##### 



SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 Form 10-Q (Mark One) (X)
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended September 30, 2004Or(  )
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from  to
 Commission file number 000-20805 ReGen Biologics, Inc. (Exact name of registrant as specified in its charter) Delaware(State or other jurisdiction of
incorporation or organization)
    
    23-2476415(I.R.S. Employer
Identification No.)509 Commerce Street,1st Floor, East Wing,Franklin Lakes, NJ(Address of principal executive offices)
    
    07417(Zip Code)
 Registrants telephone number, including area code: (201) 651-5140 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Title of Class  Common Stock $.01 par value per share Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes (X) No (  ) Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes (  ) No (X) The number of outstanding shares of the registrants common stock as of
November 12, 2004 was 49,234,298.




---



##### 



REGEN BIOLOGICS, INC. INDEX PART I  Financial InformationItem 1. Financial StatementsCondensed Consolidated Balance Sheets at September 30, 2004 (unaudited) and December
31, 2003Condensed Consolidated Statements of Operations for the Three Months Ended September
30, 2004 (unaudited) and 2003 (unaudited), the Nine Months Ended September 30, 2004
(unaudited) and 2003 (unaudited) and the Period from December 21, 1989 to September
30, 2004 (unaudited)Consolidated Statement of Changes in Stockholders Equity (Deficit) and Series A &
Series C Redeemable Convertible Preferred Stock for the Period from December 21, 1989
(inception) to September 30, 2004 (unaudited)Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September
30, 2004 (unaudited) and 2003 (unaudited) and the Period from December 21, 1989
(inception) to September 30, 2004 (unaudited)Notes to Condensed Consolidated Financial Statements (unaudited)Item 2. Managements Discussion and Analysis of Financial Conditions and Results of OperationsItem 3. Quantitative and Qualitative Disclosures about Market RiskItem 4. Controls and ProceduresPART II  Other InformationItem 1. Legal ProceedingsItem 2. Unregistered Sales of Equity Securities and Use of ProceedsItem 3. Defaults upon Senior SecuritiesItem 4. Submission of Matters to a Vote of Security HoldersItem 5. Other InformationItem 6. ExhibitsSignaturesCertifications




---



##### 



PART I  Financial Information Item 1. Financial Statements REGEN BIOLOGICS, INC.
(A Development Stage Company) CONDENSED CONSOLIDATED BALANCE SHEETS
  September 30, 2004
    
    December 31, 2003(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    13,507
    
    
    $
    8,323Trade receivables, net of allowance for doubtful
accounts $6 and $0 as of September 30, 2004 and
December 31, 2003, respectively
    
    
    40
    
    
    
    11Receivables from related party
    
    
    65
    
    
    
    Inventory
    
    
    102
    
    
    
    216Prepaid expenses and other current assets
    
    
    241
    
    
    
    247Total current assets
    
    
    13,955
    
    
    
    8,797Property and equipment, net
    
    
    52
    
    
    
    80Other assets
    
    
    130
    
    
    
    152Total assets
    
    $
    14,137
    
    
    $
    9,029LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)Current liabilities:Accounts payable
    
    $
    349
    
    
    $
    408Accounts payable to related parties
    
    
    19
    
    
    
    26Accrued expenses
    
    
    424
    
    
    
    541Current portion of capital leases
    
    
    6
    
    
    
    4Total current liabilities
    
    
    798
    
    
    
    979Pension liability
    
    
    161
    
    
    
    144Other liabilities
    
    
    19
    
    
    
    19Long-term portion of capital leases
    
    
    1
    
    
    
    3Long-term portion of notes payable to related party,
including accrued interest of $1,052 and $958 as of
September 30, 2004 and December 31, 2003,
respectively
    
    
    7,095
    
    
    
    7,001Total liabilities
    
    
    8,074
    
    
    
    8,146Series A redeemable convertible preferred stock, $.01
par value; 30,000,000 shares authorized, liquidation
preference of $6,587; and 14,700,805 shares issued
and outstanding as of September 30, 2004 and $6,855;
and 15,298,351 shares issued and outstanding as of
December 31, 2003
    
    
    6,587
    
    
    
    6,855Series C redeemable convertible preferred stock, $.01
par value; 30,000,000 shares authorized, liquidation
preference of $6,900; and 15,398,341 issued and
outstanding as of September 30, 2004 and $9,969; and
22,246,153 issued and outstanding as of December 31,
2003
    
    
    5,951
    
    
    
    8,439Stockholders equity (deficit):Common stock
    
    
    490
    
    
    
    293Accumulated other comprehensive loss
    
    
    (58
    )
    
    
    (58
    )Additional paid-in capital
    
    
    50,515
    
    
    
    37,249Deficit accumulated during development stage
    
    
    (57,422
    )
    
    
    (51,895
    )Total stockholders equity (deficit)
    
    
    (6,475
    )
    
    
    (14,411
    )Total liabilities and stockholders equity (deficit)
    
    $
    14,137
    
    
    $
    9,029
 See accompanying Notes to Condensed Consolidated Financial Statements.




---



##### 



REGEN BIOLOGICS, INC.
(A Development Stage Company) CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
  Three Months Ended
    
    Nine Months Ended
    
    Period fromSeptember 30,
    
    September 30,
    
    December 21, 1989(Inception) to2004
    
    2003
    
    2004
    
    2003
    
    September 30, 2004(unaudited)
    
    (unaudited)
    
    (unaudited)
    
    (unaudited)
    
    (unaudited)Revenue:Sales
    
    $
    190
    
    
    $
    62
    
    
    $
    431
    
    
    $
    260
    
    
    $
    2,826Royalties
    
    
    12
    
    
    
    7
    
    
    
    37
    
    
    
    20
    
    
    
    178Grant and other revenue
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    433Total revenue
    
    
    202
    
    
    
    69
    
    
    
    468
    
    
    
    280
    
    
    
    3,437Expenses:Costs of goods sold
    
    
    169
    
    
    
    52
    
    
    
    350
    
    
    
    348
    
    
    
    3,281Research and development
    
    
    861
    
    
    
    627
    
    
    
    2,565
    
    
    
    1,774
    
    
    
    30,032Business development,
general and
administrative
    
    
    673
    
    
    
    498
    
    
    
    2,293
    
    
    
    1,749
    
    
    
    16,019Compensation expense
associated with stock
options and warrants
    
    
    42
    
    
    
    35
    
    
    
    199
    
    
    
    36
    
    
    
    6,541Total expenses
    
    
    1,745
    
    
    
    1,212
    
    
    
    5,407
    
    
    
    3,907
    
    
    
    55,873Operating loss
    
    
    (1,543
    )
    
    
    (1,143
    )
    
    
    (4,939
    )
    
    
    (3,627
    )
    
    
    (52,436
    )Merger cost
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (515
    )Interest and other income
    
    
    46
    
    
    
    1
    
    
    
    85
    
    
    
    8
    
    
    
    1,319Rental income
    
    
    87
    
    
    
    60
    
    
    
    249
    
    
    
    298
    
    
    
    1,815Rent expense
    
    
    (86
    )
    
    
    (92
    )
    
    
    (247
    )
    
    
    (306
    )
    
    
    (1,678
    )Interest expense
    
    
    (35
    )
    
    
    (29
    )
    
    
    (95
    )
    
    
    (92
    )
    
    
    (3,054
    )License fees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,050Net loss
    
    $
    (1,531
    )
    
    $
    (1,203
    )
    
    $
    (4,947
    )
    
    $
    (3,719
    )
    
    $
    (52,499
    )Deemed dividend to Series
C Preferred Stockholders
upon issuance of Series C
Preferred Stock with a
beneficial conversion and
amortization of related
issuance cost
    
    
    (84
    )
    
    
    (4,292
    )
    
    
    (580
    )
    
    
    (4,292
    )
    
    
    (4,923
    )Net loss attributable to
common stockholders
    
    $
    (1,615
    )
    
    $
    (5,495
    )
    
    $
    (5,527
    )
    
    $
    (8,011
    )
    
    $
    (57,422
    )Basic and diluted net loss
per share attributable to
common stockholders
    
    $
    (0.03
    )
    
    $
    (0.19
    )
    
    $
    (0.14
    )
    
    $
    (0.28
    )
    
    $
    (3.01
    )Weighted average number of
shares used for
calculation of net loss
per share
    
    
    48,498,899
    
    
    
    29,070,786
    
    
    
    39,640,542
    
    
    
    29,070,786
    
    
    
    19,051,591
 See accompanying Notes to Condensed Consolidated Financial Statements.




---



##### 



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
 (Dollars in thousands, except per share data)
 Stockholders Equity (Deficit)Series A
    
    Series CRedeemable
    
    Redeemable
    
    Series A - F
    
    Series BConvertible
    
    Convertible
    
    Convertible
    
    Convertible
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    DeficitPreferred
    
    Preferred
    
    Preferred
    
    Preferred
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Accumulated
    
    Accumulated
    
    TotalStock
    
    Stock
    
    Stock
    
    Stock
    
    Common Stock
    
    Additional
    
    Deferred
    
    During
    
    Other
    
    StockholdersPaid In
    
    Stock
    
    Development
    
    Comprehensive
    
    EquityShare
    
    Amount
    
    Share
    
    Amount
    
    Shares
    
    Amount
    
    Shares
    
    Amount
    
    Shares
    
    Amount
    
    Capital
    
    Compensation
    
    Stage
    
    Loss
    
    (Deficit)Issuance 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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    725,000
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,226,338
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,650
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,650Net loss from inception
(December 21, 1989)
through December 31, 1992
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,476
    )
    
    
    
    
    
    
    (2,476
    )Balance at December 31, 1992
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,951,338
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    550,552
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,501,890
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    2,105,200
    
    
    
    1
    
    
    
    6,828
    
    
    
    
    
    
    
    (3,818
    )
    
    
    
    
    
    
    3,012Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,463
    )
    
    
    
    
    
    
    (1,463
    )Balance at December 31, 1994
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,501,890
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    2,105,200
    
    
    
    1
    
    
    
    6,828
    
    
    
    
    
    
    
    (5,281
    )
    
    
    
    
    
    
    1,549Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,959
    )
    
    
    
    
    
    
    (1,959
    )Balance at December 31, 1995
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,501,890
    
    
    $
    1
    
    
    
    
    
    
    
    
    
    
    
    2,105,200
    
    
    $
    1
    
    
    $
    6,828
    
    
    
    
    
    
    $
    (7,240
    )
    
    
    
    
    
    $
    (410
    )
 See accompanying Notes to Condensed Consolidated Financial Statements




---



##### 



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 September 30, 2004 (unaudited)(Dollars in thousands, except per share data) Stockholders Equity (Deficit)Series A
    
    Series C
    
    Series A - F
    
    Series B
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    DeficitRedeemable Convertible
    
    Redeemable Convertible
    
    Convertible
    
    Convertible Preferred
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Accumulated
    
    Accumulated
    
    TotalPreferred Stock
    
    Preferred Stock
    
    Preferred Stock
    
    Stock
    
    Common Stock
    
    Additional
    
    Deferred
    
    During
    
    Other
    
    StockholdersPaid In
    
    Stock
    
    Development
    
    Comprehensive
    
    EquityShares
    
    Amount
    
    Shares
    
    Amount
    
    Shares
    
    Amount
    
    Shares
    
    Amount
    
    Shares
    
    Amount
    
    Capital
    
    Compensation
    
    Stage
    
    Loss
    
    (Deficit)Balance at December 31, 1995 (carried forward)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,501,890
    
    
    $
    1
    
    
    
    
    
    
    
    
    
    
    
    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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,191,321
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,693,211
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    335,314
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,028,525
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,028,525
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    453,310
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,481,835
    
    
    $
    1
    
    
    
    
    
    
    
    
    
    
    
    2,502,919
    
    
    $
    1
    
    
    $
    24,943
    
    
    $
    (3,247
    )
    
    $
    (22,312
    )
    
    
    
    
    
    $
    (614
    )
 See accompanying Notes to Condensed Consolidated Financial Statements




---



##### 



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 September 30, 2004 (unaudited)(Dollars in thousands, except per share data) Stockholders Equity (Deficit)Series A
    
    Series CRedeemable
    
    Redeemable
    
    Series A - F
    
    Series BConvertible
    
    Convertible
    
    Convertible
    
    Convertible
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    DeficitPreferred
    
    Preferred
    
    Preferred
    
    Preferred
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Accumulated
    
    Accumulated
    
    TotalStock
    
    Series C
    
    Stock
    
    Stock
    
    Common Stock
    
    Additional
    
    Deferred
    
    During
    
    Other
    
    StockholdersPaid In
    
    Stock
    
    Development
    
    Comprehensive
    
    EquityShares
    
    Amount
    
    Shares
    
    Amount
    
    Shares
    
    Amount
    
    Shares
    
    Amount
    
    Shares
    
    Amount
    
    Capital
    
    Compensation
    
    Stage
    
    Loss
    
    (Deficit)Balance at December 31, 1999 (carried forward)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,481,835
    
    
    $
    1
    
    
    
    
    
    
    
    
    
    
    
    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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,481,835
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,481,835
    
    
    $
    1
    
    
    
    
    
    
    
    
    
    
    
    2,528,044
    
    
    $
    1
    
    
    $
    27,058
    
    
    $
    (2,930
    )
    
    $
    (31,871
    )
    
    
    
    
    
    $
    (7,741
    )
 See accompanying Notes to Condensed Consolidated Financial Statements




---



##### 



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 September 30, 2004 (unaudited)(Dollars in thousands, except per share data) Stockholders Equity (Deficit)Series A
    
    Series CRedeemable
    
    Redeemable
    
    Series A - F
    
    Series BConvertible
    
    Convertible
    
    Convertible
    
    Convertible
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    DeficitPreferred
    
    Preferred
    
    Preferred
    
    Preferred
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Accumulated
    
    Accumulated
    
    TotalStock
    
    Stock
    
    Stock
    
    Stock
    
    Common Stock
    
    Additional
    
    Deferred
    
    During
    
    Other
    
    StockholdersPaid In
    
    Stock
    
    Development
    
    Comprehensive
    
    EquityShares
    
    Amount
    
    Shares
    
    Amount
    
    Shares
    
    Amount
    
    Shares
    
    Amount
    
    Shares
    
    Amount
    
    Capital
    
    Compensation
    
    Stage
    
    Loss
    
    (Deficit)Balance at December 31, 2001 (carried forward)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,481,835
    
    
    $
    1
    
    
    
    
    
    
    
    
    
    
    
    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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,564,047
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    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
    
    
    15,298,351
    
    
    $
    6,855
    
    
    
    
    
    
    
    
    
    
    
    (5,564,047
    )
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,854
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,855
    )Conversion of convertible preferred shares to Common Stock and
Series B Preferred Shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,481,835
    )
    
    
    (1
    )
    
    
    12,025,656
    
    
    $
    120
    
    
    
    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
    )
    
    
    (120
    )
    
    
    12,025,656
    
    
    
    120Minimum Pension Liability
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (58
    )
    
    
    (58
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,951
    )
    
    
    
    
    
    
    (9,951
    )Other Comprehensive Loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,009
    )Balance at December 31, 2002
    
    
    15,298,351
    
    
    
    6,855
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    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
    
    
    
    
    
    
    
    
    
    
    22,246,153
    
    
    $
    9,357
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    97
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    97Issuance of Common Stock warrants to Series C Stockholders
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (969
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    969
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    969Valuation of beneficial conversion associated with Series C Stock
financing
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,292
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,292
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,292Accretion of beneficial conversion associated with Series C Stock
financing
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,292
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,292
    )
    
    
    
    
    
    
    (4,292
    )Issuance of Common Stock  warrants exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    230,000
    
    
    
    2
    
    
    
    113
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    115Accretion of Series C Stock issuance cost
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    51
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (51
    )
    
    
    
    
    
    
    (51
    )Net loss and comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,730
    )
    
    
    
    
    
    
    (5,730
    )Balance at December 31, 2003
    
    
    15,298,351
    
    
    $
    6,855
    
    
    
    22,246,153
    
    
    $
    8,439
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    29,300,786
    
    
    $
    293
    
    
    $
    37,249
    
    
    $
    
    
    
    $
    (51,895
    )
    
    $
    (58
    )
    
    $
    (14,411
    )
 See accompanying Notes to Condensed Consolidated Financial Statements.




---



##### 



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 September 30, 2004 (unaudited)(Dollars in thousands, except per share data) Stockholders Equity (Deficit)Series A
    
    Series CRedeemable
    
    Redeemable
    
    Series A - F
    
    Series BConvertible
    
    Convertible
    
    Convertible
    
    Convertible
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    DeficitPreferred
    
    Preferred
    
    Preferred
    
    Preferred
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Accumulated
    
    Accumulated
    
    TotalStock
    
    Stock
    
    Stock
    
    Stock
    
    Common Stock
    
    Additional
    
    Deferred
    
    During
    
    Other
    
    StockholdersPaid In
    
    Stock
    
    Development
    
    Comprehensive
    
    EquityShares
    
    Amount
    
    Shares
    
    Amount
    
    Shares
    
    Amount
    
    Shares
    
    Amount
    
    Shares
    
    Amount
    
    Capital
    
    Compensation
    
    Stage
    
    Loss
    
    (Deficit)Balance at December 31, 2003
    
    
    15,298,351
    
    
    $
    6,855
    
    
    
    22,246,153
    
    
    $
    8,439
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    29,300,786
    
    
    $
    293
    
    
    $
    37,249
    
    
    $
    
    
    
    $
    (51,895
    )
    
    $
    (58
    )
    
    $
    (14,411
    )Compensation expense associated with stock options
outstanding
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    215
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    215Accretion of Series C Stock issuance cost
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    138
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (138
    )
    
    
    
    
    
    
    (138
    )Recognition of Series C Stock issuance cost upon conversion
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    442
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (442
    )
    
    
    
    
    
    
    (442
    )Issuance of Common Stock  warrants exercised net of 8,901
shares held treasury
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    79,211
    
    
    
    1
    
    
    
    30
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    31Issuance of Common Stock  options exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    83,243
    
    
    
    1
    
    
    
    14
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15Issuance of Common Stock  common stock offering
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,074,595
    
    
    
    121
    
    
    
    9,745
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,866Conversion of Series A Stock to Common Stock
    
    
    (597,546
    )
    
    
    (268
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    597,546
    
    
    
    6
    
    
    
    262
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    268Conversion of Series C Stock to Common Stock
    
    
    
    
    
    
    
    
    
    
    (6,847,812
    )
    
    
    (3,068
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,847,812
    
    
    
    68
    
    
    
    3,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,068Net loss and comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,947
    )
    
    
    
    
    
    
    (4,947
    )Balance at September 30, 2004 (unaudited)
    
    
    14,700,805
    
    
    $
    6,587
    
    
    
    15,398,341
    
    
    $
    5,951
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    48,983,193
    
    
    $
    490
    
    
    $
    50,515
    
    
    $
    
    
    
    $
    (57,422
    )
    
    $
    (58
    )
    
    $
    (6,475
    )
 See accompanying Notes to Condensed Consolidated Financial Statements.




---



##### 



REGEN BIOLOGICS, INC.
(A Development Stage Company) CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
  Nine Months Ended
    
    Period fromSeptember 30,
    
    December 21, 1989(Inception) to2004
    
    2003
    
    September 30, 2004(unaudited)
    
    (unaudited)
    
    (unaudited)Operating ActivitiesNet loss
    
    $
    (4,947
    )
    
    $
    (3,719
    )
    
    $
    (52,499
    )Adjustments to reconcile net loss to net cash used in operating activities:Compensation expense associated with stock options
    
    
    199
    
    
    
    36
    
    
    
    6,543Amortization of debt discount for warrant and beneficial conversion
feature
    
    
    
    
    
    
    
    
    
    
    1,500Non-cash interest expense
    
    
    94
    
    
    
    92
    
    
    
    1,248Depreciation and amortization
    
    
    47
    
    
    
    78
    
    
    
    2,173Loss on disposal of property and equipment
    
    
    
    
    
    
    
    
    
    
    9Changes in operating assets and liabilities:Other current assets and receivables
    
    
    (71
    )
    
    
    (97
    )
    
    
    (236
    )Inventory
    
    
    114
    
    
    
    27
    
    
    
    (102
    )Other assets
    
    
    22
    
    
    
    22
    
    
    
    (80
    )Accounts payable and accrued expenses
    
    
    (183
    )
    
    
    129
    
    
    
    481Other liabilities
    
    
    17
    
    
    
    (25
    )
    
    
    36Net cash used in operating activities
    
    
    (4,708
    )
    
    
    (3,457
    )
    
    
    (40,927
    )Investing ActivitiesPurchases of property and equipment
    
    
    (15
    )
    
    
    (20
    )
    
    
    (1,998
    )Changes in short-term investments
    
    
    
    
    
    
    3,473
    
    
    
    2,945Net cash (used in) provided by investing activities
    
    
    (15
    )
    
    
    3,453
    
    
    
    947Financing 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
    
    
    
    
    
    
    9,491
    
    
    
    34,221Proceeds from issuance of common stock, net of offering costs paid in cash
    
    
    9,911
    
    
    
    
    
    
    
    10,327Repayment of capital lease obligations
    
    
    (4
    )
    
    
    (4
    )
    
    
    (121
    )Proceeds from notes payable
    
    
    
    
    
    
    
    
    
    
    11,410Payments on notes payable
    
    
    
    
    
    
    
    
    
    
    (2,323
    )Net cash provided by financing activities
    
    
    9,907
    
    
    
    9,487
    
    
    
    53,486Net increase in cash
    
    
    5,184
    
    
    
    9,483
    
    
    
    13,506Cash and cash equivalents at beginning of period
    
    
    8,323
    
    
    
    1
    
    
    
    1Cash and cash equivalents at end of period
    
    $
    13,507
    
    
    $
    9,484
    
    
    $
    13,507Supplemental Disclosure of Cash Flow InformationNon-cash disclosure:Issuance of Series B convertible preferred stock upon conversion of notes
payable
    
    $
    
    
    
    $
    
    
    
    $
    300Equipment purchased pursuant to capital leases
    
    
    4
    
    
    
    
    
    
    
    128Cancellation of stock options associated with deferred stock compensation
    
    
    
    
    
    
    
    
    
    
    1,250Net assets assumed in merger
    
    
    
    
    
    
    
    
    
    
    2,733Conversion of bridge financing to equity
    
    
    
    
    
    
    
    
    
    
    2,860Beneficial Conversion of Series C Preferred Stock
    
    
    
    
    
    
    4,292
    
    
    
    4,292Warrants associated with Series C Preferred Stock
    
    
    
    
    
    
    969
    
    
    
    969Warrants associated with Series C Preferred Stock private placement agent fee
    
    
    
    
    
    
    97
    
    
    
    97Conversion of Series A Preferred Stock
    
    
    268
    
    
    
    
    
    
    
    268Warrants exercised, cashless transaction
    
    
    10
    
    
    
    
    
    
    
    10Conversion of Series C Preferred Stock
    
    
    3,068
    
    
    
    
    
    
    
    3,068Cash disclosure:Cash paid for interest
    
    
    1
    
    
    
    
    
    
    
    315
 See accompanying Notes to Condensed Consolidated Financial Statements.




---



##### 



REGEN BIOLOGICS, INC.  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Dollars in thousands, except per share data)
 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation On June 21, 2002, ReGen Biologics, Inc (ReGen or the Company) acquired
RBio, Inc., formerly named ReGen Biologics, Inc. The acquisition was recorded
for accounting purposes as a reverse merger and recapitalization. For purposes
of this Form 10-Q, the historical financial statements of RBio, Inc., including
related notes, have replaced the prior historical financial statements of the
Company. The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with the instructions to Form 10-Q and do not
include all the information and notes required by accounting principles
generally accepted in the United States for complete financial statements. In
the opinion of management, the accompanying condensed consolidated financial
statements contain all adjustments (consisting of normal recurring accruals)
necessary to present fairly the financial position and the results of
operations for the interim periods. ReGen will continue to require additional capital to further develop its
products and further develop sales and distribution channels for its products
around the world. Accordingly, the Company is still considered a development
stage enterprise. Management believes that ReGen will emerge from the
development stage when the Collagen Meniscus Implant, or CMI, product is
available for sale in the U.S. or 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/A for the year ended
December 31, 2003. ReGen currently operates in one business segment that develops and
manufactures tissue growth and repair products for unmet markets in both the
U.S. and globally. ReGen is managed and operated as one business segment.
Accordingly, ReGen does not prepare financial information for separate product
areas and does not have separate reportable segments as defined by Statement of
Financial Accounting Standards (SFAS) No. 131, Disclosure about Segments of an
Enterprise and Related Information. Concentrations of Risk The Company currently has two principal customers, which market and sell
the Companys two current products. Customer A has the license to sell the
SharpShooter product. Customer B, which is also a shareholder of the Company,
has a non-exclusive license to sell the CMI product outside of the United
States and a license to sell the SharpShooter product in a limited manner in
connection with the sale of the CMI. Concentrations of receivables and revenues
by customer are as follows: Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,
    
    December 31,2004
    
    2003
    
    2004
    
    2003
    
    2003Accounts receivable:Customer A
    
    
    38
    %
    
    
    
    %
    
    
    38
    %
    
    
    
    %
    
    
    100
    %Customer B
    
    
    62
    %
    
    
    100
    %
    
    
    62
    %
    
    
    100
    %
    
    
    0
    %Sales revenue:Customer A
    
    
    31
    %
    
    
    17
    %
    
    
    51
    %
    
    
    23
    %
    
    
    23
    %Customer B
    
    
    69
    %
    
    
    83
    %
    
    
    49
    %
    
    
    77
    %
    
    
    77
    %Royalties:Customer A
    
    
    100
    %
    
    
    100
    %
    
    
    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. Adoption of New Accounting Pronouncements In January 2003, the FASB issued Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities. Interpretation No. 46 requires a
variable interest entity to be consolidated by a company if that company is
subject to a majority of the risk of loss from the variable interest entitys
activities or is entitled to receive a majority of the entitys residual
returns or both. Previously, entities were generally consolidated by a company
that had a controlling financial interest through ownership of a majority
voting interest in the entity. In December 2003, the FASB issued FIN 46
(revised December 2003), Consolidation of Variable Interest Entities,(FIN 46R)
to clarify some of the provisions of FIN 46. For the year ended December 31,
2003, the Company was required to apply the provisions of FIN 46 that relate to
special purpose entities (SPEs) created prior to February 1, 2003. Adoption of
these provisions did not have a material impact on the Companys financial
statements. For the quarter ended March 31, 2004, the Company was required to
adopt the provisions related to non-SPEs created prior to February 1, 2003, and
the provisions related to all entities, regardless of whether an SPE, that were
created subsequent to January 31, 2003. Adoption of these provisions did not
have a material impact on the Companys financial statements. In December 2003, the FASB issued FASB Statement No. 132 (revised 2003),
Employers Disclosures about Pensions and Other Postretirement Benefits. The
revised standard requires new disclosures in addition to those required by the
original standard about the assets, obligations, cash flows and net periodic
benefit cost of defined benefit pension plans and other defined benefit
postretirement plans. As revised, SFAS No. 132 was effective for financial
statements with fiscal years ending after December 15, 2003. The interim-period
disclosures required by this standard were effective for interim periods
beginning after December 15, 2003. See Defined Benefit Plan for newly
required interim disclosures. Reclassifications Certain prior year and inception to September 30, 2004 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
accounts as cash equivalents. The Company held cash equivalents of $12,262 and
$8,091 in a money market account and $1,245 and $232 in sweep accounts as of
September 30, 2004 and December 31, 2003, respectively. Inventory Inventory is valued at the lower of actual cost or market, using the
first-in, first-out (FIFO) method. Work in process is calculated by estimating
the number of units that will be successfully converted to finished goods,
based upon a build-up in the stage of completion using estimated labor inputs
for each stage and historical yields reduced by estimated usage for quality
control testing and for research and development.




---



##### 



Inventory consists of the following: September 30,
    
    December 31,2004
    
    2003(In thousands)Raw material
    
    $
    30
    
    
    $
    29Work in process
    
    
    13
    
    
    
    16Finished goods
    
    
    59
    
    
    
    171$
    102
    
    
    $
    216
 Inventory was adjusted down $162 and $62 during the periods ended
September 30, 2004 and December 31, 2003, respectively, to reflect values at
the lower of cost or market. At September 30, 2004, 18% of the units in
inventory are valued at below the Companys cost. Due to a high degree of fixed
costs in the production process, and the early stage of market acceptance for
the Companys products, current sales and production volumes for all of the
Companys products are not adequate to provide for per unit costs that are
lower than the current market prices. Accrued Expenses Accrued expenses consist of the following: September 30,
    
    December 31,2004
    
    2003(In thousands)Accrued professional fees
    
    $
    250
    
    
    $
    190Accrued officer compensation
    
    
    
    
    
    
    178Accrued printing cost
    
    
    27
    
    
    
    26Accrued common stock registration cost
    
    
    50
    
    
    
    75Accrued vacation
    
    
    39
    
    
    
    22Other accrued cost
    
    
    58
    
    
    
    50$
    424
    
    
    $
    541
 Defined Benefit Plan Prior to the reverse merger and recapitalization, the Company sponsored a
defined benefit pension plan (Pension Plan) covering all former employees of
National Health Advisors, a subsidiary of the Company acquired in 1997. The
Pension Plan was amended to freeze benefit accruals and the entry of new
participants effective October 31, 1997. The sale of the Companys APACHE
business in 2001 resulted in the termination of all remaining participants in
the Pension Plan. The Company previously disclosed in its financial statements for the year
ended December 31, 2003, that it did not expect to make contributions to the
plan during 2004 and as of September 30, 2004 no contributions have been made.
Pension expense during the three- and nine-month periods ended September 30,
2004 and 2003 was not material. Stock Based Compensation The Company has adopted the disclosure only provisions of SFAS No. 123.
Accordingly, if the exercise price of the Companys employee stock options
equals or exceeds the estimated fair value of the underlying stock on the date
of grant, no compensation expense is generally recognized.




---



##### 



Had compensation costs for the Companys stock options been determined
based on SFAS No. 123 as amended by SFAS No. 148, the Companys net loss
attributable to common stockholders and net loss per share attributable to
common stockholders would have been as follows (dollars in thousands, except
per share data): Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Net loss attributable to
common stockholders, as
reported
    
    $
    (1,615
    )
    
    $
    (5,495
    )
    
    $
    (5,527
    )
    
    $
    (8,011
    )Add: Total stock-based
employee compensation expense
as reported under intrinsic
value method (APB No 25) for
all awards, net of related tax
effects
    
    
    36
    
    
    
    34
    
    
    
    181
    
    
    
    34Deduct: Total stock-based
employee compensation expense
determined under fair value
based method (SFAS No. 123)
for all awards, net of related
tax effects
    
    
    (194
    )
    
    
    (46
    )
    
    
    (613
    )
    
    
    (138
    )Pro forma net loss
attributable to common
stockholders
    
    $
    (1,773
    )
    
    $
    (5,507
    )
    
    $
    (5,959
    )
    
    $
    (8,115
    )Net loss per share
attributable to common
stockholders:Basic and diluted  as reported
    
    $
    (0.03
    )
    
    $
    (0.19
    )
    
    $
    (0.14
    )
    
    $
    (0.28
    )Basic and diluted  pro forma
    
    $
    (0.04
    )
    
    $
    (0.19
    )
    
    $
    (0.15
    )
    
    $
    (0.28
    )Shares
    
    
    48,498,899
    
    
    
    29,070,786
    
    
    
    39,640,542
    
    
    
    29,070,786
 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. (2) RELATED PARTY TRANSACTIONS The Company has a cost reimbursement agreement with a shareholder of the
Company. For the periods ended September 30, 2004 and December 31, 2003, the
Company is entitled to receive, and recorded as a reduction of business
development expenses, reimbursement of approximately $15 and $90, respectively. For the three months ended September 30, 2004 and September 30, 2003, 69%
and 83%, respectively of the Companys sales revenue was from sales to Customer
B, a related party. For the nine months ended September 30, 2004 and September
30, 2003, 49% and 77%, respectively of the Companys revenues were from sales
to Customer B, which is also a shareholder of the Company. At September 30, 2004 and December 31, 2003, approximately $19 and $26 of
accounts payable for services or reimbursed expenses were due to related
parties including officers or directors who are also shareholders. The Company
has paid $65 and $137 to the afore mentioned related parties during the nine
months ended September 30, 2004 and the year ended December 31, 2003,
respectively. During the second quarter 2004 the Company made a donation of
approximately $8 to the Steadman Hawkins Foundation for orthopedic research.
Dr. Steadman, a director and shareholder of the Company is a director of the
Foundation.




---



##### 



(3) FINANCINGS AND CAPITAL TRANSACTIONS The Series C Redeemable Convertible Preferred Stock (the Series C Stock)
and Series A Redeemable Convertible Preferred Stock (the Series A Stock) are
subject to Registration Rights Agreements entered into as of September 23, 2003
and September 30, 2003 whereby the holders of such shares have, in certain
circumstances, the right to require the Company to register the common shares
into which the Series C Stock and the Series A Stock is convertible. In June of
2004, ReGen received notice from certain holders of the Series C Stock and
Series A Stock, representing 35,549,814 shares, requesting that ReGen register
such shares pursuant to the terms of the Registration Rights Agreements. On April 19, 2004, the Company completed a private placement for
12,074,595 shares of restricted common stock at a price per share of $0.85,
resulting in proceeds net of issuance costs of approximately $9,866 (the April
Financing). The common stock sold in the private placement was initially
subject to lock-up provisions for a period of 150 days after the completion of
the private placement. On July 14, 2004, the Company filed a registration statement (the
Registration Statement) with the SEC on Form S-1 for registration of
47,624,409 shares of common stock to be sold at the election of the selling
stockholders. 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 (issuable upon the conversion of certain
shares of Series A Stock and Series C Stock) and all of the shares issued in
the April Financing. In the second and third quarters of 2004, respectively, holders of 437,382
and 160,164 shares of Series A Redeemable Convertible Preferred Stock, and
holders of 6,117,394 and 730,418 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
second and third quarters of 2004, respectively, $396 and $46 of unamortized
issuance cost 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. Item 2. Managements Discussion and Analysis of Financial Condition and Results
of Operations (dollars in thousands, except per share data and per unit data) On June 21, 2002, ReGen Biologics, Inc (ReGen) acquired RBio, Inc.,
formerly named ReGen Biologics, Inc. The acquisition was recorded for
accounting purposes as a reverse merger and recapitalization. For purposes of
this filing, the historical financial statements of RBio, Inc. including
related notes have replaced the prior historical financial statements of ReGen. The following discussion and analysis should be read in conjunction with
the condensed consolidated financial statements and related notes included
elsewhere in this Form 10-Q. This section of the Form 10-Q contains
forward-looking statements that involve risks and uncertainties, such as
statements about our plans, objectives, expectations and intentions. We use
words such as anticipate, believe, expect, future and intend and
similar expressions to identify forward-looking statements. Our actual results
could differ materially from those anticipated in these forward-looking
statements for many reasons. You should not place undue reliance on these
forward-looking statements, which apply only as of the date of this Form 10-Q.




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Business We are a leading orthopedic products company that develops and
manufactures tissue growth and repair products for unmet markets in both the
U.S. and globally. Our primary product, the Collagen Meniscus Implant, or CMI,
is an implant designed to 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. We are not aware of any other product that has
been cleared for sale or has entered 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. As
indicated from the preliminary results of our clinical studies, the greatest
benefits to the patient from implantation of the CMI are seen in the patients
who have undergone prior treatment to their meniscus, and include:  
    
    Substantial growth of new tissue in the meniscus, which does not
otherwise re-grow after removal in a partial meniscectomy;  
    
    Significantly greater return to pre-injury activity levels than those
patients receiving only a partial meniscectomy; and  
    
    A highly correlated relationship between the patients pain and
function, and their degree of return to pre-injury activity, e.g., CMI
patients experience an approximately equal level of pain as do the
patients in the control group who received only a partial
meniscectomy, but do so at a significantly higher return to pre-injury
activity levels. In November 2002, ReGen completed the required enrollment and related
surgical procedures for its CMI clinical trial in the U.S. At the request of
surgeons participating in the trial, additional patients were enrolled and
surgeries completed by early 2003. 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 (PMA) application to the FDA. Management
expects the last of these two-year clinical follow-up exams will be completed
by early 2005, with submission of the completed PMA to the FDA shortly
thereafter. The process of review by the FDA is uncertain and the FDA staff
must clear the Companys PMA for review by the Orthopedic Panel. We expect
that the FDA Orthopedic Panel will review our PMA and will issue its
recommendation thereon to the FDA in late 2005 or early 2006, with a final
decision from the FDA thereafter. Should the FDA approve the CMI for sale in
the U.S., sales of the CMI in the U.S. are not expected to occur until, at the
earliest, late 2006. 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 performance of the Company. 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 over 40% of all
partial meniscectomy procedures, or approximately 476,000 patients, by 2010. 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
2002 would have been approximately $850 million, and is expected to increase to
approximately $1.7 billion by 2010 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. The CMI is currently cleared for sale in Europe, Australia and Chile. The
CMI is distributed outside the U.S. on a non-exclusive basis by the Centerpulse
unit (Centerpulse) of Zimmer Holdings, Inc. (NYSE: ZMH) (Zimmer).




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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. In general, we have seen positive reception to the CMI by surgeons and
patients in Europe. The CMI is approved for sale in most European countries and
Australia, but reimbursement approval in certain countries, including Germany,
the largest European country, has not been obtained. The primary business of
Centerpulse, the Companys non-exclusive distribution partner in Europe, 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. In August 2003,
Centerpulse agreed to be acquired by Zimmer, and on October 2, 2003 Zimmer
announced the completion of its exchange offers. The acquisition by Zimmer
resulted in beneficial ownership by Zimmer of 98.7% of Centerpulses issued
shares. We believe that the ongoing acquisition and business
integration-related activities that affected Centerpulse throughout 2003 were
disruptive to the focus of its limited resources on building a sports medicine
marketing business in general, and on selling the CMI in particular. We believe
these trends have continued in 2004. In 2003 Centerpulse was obligated to sell a minimum of 800 CMIs. On
February 5, 2004 Centerpulse delivered its final sales report for the calendar
year ended December 31, 2003. This report indicated that Centerpulse failed to
meet the minimum sales requirements. According to the terms of the distribution
agreement with Centerpulse, we had 45 calendar days from receipt of the final
sales report to exercise the options provided to us in the agreement. We have
elected to amend the distribution agreement to make the distribution rights to
the CMI held by Centerpulse non-exclusive. Pursuant to the terms of the
distribution agreement, this election took effect on April 17, 2004, 30 days
from the date of Centerpulses receipt of our notice. 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
both in the U.S. and throughout certain other countries;  
    
    Launching the CMI in the U.S.; and  
    
    Conducting further research on select product opportunities within our
research and development pipeline to determine whether to pursue
further development of these opportunities. Our long-term strategy is to capitalize on our proven collagen scaffold
technology by continuing to design, develop, manufacture, and market our own
products, as well as partner with key market leaders to develop and market
products in other targeted therapeutic areas. Our Core Technology Our core technology focuses on guided tissue generation. That is, if the
body is provided with a suitable environment for cellular ingrowth, the body
has the ability to use its own cell structures to grow new tissue. We have
developed a proprietary type I bovine collagen scaffold material that uses the
bodys own cells to grow new tissue. The various tissue matrix engineering
processes used in the design of this scaffold are the basis of our tissue
growth technology and product offerings. Our proprietary processes are capable
of producing implants with the various physical properties required for
remodeling each specific target tissue. Our initial application, the CMI, uses
this technology to guide the generation of new tissue in the medial meniscus of
the knee. We have recently completed development of a CMI for the lateral
meniscus, which is not currently cleared for sale, pending completion of
clinical studies and compliance with related regulatory requirements.




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##### 



Collagen is a multifunctional family of proteins with unique structural
characteristics. To date, 19 different proteins can be classified as collagen,
making collagen the most abundant protein in the human body. Among the various
collagens, type I collagen is the most abundant and is the major constituent of
bone, skin, and tendon. The structure of animal type I collagen is highly similar to the structure
of human type I collagen. This finding is supported by data from our current
U.S. clinical trial. Based on the important functions of type I collagen in the
body and the biocompatibility of animal type I collagen, this material has
become increasingly popular as a biomaterial for clinical applications,
particularly in the repair and generation of new tissue. Critical Accounting Policies The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
For further discussion of our accounting policies see Note 1 Summary of
Significant Accounting Policies of the Notes to Condensed Consolidated
Financial Statements. Results of Operations Three and Nine Months Ended September 30, 2004 Compared to Three and Nine
Months Ended September 30, 2003 REVENUE.The Companys revenue for the three months ended September 30, 2004
was $202 compared with $69 for the same period in 2003, an increase of
approximately $133 or 193%. Revenue for the nine months ended September 30,
2004 was $468 compared with $280 for the same period in 2003, an increase of
approximately $188 or 67%. These increases result from higher product sales to
our distributors and related royalties. CMI sales were $107 and $165, respectively, for the three and nine months ended
September 30, 2004, compared with $0 and $68, respectively, for the same
periods in 2003, representing increases of $107 and $97 (143%), respectively.
Sales increases were due to the higher number of CMI units shipped to
Centerpulse in the respective periods. Unit shipments of the CMI during the
three and nine months ended September 30, 2004, were 213 and 326, respectively,
compared with 0 and 139 units, respectively, shipped in the same periods in
2003, representing increases of 213 and 187 (135%) units, respectively.
Historically, shipments of the CMI, and therefore revenue to the Company, have
been inconsistent. Effective April 17, 2004, we elected to convert our
distribution agreement with Centerpulse to non-exclusive. Centerpulse has
continued to market the CMI, however, future sales of the CMI by Centerpulse,
and our revenue there from, are uncertain. SharpShooter sales approximated $83 and $266, respectively, for the three and
nine months ended September 30, 2004 compared with $62 and $192, respectively,
for the same periods in 2003, representing increases of $21 (34%) and
$74,(39%), respectively. SharpShooter sales to Centerpulse for the three and
nine months ended September 30, 2004 were $24 and $47, respectively, compared
to $51 and $132, respectively, for the same periods in 2003, representing
decreases of $27 (53%) and $85 (64%), respectively. The decreases were offset
by increased SharpShooter sales to Linvatec, ReGens primary distributor for
the SharpShooter. SharpShooter sales to Linvatec for the three and nine months
ended September 30, 2004 were $59 and $219, respectively, compared to $10 and
$59, respectively, for the same periods in 2003, representing increases of $49
(490%) and $160 (271%), respectively. For the three and nine months ended
September 30, 2004, SharpShooter sales to Linvatec accounted for approximately
72% and 82%, respectively, of total SharpShooter sales compared with 17% and
31%, respectively, for the same periods in 2003.




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Royalties received from Linvatec for the three and nine months ended September
30, 2004, approximated $12 and $37, respectively, compared with $7 and $20,
respectively, for the same periods in 2003, representing increases of $5 (71%)
and $17 (85%), respectively. In March and April 2003, ConMed, the parent company of Linvatec announced that
it had completed the acquisition of Bionx Implants, Inc. (Bionx) and that it
would be integrating the sale of the Bionx products with its orthopedic
subsidiary, Linvatec. As part of this integration, ConMed announced that it
would be reorganizing its 90 direct orthopedic sales representatives into 18
exclusive sales agent groups that would eventually manage 230 sales
professionals in the U.S. While shipments of the SharpShooter products have
been historically inconsistent, we believe that these corporate and operating
organizational matters had affected activities at Linvatec, such that orders of
our products throughout most of 2003 were negatively impacted. Linvatecs sales
of the SharpShooter increased sequentially by 46% in the third quarter of 2003,
40% in the fourth quarter of 2003, 8% in the first quarter of 2004, 7% in the
second quarter of 2004, and then decreased 5% in the third quarter of 2004, due
to the seasonal impact on orthopedic device sales. However, the declining rate
of sequential sales growth in Linvatecs SharpShooter sales, suggests a
possible slowing in the rate of growth of our SharpShooter sales and royalty
revenue. COST OF GOODS SOLD.Cost of goods sold approximated $169 and $350,
respectively, for the three and nine months ended September 30, 2004, compared
with $52 and $348, respectively, for the same periods in 2003, representing
increases of $117 (225%) and $2 (1%), respectively. The increases directly
correlate to the increases in sales, particularly sales of CMI, which have a
higher relative per unit cost. For the three and nine months ended September
30, 2004, CMI costs accounted for $102 and $155, respectively, compared with $0
and $97, respectively, for the same periods in 2003. For the three and nine
months ended September 30, 2004, SharpShooter costs accounted for approximately
$67 and $195, respectively, compared with $52 and $251, respectively, for the
same periods in 2003. RESEARCH AND DEVELOPMENT.Research and development expenses for the three and
nine months ended September 30, 2004 approximated $861 and $2,565, respectively,
compared with $627 and $1,774 respectively, for the same periods in 2003,
representing approximate increases of $234 (37%) and $791 (45%), respectively .
These increases result from (i) increased salaries and benefits related to new
hires and planned salary increases for existing employees, (ii) increased
development costs, primarily for consulting services in connection with the PMA
submission for the CMI, and (iii) increased patent fees for existing and new
registrations and legal fees associated with patent and other intellectual
property services. Management expects these trends to continue through 2004, as
we prepare our PMA for submission to the FDA. In early July 2004 the Company
submitted to the FDA the manufacturing module, the first of three PMA modules,
for the CMI. BUSINESS DEVELOPMENT, GENERAL AND ADMINISTRATIVE.Business development, general
and administrative expenses approximated $673 and $2,293, respectively, for the
three and nine months ended September 30, 2004 compared with $498 and $1,749,
respectively, for the same periods in 2003, representing approximate increases
of $175 (35%) and $544 (31%), respectively. These increases result primarily
from higher costs associated with (i) professional fees, principally for legal
and accounting services related to the registration statement of Form S-1 filed
in 2004, and other public filings, (ii) employee compensation, (iii) printing
costs related to public filings, and (iv) investor relations. Management
expects these trends to continue through 2004. COMPENSATION EXPENSE ASSOCIATED WITH STOCK OPTIONS AND WARRANTS.Compensation
expense associated with stock options and warrants for the three and nine
months ended September 30, 2004 approximated $42 and $199, respectively,
compared to $35 and $36, respectively, for the same periods in 2003. Stock
based compensation expense for the three and nine months ended September 30,
2004 consisted of (i) $6 and $18, respectively, for non-employees and (ii) $36
and $181, respectively, for employees.




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NON-OPERATING INCOME (EXPENSE).Non-operating income (expense) consists of
interest and other income, rental income, rental expense, interest expense and
license fees. Interest and other income approximated $46 and $85, respectively,
for the three and nine months ended September 30, 2004, compared with $1 and
$8, respectively, for the same periods in 2003, representing approximate
increases of $45 and $77, respectively. These increases are primarily related
to higher balances of cash and cash equivalents during the respective periods
in 2004. Net rental income (expense), 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 and $2, respectively, for the three
and nine months ended September 30, 2004, compared with net rental expense of
$32 and $8, respectively, for the same periods in 2003. Sub-lease rent was
reduced pursuant to amendments to the sub-lease agreement, which became
effective June 1, 2003. The amended agreement provided for an abatement
approximating $27 to offset rental revenue. Interest expense for the three and
nine months ended September 30, 2004 approximated $35 and $95, respectively,
compared with $29 and $92, respectively, for the same periods in 2003,
approximate increases of $6 and $3, respectively, primarily due to rising
interest rates. Liquidity and Capital Resources On April 19, 2004, the Company completed a private placement for
12,074,595 shares of restricted common stock at a price per share of $0.85 (the
April Financing), resulting in proceeds net of issuance costs of approximately
$9,866, which the Company deposited into its money market account. The common
stock sold in the private placement was subject to lock-up provisions for a
period of 150 days after the completion of the private placement. On July 14,
2004, the Company filed a registration statement with the SEC on Form S-1 for
registration of 47,624,409 common shares to be sold at the election of the
selling stockholders. The shares registered included common shares registered
pursuant to the Registration Rights Agreements with the holders of Series A
Stock and Series C Stock (issuable upon the conversion of certain shares of
Series A Stock and Series C Stock) and all of the common shares issued pursuant
to the April Financing. The Registration Statement was declared effective by
the SEC on July 23, 2004. Cash and cash equivalents were approximately $13,507 as of September 30,
2004 compared with approximately $8,323 as of December 31, 2003. The increase
in cash and cash equivalents is primarily the net effect of cash used to
support the normal operations of ReGen offset by net proceeds of $9,866 from
the April Financing. Cash used in operating activities of approximately $4,708 resulted from
the net loss of approximately $4,947, adjusted to account for a net decrease in
accounts receivables, inventory and other assets of approximately $65, a net
decrease in accounts payable, accrued expenses and other liabilities of $166,
together with adjustments for non-cash items, depreciation, compensation and
interest expense, totaling $340. During the nine months ended September 30, 2004, ReGen invested
approximately $19 to purchase property and equipment including $4 pursuant to
financing lease accounted for as a capital lease. During the nine months ended September 30, 2004 ReGens financing
activities provided approximately $9,907, including approximately $31 in
proceeds from the exercise of common stock warrants, $15 in proceeds from the
exercise of common stock options and $9,866 in net proceeds from the April
Financing, offset by $4 repayment of capital lease obligations.




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Through September 30, 2004, the Company has incurred cumulative net
operating losses of approximately $52,500 and used approximately $40,900 in
cash for operating activities. Management anticipates that the Company will
continue to incur net losses at least until FDA approval is received and the
Company is able to market the CMI product in the United States. Management
anticipates that additional funds will be required to satisfy expenses
associated with the preparations for and, if approved, marketing and
distribution of the CMI in the U.S., as well as continued product development.
Such additional funds may be obtained in the form of debt financing, equity
financing, or both. While the Company has been successful in the past in
obtaining the necessary capital to support its operations, there is no
guarantee that the Company will be able to obtain additional equity capital
under commercially reasonable terms and conditions, or at all. Based upon
current cash reserves and current spending rates, management believes the
Company has adequate cash on hand to support ongoing operations through the
first half of 2006. Any substantial increase in spending beyond current rates will likely
shorten the time period when additional funds will be required. SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS Cautionary Note Regarding Forward-Looking Statements Statements in this filing, which are not historical facts, are
forward-looking statements under provisions of the Private Securities
Litigation Reform Act of 1995. All forward-looking statements involve risks and
uncertainties. Such statements are based on the current expectations and
beliefs of the managements of ReGen and RBio and are subject to a number of
factors and uncertainties that could cause actual results to differ materially
from those described in the forward-looking statements, including those
discussed in the Risk Factors section of the Form S-1 declared effective July
23, 2004. We wish to caution readers that the following important factors,
among others, in some cases have affected, and in the future could affect our
actual results and could cause our actual results in fiscal 2004 and beyond to
differ materially from those expressed in any forward-looking statements made
by us or on our behalf. Important factors that could cause actual results to differ materially
include but are not limited to our ability to complete the Collagen Meniscus
Implant, or CMI, clinical trial and obtain U.S. Food and Drug Administration,
or FDA, approval, our ability to obtain additional financing, the ability of
our distribution partners to effectively market and sell our products, our
ability to procure product components and effectively produce products for
resale, our ability to control production quantities and inventory in order to
avoid unanticipated costs such as outdated inventory, the timely collection of
our accounts receivable, our ability to attract and retain key employees, our
ability to timely develop new products and enhance existing products, the
occurrence of certain operating hazards and uninsured risks, our ability to
protect proprietary information and to obtain necessary licenses on
commercially reasonable terms, the impact of governmental regulations, changes
in technology, marketing risks, our ability to be listed on a national
securities exchange or quotation system, our ability to adapt to economic,
political and regulatory conditions affecting the healthcare industry and other
unforeseen events that may impact our business. Our quarterly revenues and operating results have varied significantly in
the past and are likely to vary from quarter to quarter in the future. Quarterly revenues and operating results may fluctuate as a result of a
variety of factors, including the ability of our distribution partners to
market and sell our products, variable customer demand for our products and
services, our investments in research and development or other corporate
resources, our ability to effectively and consistently manufacture our
products, and avoid costs associated with the recall of defective or
potentially defective products, the ability of our vendors to effectively and
timely deliver necessary materials and product components, acquisitions of
other companies or assets, the timing of new product introductions, changes in
distribution channels, sales and marketing promotional activities and trade
shows and general economic conditions. Further, due to the relatively fixed
nature of most of our costs, which primarily include personnel, facilities and
related costs, any unanticipated shortfall in revenue in any fiscal quarter
would have an adverse effect on our results of operations in that quarter.
Accordingly,
our operating results for any particular quarterly period may not necessarily
be indicative of results for future periods.




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Our filings with the SEC are available to the public from commercial
document retrieval services and at the Web site maintained by the SEC at
http://www.sec.gov. Item 3. Quantitative and Qualitative Disclosures about Market Risk For information regarding ReGens exposure to certain market risks, see
Item 7A, Quantitative and Qualitative Disclosures About Market Risk, in the
Companys Annual Report on Form 10-K/A for the year ended December 31, 2003.
Except as described in the Managements Discussion and Analysis of Financial
Condition and Results of Operations, there have been no significant changes in
our financial instrument portfolio or market risk exposure since December 31,
2003. Item 4. Controls and Procedures We maintain disclosure controls and procedures within the meaning of
Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended, or the
Exchange Act. Our disclosure controls and procedures (Disclosure Controls),
are designed to ensure that information required to be disclosed by the Company
in the reports filed under the Exchange Act, such as this Quarterly Report on
Form 10-Q, is recorded, processed, summarized and reported within the time
periods specified in the U.S. Securities and Exchange Commissions rules and
forms. Our Disclosure Controls are also designed to ensure that such
information is accumulated and communicated to our management, including our
Chief Executive Officer and Chief Financial Officer, as appropriate, to allow
for timely decisions regarding required disclosure. In designing and evaluating
our Disclosure Controls, management recognized that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and
management necessarily was required to apply its judgment in evaluating and
implementing possible controls and procedures. Evaluation of Disclosure Controls and Procedures. As of the end of the
period covered by this Quarterly Report on Form 10-Q, we evaluated the
effectiveness of the design and operation of the Companys disclosure controls
and procedures, which was done under the supervision and with the participation
of our management, including our Chief Executive Officer and our Chief
Financial Officer. Immediately following the Signatures section of this
Quarterly Report on Form 10-Q are certifications of our Chief Executive Officer
and Chief Financial Officer, which are required in accordance with Rule 13a-14
of the Exchange Act. This Controls and Procedures section includes the
information concerning the controls evaluation referred to in the
certifications and it should be read in conjunction with the certifications for
a more complete understanding of the topics presented. Based on the controls
evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that, as of the date of their evaluation, our Disclosure Controls and
Procedures were effective at the reasonable assurance level 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 third fiscal quarter of 2004 that has materially affected,
or is reasonably likely to materially affect, the Companys internal control
over financial reporting.




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PART II Item 1. Legal Proceedings We are a defendant or party 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 (dollars in
thousands, except per share data) 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)




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##### 



Number
    
    Description4.2
    
    Rights Agreement between the Company and First Chicago Trust Company of New York,
dated as of May 6, 1997(9)4.3
    
    ReGen Biologics, Inc. Employee Stock Option Plan, Amended and Restated Effective
January 31, 2003(12)4.4
    
    ReGen Biologics, Inc. Non-Employee Director Stock Option Plan, Amended and Restated
Effective January 31, 2003(12)4.5
    
    Registration Rights Agreement between the Company and the Investors listed therein(8)4.6
    
    Registration Agreement between the Company and Certain Stockholders, dated December
28, 1995(18)4.7
    
    Amendment No. 1 to Rights Agreement between the Company and EquiServe Trust Company,
N.A. dated as of June 7, 2002(10)4.8
    
    Nonqualified Stock Option Agreement between the Company and The Cleveland Clinic
Foundation, dated August 19, 1994(18)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)




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##### 



Number
    
    Description10.3
    
    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)31.1
    
    Section 302 Certification from Gerald E. Bisbee, Jr., dated November 12, 2004(23)31.2
    
    Section 302 Certification from Brion Umidi, dated November 12, 2004(23)32.1
    
    Section 906 Certification from Gerald E. Bisbee, Jr., dated November 12, 2004(23)32.2
    
    Section 906 Certification from Brion Umidi, dated November 12, 2004(23)  (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).




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##### 



Number
    
    Description(6)
    
    Incorporated herein by reference to the Companys Report on Form 10-Q for the quarter ended June 30,
2001 (File No. 000-20805).(7)
    
    Incorporated herein by reference to the Companys Registration Statement on Form S-3, filed on November
19, 2003 (File No. 333-110605).(8)
    
    Incorporated herein by reference to the Companys Report on Form 8-K, filed on September 25, 2003 (File
No. 000-20805).(9)
    
    Incorporated herein by reference to the Companys Report on Form 8-K filed on June 4, 1997 (File No.
000-20805).(10)
    
    Incorporated herein by reference to the Companys Report on Form 10-Q for the quarter ended June 30,
2002 (File No. 000-20805).(11)
    
    Incorporated herein by reference to the Companys Report on Form 10-K for the year ended December 31,
1997 (File No. 000-20805).(12)
    
    Incorporated herein by reference to the Companys Proxy Statement on Schedule 14A filed on April 14,
2003 (File No. 000-20805).(13)
    
    Incorporated herein by reference to the Companys Report on Form 8-K/A, filed on September 4, 2002
(File No. 000-20805).(14)
    
    Incorporated herein by reference to the Companys Current Report on Form 8-K filed on January 14, 1997
(File No. 000-20805).(15)
    
    Incorporated herein by reference to the Companys Report on Form SC 13D filed on March 24, 2003 (File
No. 005-49089).(16)
    
    Incorporated herein by reference to the Companys Report on Form SC 13D/A filed on October 3, 2003
(File No. 005-49089).(17)
    
    Incorporated herein by reference to the Companys Report on Form 8-K, filed on January 6, 2003 (File
No. 000-20805).(18)
    
    Incorporated herein by reference to the Companys Registration Statement on Form S-1, filed on June 4,
1996 (File No. 333-04106).(19)
    
    Incorporated herein by reference to the Companys Report on Form 10-Q for the quarter ended March 31,
1997 (File No. 000-20805).(20)
    
    Incorporated herein by reference to the Companys Report on Form 10-K for the year ended December 31,
2003 (File No. 000-20805)(21)
    
    Incorporated herein by reference to the Companys Registration Statement on Form S-1/A, filed on
January 14, 2004 (File No. 333-110605).(22)
    
    Incorporated herein by reference to the Companys Registration Statement on Form S-1, filed on April
26, 2004 (File No. 33-114867)(23)
    
    Included with this filing.




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##### 



SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized on November 12,
2004. REGEN BIOLOGICS, INC
By: /s/ BRION D. UMIDI
Brion D. UmidiSenior Vice President and
Chief Financial Officer