number of our
authorized shares of common stock from 130,000,000 shares to 165,000,000 shares. As of March 31,
2005, a total of 53,396,717 shares of the Companys currently authorized 130,000,000 shares of
common stock were issued and outstanding. Additionally, the Company has reserved 25,925,429 shares
of common stock for conversion of outstanding Preferred Stock and 24,229,550 shares of common stock
for exercise of stock options and warrants. The increase in the number of authorized but unissued
shares of common stock will enable the Company, without further stockholder approval, to issue
shares from time to time as may be required for proper business purposes, including, among others,
future financing transactions. If we obtain financing through the sale of additional equity or debt securities, this could
result in dilution to our stockholders by increasing the number of shares of outstanding stock. We
cannot predict the effect this dilution may have on the price of our common stock. In addition, in order to obtain additional equity financing, we must have a sufficient number
of authorized shares available for issuance under our charter. If such shares are not available for
issuance, in order to complete such financing, we would be required to seek the approval of our
shareholders to amend our charter to increase our authorized shares available for issuance. We may face challenges to our patents and proprietary rights. Our ability to develop and maintain proprietary aspects of our business, including the CMI and
the SharpShooter, is critical for our future success. We rely on a combination of confidentiality
protections, contractual requirements, trade secret protections, patents, trademarks and copyrights
to protect our proprietary intellectual property. Our patent positions and those of other medical
device companies are uncertain and involve complex and evolving legal and factual questions.
Pending patent applications may not result in issued patents. Patents issued to or licensed by us
may be challenged or circumvented by competitors and such patents may not be found to be valid or
sufficiently broad to protect our technology or to provide us with any competitive advantage. Any
future litigation, regardless of the outcome, could result in substantial expense and significant
diversion of the efforts of our technical and management personnel. While we attempt to ensure that our products do not infringe other parties patents and
proprietary rights, our competitors may assert that our products or the methods they employ are
covered by patents held by them. Furthermore, third parties could obtain patents that may require
licensing for the conduct of our business, and there can be no assurance that we would be able to
obtain the required licenses. We also rely on nondisclosure agreements with certain employees,
consultants and other parties to protect, in part, trade secrets and other proprietary technology.
Litigation may be necessary to enforce our patents and license agreements, to protect our trade
secrets or know-how or to determine the enforceability, scope and validity of the proprietary
rights of others. An adverse determination in any such proceeding could subject us to significant
liabilities to third parties, or require us to seek licenses from third parties or pay royalties
that may be substantial. An adverse determination in a judicial or administrative proceeding or
failure to obtain necessary licenses could prevent us from manufacturing or selling certain of our
products which in turn would have a material adverse effect on our business, financial condition
and results of operations. 31




---



##### 



The terms of our Credit Agreements with Centerpulse subject us to the risk of foreclosure on
certain intellectual property. Centerpulse has provided us debt financing pursuant to two Credit Agreements. To secure our
obligations under one of the Credit Agreements, we have granted Centerpulse a security interest in
certain of our intellectual property and have agreed not to license or sell such intellectual
property, other than in the ordinary course of our business. In the event we, without the written
consent of Centerpulse, enter into an agreement with a competitor of Centerpulse involving either
the licensing of our intellectual property or the co-development of intellectual property, in each
case relating to future generations of the CMI, Centerpulse may, at its option, accelerate the
maturity of the debt. As of March 31, 2005, we owed approximately $7.2 million under these credit
facilities, of which approximately $4.7 million is collateralized by a security interest in certain
of our intellectual property. The credit agreements provide that the debt will mature on the
earlier of 36 months from the date we receive FDA approval for the CMI or December 31, 2009. If an
event of default occurs under the 2000 Credit Agreement, Centerpulse may exercise its right to
foreclose on certain intellectual property used as collateral for the payment of these obligations.
Any such default and resulting foreclosure could have a material adverse effect on our financial
condition. We are dependent on a single or a limited number of suppliers and the loss of any of these
suppliers could adversely affect our business. We rely upon our vendors for the supply of raw materials and product components used in the
manufacture of our CMI and SharpShooter products. Furthermore, in several cases we rely on a single
vendor to supply critical materials or components. In the event that we are unable to obtain
components for any of our products, or are unable to obtain such components on commercially
reasonable terms, we may not be able to manufacture or distribute our products on a timely and
competitive basis, or at all. If we experience any delays in product availability, the costs
incurred in locating alternative suppliers could have a material adverse effect on our operations. Our reliance on third parties to distribute our products may increase our operating costs and
reduce our operating margins. We rely on third parties to distribute our products. The inability or lack of desire of these
third parties to deliver or perform for us in a timely or cost-effective manner could cause our
operating costs to rise and our margins to fall. We are subject to the risk that outside factors
may prevent such third parties from meeting our distribution needs. The CMI is currently
distributed outside the U.S. under a distributorship agreement with Centerpulse which was exclusive
until April 17, 2004. On February 15, 2005 we received notice from Centerpulse of its intent to
terminate, the Distributorship Agreement effective August 11, 2005. The Distributorship Agreement
permits termination by Zimmer at any time upon six months prior written notice to the Company.
Zimmer did not provide any reason for the termination. We have had no CMI sales to Centerpulse
during the first quarter of 2005 and do not expect to have CMI sales to Centerpulse in subsequent
periods. The SharpShooter is currently marketed through a worldwide distribution agreement with
Linvatec. Although, sales of the SharpShooter by Linvatec, the primary distributor of the SharpShooter,
increased by 20% in the first quarter of 2005
compared to the same period in 2004, historically sales to Linvatec have been inconsistent.
These distributors have in the past, and may in the future, fail to effectively distribute our
products. Although the FDA has not approved the CMI for sale in the U.S., if the FDA does approve the
CMI for sale in the U.S., we do not have a distributor for the CMI in the U.S., or, beginning
August 11, 2005, outside the U.S. There is no guarantee that we will be able to find a suitable
third party to effectively distribute the CMI in the U.S. or elsewhere. We may not be successful in
entering into distribution arrangements and marketing alliances with other third parties or if we
do, we will be subject to a number of risks, including:  
    we may be required to relinquish important rights to our products;
    we may not be able to control the amount and timing of resources that our distributors
may devote to the commercialization of our products;
    our distributors may experience financial difficulties; and 32




---



##### 




    business combinations or significant changes in a distributors business strategy may
also adversely affect a distributors willingness or ability to complete its obligations
under any arrangement. Failure to market and distribute products to our customers in a timely and cost effective manner
would cause our operating costs to increase and our margins to fall. Developing a sales and marketing organization is difficult, expensive and time-consuming. The Company has created a Swiss subsidiary to conduct its European distribution activities
through local market distributors and a limited number of employees to be hired by the Company or
its subsidiary. If the CMI is approved by the FDA, the Company may elect to conduct its marketing
and distribution activities itself in the U.S. Conducting marketing and distribution activities
will force us to invest in sales and marketing personnel and related costs. Developing the sales
force to market and sell products is a difficult, expensive and time-consuming process. We have
limited experience developing a sales organization and may be unsuccessful in attempting to do so.
Factors that may inhibit our efforts to market our products without third party distributors
include our inability to recruit and retain adequate numbers of effective sales and marketing
personnel and the inability of sales personnel to obtain access to or persuade adequate numbers of
physicians to use our products. If we are unable to develop a sales and marketing operation or if
such sales or marketing operation is not successful, we may not be able to increase market
awareness and sell the CMI in Europe and, if approved by the FDA, in the U.S. Our reliance on Centerpulse as a shareholder and lender may allow Centerpulse to exert control over
our actions. Based on shares outstanding as of March 31, 2005, Centerpulse beneficially owns approximately
7.1% of our common stock. Additionally, Centerpulse is a party to a stockholders agreement, which
requires each of the parties to the stockholders agreement to vote for Centerpulses designee to
our Board of Directors. The stockholders agreement expires on the earliest to occur of (i) June
21, 2007 (ii) a change of control of the Company, or (iii) the re-listing of the common stock of
the Company on a national securities exchange or the NASDAQ. CMI sales to Centerpulse, the
exclusive distributor of the CMI outside of the U.S. until April 17, 2004, decreased substantially
for the year ended December 31, 2003 compared to the year ended December 31, 2002, and we elected
to exercise our right to convert our distributorship agreement with them to a non-exclusive
agreement. On February 15, 2005 we received notice from Centerpulse of its intent to terminate the
distributorship agreement, effective August 11, 2005. The agreement permits termination by
Centerpulse at any time upon six months prior written notice to the Company. Centerpulse did not
provide any reason for the termination. Also on February 15, 2005, Richard Fritschi, the President
of Centerpulse Orthopedics Ltd, a unit of Zimmer, resigned his position as a director of the
Company. Mr. Fritschis resignation was not related to any disagreement with the Company. These
actions will allow us to distribute the CMI directly or find a third party to distribute the CMI,
but may also result in a decrease of sales of the CMI by Centerpulse in the future, which could
result in a decrease in our sales and revenues from the CMI. Centerpulse has provided us debt
financing pursuant to two Credit Agreements. To secure our obligations under one of the Credit
Agreements, we have granted Centerpulse a security interest in certain of our intellectual property
and have agreed not to license or sell such intellectual property, other than in the ordinary
course of our business. In the event we, without the written consent of Centerpulse, enter into an
agreement with a competitor of Centerpulse involving either the licensing of our intellectual
property or the co-development of intellectual property, in each case relating to future
generations of the CMI, Centerpulse may, at its option, accelerate the maturity of the debt. These
factors, individually or taken together, may result in Centerpulse being able to exercise
substantial control over the Company. In many cases, Centerpulses interests and the Companys
interests are not aligned and so Centerpulse may exert control in a manner that is inconsistent
with the Companys interests. Disruption of our manufacturing could adversely affect our business, financial condition and
results of operations. Our results of operations are dependent upon the continued operation of our manufacturing
facility in Redwood City, California. The operation of biomedical manufacturing plants involves
many risks. Such risks include the risks of breakdown, failure or substandard performance of
equipment, the occurrence of natural and other disasters, and the need to comply with the
requirements of directives from government agencies, including the FDA. The occurrence of material
operational problems could have a material adverse effect on our business, financial condition, and
results of operations during the period of such operational difficulties. 33




---



##### 



Our success depends upon our ability to recruit and retain key personnel. Our success depends, in part, upon our ability to attract and retain qualified operating
personnel. Competition for skilled personnel in the areas of research and development,
manufacturing, marketing and other areas is highly competitive. In addition, we believe that our
success will depend on the continued employment of our Chairman, President and CEO, Dr. Gerald
Bisbee with whom we have entered into an employment agreement, and our Senior Vice President,
Clinical and Regulatory Affairs, John Dichiara, with whom we have no formal employment agreement,
and others involved in the management and operation of the Company. We do not maintain key person
life insurance for any of our personnel. To the extent we are unable to recruit or retain qualified
personnel, our business may be adversely affected. If we, or our third party suppliers, do not comply with laws regulating the protection of the
environment and health and human safety, our business could be adversely affected. Our research and development processes involve the controlled use of hazardous chemical and
biologic materials, and produce waste products. We are subject to federal, state and local laws and
regulations governing the use, storage, handling and disposal of such materials and waste products.
Our efforts to comply with applicable environmental laws require an ongoing and significant
commitment of our resources. Although we believe that our procedures for handling and disposing of
such materials and waste products materially comply with the standards prescribed by such laws and
regulations, the risk of accidental contamination or injury from these materials or waste products
cannot be eliminated completely. In the event of such an accident, we could be held liable for any
damages that result and appropriate corrective action and any such liability could exceed our
financial resources. Future changes in applicable federal, state or local laws or regulations or in
the interpretation of current laws and regulations, could have a material adverse effect on our
business. Failure to comply could subject us to denial of the right to conduct business, fines,
criminal penalties and other enforcement actions. Although we maintain workers compensation
insurance to cover us for costs and expenses we may incur due to injuries to our employees
resulting from the use of hazardous chemical and biologic materials, this insurance may not provide
adequate coverage against potential liabilities. We do not maintain insurance for environmental
liability or toxic tort claims that may be asserted against us. If our third party suppliers do not comply with federal, state and local environmental, health
and safety laws and regulations applicable to the manufacture and delivery of their products, our
business could be adversely affected by the affects on third party product supply and/or pricing or
we could be held liable for any resulting damages. Our business could be materially adversely impacted by risks inherent in international markets. During the period ended March 31, 2005 and the year ended December 31, 2004, approximately 20%
and 46%, respectively, of our revenue was generated by customers outside the U.S. We expect that
customers outside the U.S. will continue to account for a significant portion of our revenue in the
future, at least until we are able to market the CMI (or other new products) in the U.S. Our
international sales subject us to inherent risks related to changes in the economic, political,
legal and business environments in the foreign countries in which we do business, including the
following:  
    Fluctuations in currency exchange rates;
    Regulatory, product approval and reimbursement requirements;
    Tariffs and other trade barriers;
    Greater difficulty in accounts receivable collection and longer collection periods;
    Difficulties and costs of managing foreign distributors;
    Reduced protection for intellectual property rights in some countries;
    Burdens of complying with a wide variety of foreign laws;
    The impact of recessions in economies outside the U.S.; and
    Political and economic instability. 34




---



##### 



If we fail to successfully market and sell our products in international markets, our
business, financial condition, results of operations and cash flows could be materially and
adversely affected. Our full Board of Directors, which is not fully independent, acts as the compensation committee;
therefore, compensation and benefits may be excessive, inadequate or improperly structured. Our compensation committee, which was set up to determine the compensation and benefits of our
executive officers, to administer our stock plans and employee benefit plans and to review policies
relating to the compensation and benefits of our employees, and which formerly consisted of one
director who was not independent under the listing standards of the national securities exchanges
and automated quotation systems, has been eliminated. The full Board of Directors now performs
those duties. Compensation decisions made by a Board of Directors, which is not independent, could
result in excess compensation or benefits to our executives or employees. Additionally, the Board
of Directors could recommend inadequate or improperly structured compensation and benefits for our
executives or employees, which could result in a failure to retain or an inability to hire
executives or employees. The price of our common stock has been, and will likely continue to be, volatile. The market price of our common stock, like that of the securities of many other development
stage companies, has fluctuated over a wide range and it is likely that the price of our common
stock will fluctuate in the future. Over the past three fiscal years, and for the period from
January 1, 2005 through March 31, 2005, the closing price of our common stock, as reported by the
OTC Bulletin Board, has fluctuated from a low of $0.04 to a high of
$1.54. The market price of our
common stock could be impacted by a variety of factors, including:  
    Fluctuations in stock market prices and trading volumes of similar companies or of the markets generally;
    Disclosure of the results of regulatory proceedings, including the approval or lack of approval by the FDA of the CMI;
    Changes in government regulation;
    Additions or departures of key personnel;
    Our investments in research and development or other corporate resources;
    Announcements of technological innovations or new commercial products or services by us or our competitors;
    Developments in the patents or other proprietary rights owned or licensed by us or our competitors;
    The timing of new product introductions;
    Actual or anticipated fluctuations in our operating results;
    Our ability to effectively and consistently manufacture our products and avoid costs
associated with the recall of defective or potentially defective products;
    The ability of our distribution partners to market and sell our products,
    Changes in distribution channels; and
    The ability of our vendors to effectively and timely deliver necessary materials and product components. 35




---



##### 



Further, due to the relatively fixed nature of most of our costs, which primarily include
personnel costs as well as facilities costs, any unanticipated shortfall in revenue in any fiscal
quarter would have an adverse effect on our results of operations in that quarter. Accordingly, our
operating results for any particular quarter may not be indicative of results for future periods
and should not be relied upon as an indication of our future performance. These fluctuations could
cause the trading price of our stock to be negatively affected. Our quarterly operating results
have varied substantially in the past and may vary substantially in the future. In addition, the
stock market has been very volatile, particularly on the OTC Bulletin Board where our stock is
quoted. This volatility is often not related to the operating performance of companies listed
thereon and will probably continue in the foreseeable future. Ownership of our stock is concentrated and this small group of stockholders may exercise
substantial control over our actions. Based on shares outstanding as of March 31, 2005, the following entities beneficially own five
percent or more of our common stock: Robert McNeil, Ph.D. owns approximately 27.8% (which includes
shares owned by Sanderling Ventures); Sanderling Ventures owns approximately 26.9%; Centerpulse
owns approximately 7.1%, L-R Global Partners LP and L-R Partners Global Fund, Ltd. own
approximately 6.4% (5.0% and 1.4% respectively) and Gerald E. Bisbee, Jr., Ph.D. owns approximately
5.8%. These stockholders, if acting together, have the ability to exert substantial influence over
the outcome of corporate actions requiring stockholder approval. This concentration of ownership
may also have the effect of delaying or preventing a change in our control. Additionally, the holders of approximately 37.8% of our outstanding common stock on an as
converted basis are parties to a stockholders agreement. The parties to the stockholders
agreement agreed to vote all of their shares of capital stock of ReGen in favor of certain
corporate actions, including but not limited to, maintaining ReGens board of directors at seven
members, electing certain individuals to ReGens board, a reverse split of the capital stock of
ReGen, amending ReGens certificate of incorporation to increase the number of authorized shares of
common stock of ReGen and amending ReGens by-laws. A substantial number of shares of our common stock are eligible for sale pursuant to the
Registration Statement on Form S-1 and pursuant to Rule 144 and this could cause our common stock
price to decline significantly. All of the shares of common stock issued in connection with the merger of Aros Corporation and
ReGen Biologics and the shares issued in connection with the financings in September 2003 and April
2004 are eligible for sale pursuant to Rule 144. In July 2004, the Company filed a registration statement (the Registration Statement) with
the SEC on Form S-1 for registration of 45,253,053 shares of common stock to be sold at the
election of the selling stockholders, including shares from each of the September 2003 and the
April 2004 financings. The Registration Statement was declared effective with the SEC on July 23,
2004. The shares registered include common shares registered pursuant to the registration rights
agreements between the Company and purchasers of the Common Stock of the Company (issuable upon the
conversion of certain shares of Series A Stock and Series C Stock on a one-for-one basis at the
election of the holders and all of the Common Stock of the Company issued in the April 2004
financing. As of April 30, 2005, shareholders cannot sell shares registered under the Registration
Statement because the Registration Statement must be amended by the filing of a post-effective
amendment to include recent financial statements, which amendment must be declared effective by the
SEC. If our stockholders sell, or the market perceives that our stockholders intend to sell,
substantial amounts of our common stock in the public market, the market price of our common stock
could decline significantly. These sales may also make it more difficult for us to sell equity or
equity-related securities in the future at a time and price that we deem appropriate. As a result
of restrictions on resale ending and in conjunction with the eligibility to sell common stock by
the selling stockholders, pursuant to, and as described in, the amended Registration Statement once
declared effective, the market price of our common stock could drop significantly if the holders of
such shares sell them or are perceived by the market as intending to sell them. The subordination of our common stock to our preferred stock could hurt common stockholders. Our common stock is expressly subordinate to our Series A Stock and Series C Stock in the
event of our liquidation, dissolution or winding up. With respect to our Series A Stock and Series
C Stock, any merger or sale of substantially all of our assets shall be considered a deemed
liquidation. If we were to cease operations and liquidate our assets, we would first be required to
pay approximately $11.6 million to the holders of our Series A Stock and Series C Stock and there
may not be any remaining value available for distribution to the holders of common stock after
providing for the Series A Stock and Series C Stock liquidation preference. 36




---



##### 



The exercise of warrants or options may depress our stock price and may result in dilution to our
common stockholders. There are a significant number of outstanding warrants and options to purchase our stock.If
the market price of our common stock rises above the exercise price of outstanding warrants and
options, holders of those securities are likely to exercise their warrants and options and sell the
common stock acquired upon exercise of such warrants and options in the open market. Sales of a
substantial number of shares of our common stock in the public market by holders of warrants or
options may depress the prevailing market price for our common stock and could impair our ability
to raise capital through the future sale of our equity securities. Additionally, if the holders of
outstanding options or warrants exercise those options or warrants, our common stockholders will
incur dilution. As of March 31, 2005, warrants to purchase 4,366,722 shares of our common stock at a weighted
average exercise price of $0.74 per share were outstanding and exercisable and options to purchase
12,002,910 shares of common stock at a weighted average exercise price of $0.66 per share were
outstanding and exercisable. We grant stock options and warrants as payment for consulting services and the exercise of such
options and warrants may result in dilution to our common stockholders. During the first quarter of 2005, we have not granted options or warrants for the acquisition
of our common stock. However, in the past we have granted stock options and warrants as payment for
consulting services and we may continue to do so in the future. In 2002, we issued 1,543,478
options to acquire common stock as payment for consulting services with exercise prices ranging
from $0.13 per share to $0.22 per share. In 2003, we issued 30,523 options to acquire common stock
with an exercise price of $0.45 per share and 700,000 warrants to acquire common stock with an
exercise price of $0.45 per share. In 2004, we have issued 10,000 options to acquire common stock
with an exercise price of $0.90 per share. To the extent that such options or warrants are
exercised, our shareholders will incur dilution. We may not be able to utilize all of our net operating loss carryforwards. The Company had a net operating loss carryforward at December 31, 2004 of approximately $45.8
million and a research and development tax credit of approximately $410,000. The federal and state
net operating loss carryforwards will begin to expire in 2005, if not utilized. The federal and
state research and development credit carryforwards will begin to expire in 2006, if not utilized.
The utilization of net operating loss carryforwards may be limited due to changes in the ownership
of the Company, and the effect of the reverse merger and recapitalization completed on June 21,
2002. We have established several anti-takeover measures that could delay or prevent a change of our
control. Under the terms of our amended and restated certificate of incorporation, our board of
directors is authorized, without any need for action by our stockholders, but subject to any
limitations prescribed by law, to issue shares of our preferred stock in one or more series. Each
series may consist of such number of shares and have the rights, preferences, privileges and
restrictions, such as dividend rights, dividend rates, conversion rights, voting rights, terms of
redemption, redemption prices, liquidation preferences and the right to increase or decrease the
number of shares of any series, as the board of directors shall determine. The board of directors
may issue preferred stock with voting or conversion rights that may delay, defer or prevent a
change in control of our company and that may adversely affect the market price of the common stock
and the voting and other rights of the holders of common stock. Additionally, our board of
directors adopted a stockholder rights plan and declared a dividend distribution of one right for
each outstanding share of our common stock. Each right, when exercisable, entitles the registered
holder to purchase securities at a specified purchase price, subject to adjustment. The rights plan
may have the anti-takeover effect of causing substantial dilution to the person or group that
attempts to acquire our company on terms not approved by the board of directors. The existence of
the rights plan could limit the price that certain investors might be willing to pay in the future
for shares of our capital stock and could delay, defer or prevent a merger or acquisition of our
company that stockholders may consider favorable. Our common stock is subject to the SECs Penny Stock rules, which may make our shares more
difficult to sell. Because our common stock is not traded on a stock exchange or on NASDAQ, and the market price
of the common stock is less than $5.00 per share, the common stock is classified as a penny
stock. The SEC rules regarding penny stocks may have the effect of reducing trading activity in our
common stock and making it more difficult for investors to sell. Under these rules, broker-dealers
who recommend such securities to persons other than institutional accredited investors must: 37




---



##### 




    make a special written suitability determination for the purchaser;
    receive the purchasers written agreement to a transaction prior to sale;
    provide the purchaser with risk disclosure documents which identify certain risks
associated with investing in penny stocks and which describe the market for these penny
stocks as well as a purchasers legal remedies;
    obtain a signed and dated acknowledgment from the purchaser demonstrating that the
purchaser has actually received the required risk disclosure document before a transaction
in a penny stock can be completed; and
    give bid and offer quotations and broker and salesperson compensation information to the
customer orally or in writing before or with the confirmation. These rules may make it more difficult for broker-dealers to effectuate customer transactions
and trading activity in our securities and may result in a lower trading volume of our common stock
and lower trading prices. SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS Cautionary Note Regarding Forward-Looking Statements Statements in this filing, which are not historical facts, are forward-looking statements
under provisions of the Private Securities Litigation Reform Act of 1995. All forward-looking
statements involve risks and uncertainties. Such statements are based on the current expectations
and beliefs of the managements of ReGen and RBio and are subject to a number of factors and
uncertainties that could cause actual results to differ materially from those described in the
forward-looking statements, including those discussed in the Risk Factors section of this Form
10-K. We wish to caution readers that the following important factors, among others, in some cases
have affected, and in the future could affect our actual results and could cause our actual results
in fiscal 2005 and beyond to differ materially from those expressed in any forward-looking
statements made by us or on our behalf. Important factors that could cause actual results to differ materially include but are not
limited to our ability to complete the CMI clinical trial and obtain FDA approval, our ability to
obtain additional financing, our ability or the ability of our distribution partners to effectively
market and sell our products, our ability to procure product components and effectively produce
products for resale, our ability to control production quantities and inventory in order to avoid
unanticipated costs such as outdated inventory, the timely collection of our accounts receivable,
our ability to attract and retain key employees, our ability to timely develop new products and
enhance existing products, the occurrence of certain operating hazards and uninsured risks, our
ability to protect proprietary information and to obtain necessary licenses on commercially
reasonable terms, the impact of governmental regulations, changes in technology, marketing risks,
other unforeseen events that may impact our business and our ability to adapt to economic,
political and regulatory conditions affecting the healthcare industry. Our quarterly revenue and operating results have varied significantly in the past and are
likely to vary from quarter to quarter in the future. Quarterly revenue and operating results may fluctuate as a result of a variety of factors,
including our ability or the ability of our distribution partners to market and sell our products,
variable customer demand for our products and services, our investments in research and development
or other corporate resources, our ability to effectively and consistently manufacture our products,
and avoid costs associated with the recall of defective or potentially defective products, the
ability of our vendors to effectively and timely delivery necessary materials and product
components, acquisitions of other companies or assets, the timing of new product introductions,
changes in distribution channels, sales and marketing promotional activities and trade shows and
general economic conditions. Further, due to the relatively fixed nature of most of our costs,
which primarily include personnel, facilities and related costs, any unanticipated shortfall in
revenue in any fiscal quarter would have an adverse effect on our results of operations in that
quarter. Accordingly, our operating results for any particular quarterly period may not necessarily
be indicative of results for future periods. Our filings with the SEC are available to the public from commercial document retrieval
services and at the Web site maintained by the SEC at http://www.sec.gov. 38




---



##### 



Item 3. Quantitative and Qualitative Disclosures about Market Risk For information regarding ReGens exposure to certain market risks, see Item 7A, Quantitative
and Qualitative Disclosures About Market Risk, in the Companys Annual Report on Form 10-K for the
year ended December 31, 2004. Except as described in the Managements Discussion and Analysis of
Financial Condition and Results of Operations, there have been no significant changes in our
financial instrument portfolio or market risk exposure since December 31, 2004. Item 4. Controls and Procedures We maintain disclosure controls and procedures within the meaning of Rule 13a-15(e) of the
Securities Exchange Act of 1934, as amended, or the Exchange Act. Our disclosure controls and
procedures (Disclosure Controls), are designed to ensure that information required to be
disclosed by the Company in the reports filed under the Exchange Act, such as this Quarterly Report
on Form 10-Q, is recorded, processed, summarized and reported within the time periods specified in
the U.S. Securities and Exchange Commissions rules and forms. Our Disclosure Controls are also
designed to ensure that such information is accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for
timely decisions regarding required disclosure. In designing and evaluating our Disclosure
Controls, management recognized that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control objectives, and
management necessarily was required to apply its judgment in evaluating and implementing possible
controls and procedures. Evaluation of Disclosure Controls and Procedures.As of the end of the period covered by this
Quarterly Report on 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 31.1 and 31.2 to this Quarterly Report on the Form 10-Q are
certification of our Chief Executive Officer and Chief Financial Officer, which are required in
accordance with Rule 13a-14 of the Exchange Act. This Controls and Procedures section includes the
information concerning the controls evaluation referred to in the certifications and it should be
read in conjunction with the certifications for a more complete understanding of the topics
presented. Based on the controls evaluation, our Chief Executive Officer and Chief Financial Office
have concluded that, as of March 31, 2005, our Disclosure Controls and Procedures were effective to
ensure that material information is made known to management, including our Chief Executive Officer
and Chief Financial Officer, particularly during the period when our periodic reports are being
prepared. Changes in Internal Control Over Financial Reporting.There has been no change in the
Companys internal control over financial reporting that occurred during the Companys first fiscal
quarter of 2005 that has materially affected, or is reasonably likely to materially affect, the
registrants internal control over financial reporting. 39




---



##### 



PART II Item 1. Legal Proceedings We are a defendant from time to time in lawsuits incidental to our business. We are not
currently subject to any material legal proceedings. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds None. Item 3. Defaults upon Senior Securities None. Item 4. Submission of Matters to a Vote of Security Holders None. Item 5. Other Information None. Item 6. Exhibits (a) Exhibits. The following Exhibits are filed herewith and made a part hereof: Number
    
    Description2.1
    
    
    Agreement and Plan of Merger by and among ReGen Biologics, Inc., Aros Corporation
and Aros Acquisition Corporation dated as of June 7, 2002(1)2.2
    
    
    Agreement and Plan of Merger among the Company, NHA Acquisition Corporation,
National Health Advisors, Ltd., Scott A. Mason and Donald W. Seymour dated as of
June 2, 1997(5)2.3
    
    
    Agreement and Plan of Merger among the Company and MetaContent, Inc. dated as of
March 21, 2001(2)2.4
    
    
    Asset Purchase Agreement between Cerner Corporation and the Company dated as of
April 7, 2001(3)2.5
    
    
    Amendment No. 1 to Asset Purchase Agreement by and between Cerner Corporation and
the Company dated as of June 11, 2001(3)3.1
    
    
    Amended and Restated Certificate of Incorporation(5)3.2
    
    
    Certificate of Amendment to the Certificate of Incorporation(6)3.3
    
    
    Amended and Restated By-Laws(4)3.4
    
    
    Certificate of Amendment of the Amended and Restated Certificate of Incorporation(17)4.1
    
    
    Specimen Common Stock Certificate(7)4.2
    
    
    Rights Agreement between the Company and First Chicago Trust Company of New York,
dated as of May 6, 1997(9)4.3*
    
    
    ReGen Biologics, Inc. Employee Stock Option Plan, Amended and Restated Effective
January 31, 2003(12)4.4*
    
    
    ReGen Biologics, Inc. Non-Employee Director Stock Option Plan, Amended and Restated
Effective January 31, 2003(12)4.5
    
    
    Registration Rights Agreement between the Company and the Investors listed therein(8)4.6
    
    
    Registration Agreement between the Company and Certain Stockholders, dated December
28, 1995(18)4.7
    
    
    Amendment No. 1 to Rights Agreement between the Company and EquiServe Trust Company,
N.A. dated as of June 7, 2002(10)
 40




---



##### 



Number
    
    Description4.8
    
    
    Nonqualified Stock Option Agreement between the Company and The Cleveland Clinic
Foundation, dated August 19, 1994(18)4.9
    
    
    Registration Agreement between the Company and each of Iowa Health Centers, P.C.
d/b/a Iowa Heart Center, P.C., Mercy Hospital Medical Center, Mark A. Tannenbaum,
M.D. and Iowa Heart Institute dated January 7, 1997(14)4.10
    
    
    Nonqualified Stock Option Agreements between the Company and each of Iowa Health
Centers, P.C. d/b/a Iowa Heart Center, P.C., Mercy Hospital Medical Center and Mark
A. Tannenbaum, M.D., dated January 7, 1997(19)4.11
    *
    
    Form of Nonqualified Director Stock Option Agreement(11)4.12
    
    
    Stockholders Agreement by and among the several stockholders named therein, dated
as of June 21, 2002(15)4.13
    
    
    Amendment to Stockholders Agreement by and among Allen & Company Incorporated and
the several stockholders named therein, dated as of December 4, 2002(16)4.14
    *
    
    ReGen Biologics, Inc. Non-Employee Director Supplemental Stock Option Plan Amended
and Restated Effective January 31, 2003(21)4.15
    
    
    Common Stock Registration Rights Agreement by and among ReGen Biologics, Inc., and
the stockholders named therein, dated as of April 19, 2004(22)4.16
    *
    
    Form of Incentive Stock Option Agreement(23)4.17
    *
    
    Form of Nonqualified Director Supplemental Stock Option Agreement(23)10.1
    *
    
    Employment agreement by and between Gerald E. Bisbee, Jr., Ph. D. and ReGen
Biologics, Inc. dated September 22, 1998 and amended September 12, 2000(13)10.2
    
    
    Form of Indemnification Agreement(4)10.3
    
    
    Distributorship Agreement by and between ReGen Biologics, Inc. and Sulzer
Orthopedics AG dated February 16, 1996(20)10.4
    *
    
    Employment Agreement by and between Brion D. Umidi and ReGen Biologics, Inc. dated
March 23, 2004(20)10.5
    
    
    Amendment to Distributorship Agreement by and between ReGen Biologics, Inc. and
Sulzer Orthopedics AG dated January 18, 2002(20)10.6
    
    
    License Agreement by and between ReGen Biologics, Inc. and Linvatec Corporation
dated April 7, 2000(20)10.7
    
    
    Credit Agreement by and between ReGen Biologics, Inc. and Sulzer Medica USA Holding
Company dated March 14, 2000(20)10.8
    
    
    Agreement by and among Sulzer Medica USA Holding Co., Sulzer Biologics Inc. Sulzer
Orthopedics Ltd. and ReGen Biologics, Inc. dated February 20, 2001(20)10.9
    *
    
    Assignment and Royalty Agreement by and among ReGen Biologics, Inc. Modified Polymer
Components, Inc. and Dr. J. Richard Steadman dated April 9, 1997(20)10.10
    
    
    Exclusive License Agreement by and between ReGen Biologics, Inc. and Dr. Shu-Tung Li
dated August 24, 1995(20)10.11
    *
    
    First Amendment to Employment Agreement by and between Gerald E. Bisbee, Jr., Ph. D.
and ReGen Biologics, Inc. dated March 23, 2004(20)10.12
    
    
    Common Stock Purchase Agreement by and among ReGen Biologics, Inc., and the
Individuals named therein, dated as of April 19, 2004(22)10.13
    
    
    Agreement by and between ReGen Biologics, Inc. and MedWork AG dated as of January 1,
2005(24)10.14
    
    
    Credit Agreement by and between ReGen Biologics, Inc. and Sulzer Medica USA Holding
Company dated November 30, 1998(25)21.1
    
    
    Subsidiaries of the Registrant(24)31.1
    
    
    Section 302 Certification from Gerald E. Bisbee, Jr., dated May 13, 2005(22)31.2
    
    
    Section 302 Certification from Brion Umidi, dated May 13, 2005(22)32.1
    
    
    Section 906 Certification from Gerald E. Bisbee, Jr., dated May 13, 2005(22)32.2
    
    
    Section 906 Certification from Brion Umidi, dated May 13, 2005(22)
 41




---



##### 



(1)
    
    Incorporated herein by reference to the Companys Report on Form 10-Q for the quarter ended June 30, 2002 (File No.
000-20805).(2)
    
    Incorporated herein by reference to the Companys Report on Form 10-Q/ A for the quarter ended March 31, 2001 (File
No. 000-20805).(3)
    
    Incorporated herein by reference to the Companys Report on Form 8-K filed on July 18, 2001 (File No. 000-20805).(4)
    
    Incorporated herein by reference to the Companys Report on Form 8-K filed on March 17, 2004 (File No. 000-20805).(5)
    
    Incorporated herein by reference to the Companys Report on Form 10-Q for the quarter ended June 30, 1997 (File No.
000-20805).(6)
    
    Incorporated herein by reference to the Companys Report on Form 10-Q for the quarter ended June 30, 2001 (File No.
000-20805).(7)
    
    Incorporated herein by reference to the Companys Registration Statement on Form S-3, filed on November 19, 2003
(File No. 333-110605).(8)
    
    Incorporated herein by reference to the Companys Report on Form 8-K, filed on September 25, 2003 (File No.
000-20805).(9)
    
    Incorporated herein by reference to the Companys Report on Form 8-K filed on June 4, 1997 (File No. 000-20805).(10)
    
    Incorporated herein by reference to the Companys Report on Form 10-Q for the quarter ended June 30, 2002 (File No.
000-20805).(11)
    
    Incorporated herein by reference to the Companys Report on Form 10-K for the year ended December 31, 1997 (File
No. 000-20805).(12)
    
    Incorporated herein by reference to the Companys Proxy Statement on Schedule 14A filed on April 14, 2003 (File No.
000-20805).(13)
    
    Incorporated herein by reference to the Companys Report on Form 8-K/A, filed on September 4, 2002 (File No.
000-20805).(14)
    
    Incorporated herein by reference to the Companys Current Report on Form 8-K filed on January 14, 1997 (File No.
000-20805).(15)
    
    Incorporated herein by reference to the Companys Report on Form SC 13D filed on March 24, 2003 (File No.
005-49089).(16)
    
    Incorporated herein by reference to the Companys Report on Form SC 13D/A filed on October 3, 2003 (File No.
005-49089).(17)
    
    Incorporated herein by reference to the Companys Report on Form 8-K, filed on January 6, 2003 (File No. 000-20805).(18)
    
    Incorporated herein by reference to the Companys Registration Statement on Form S-1, filed on June 4, 1996 (File
No. 333-04106).(19)
    
    Incorporated herein by reference to the Companys Report on Form 10-Q for the quarter ended March 31, 1997 (File
No. 000-20805). 42




---



##### 



(20)
    
    Incorporated herein by reference to the Companys Report on Form 10-K for the year ended December 31, 2003 (File
No. 000-20805)(21)
    
    Incorporated herein by reference to the Companys Registration Statement on Form S-1/A, filed on January 14, 2004
(File No. 333-110605).(22)
    
    Incorporated herein by reference to the Companys Registration Statement on Form S-1, filed on April 26, 2004 (File
No. 33-114867).(23)
    
    Incorporated herein by reference to the Companys Report on Form 10-Q for the quarter ended September 30, 2004
(File No. 000-20805).(24)
    
    Incorporated herein by reference to the Companys Report on Form 10-K for the year ended December 31, 2004 (File
No. 000-20805)(25)
    
    Included with this filing.*
    
    Management Contract or Compensatory Plan or Arrangement 43




---



##### 



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 May 13, 2005. REGEN BIOLOGICS, INCBy:
    
    /s/ BRION D. UMIDIBrion D. UmidiSenior Vice President and
Chief Financial Officer
 44