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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] Annual Report Under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the Fiscal Year Ended December 31, 2003.
[ ] Transition Report Under Section 13 or 15(d) of the Securities Exchange
Act of 1934
Commission File Number: 0-31152
CRDENTIA CORP.
(Name of Small Business Issuer in Its Charter)
Delaware 76-0585701
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
14114 Dallas Parkway, Suite 600, Dallas, Texas 75254
(Address of Principal Executive Offices) (Zip Code)
(972)850-0780
(Issuer's Telephone Number)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Title of class: Name of each exchange on which
Common Stock, $.0001 par value registered: None
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-B is not contained herein, and will not be
contained, to the best of the registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this
Form 10-KSB or any amendment to this Form 10-KSB. [ ]
Registrant had revenues for its most recent fiscal year of $4,711,972.
Indicate the number of shares outstanding of each issuer's classes of
Common Stock, as of the latest practicable date. At March 23, 2004,
18,838,057 shares of Common Stock, $.0001 par value, were outstanding.
The aggregate market value of the voting and non-voting common equity
held by non-affiliates of Registrant on March 23, 2004, was $19,254,500.
[as of date within 60 days]
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the definitive Proxy Statement for Registrant's 2004 Annual
Meeting of Stockholder to be filed pursuant to Regulation 14A within 120 days
after Registrant's fiscal year end, December 31, 2003 and incorporated by
reference into Part III of this Report.
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CRDENTIA CORP.
FORM 10-KSB
December 31, 2003
TABLE OF CONTENTS
PART I
ITEM 1. Description of Business 1
ITEM 2. Description of Properties 11
ITEM 3. Legal Proceedings 11
ITEM 4. Submission of Matters to a Vote of Security Holders 11
PART II
ITEM 5. Market for Equity and Related Stockholder Matters 12
ITEM 6. Management's Discussion and Analysis of Operations 13
ITEM 7. Financial Statements 16
ITEM 8. Changes in and Disagreements with Accountants 17
ITEM 8A. Controls and Procedures 17
PART III
ITEM 9. Directors and Executive Officers of the Registrant 18
ITEM 10. Executive Compensation 18
ITEM 11. Security Ownership of Certain Beneficial Owners
and Management 18
ITEM 12. Certain Relationships and Related Transactions 18
ITEM 13. Exhibits, Lists and Reports on Form 8-K 18
ITEM 14. Principal Accountant Fees and Services 22
Signatures 23
Certifications Pursuant to Section 906 of
Sarbanes-Oxley Act of 2002 24
PART F/S
Financial Statements F-1 to F-24
Exhibits
PART I
ITEM 1. BUSINESS
Company Overview and History
We are a provider of healthcare staffing services, focusing on the areas
of travel nursing, per diem staffing, contractual clinical services, and
private duty home care. Our travel nurses are recruited domestically as
well as internationally and placed on temporary assignments at healthcare
facilities across the United States. Our per diem nurses are local nurses
placed at healthcare facilities on short-term assignments. Our contractual
clinical services group provides complete clinical management and staffing
for healthcare facilities and our private duty home care group provides
nursing case management and staffing for skilled and non-skilled care in
the home.
At the beginning of the reporting period covered by this report, we were
a development stage company with no commercial operations. We did not have
any revenue in 2002 and did not have any revenue in 2003 until we completed
our first acquisition in August 2003. During the year, we pursued our
operational plan of acquiring companies in the healthcare staffing field and
completed acquisitions of four companies. As a result, we are now providing
temporary healthcare workers in 25 states and have contracts with
approximately 150 healthcare facilities. We anticipate continuing our plan
to acquire specialized companies in the healthcare staffing field for the
foreseeable future.
In August 2003, we completed our acquisition of Baker Anderson Christie,
Inc., a California corporation, which operated a healthcare staffing
business in Northern California. The transaction, for which we paid 480,000
shares of our common stock, was consummated pursuant to the terms of the
Agreement and Plan of Reorganization dated June 19, 2003, as amended on July
31, 2003.
In September 2003, we completed our acquisition of New Age Staffing,
Inc., a Delaware corporation, which operated healthcare staffing operations
in Louisiana, Alabama and Tennessee. The transaction, for which we paid
6,884,614 shares of our common stock, was consummated pursuant to the terms
of the Agreement and Plan of Reorganization dated September 15, 2003. This
acquisition provided us entry into the area of travel nursing and resulted
in our first significant revenue.
In October 2003, we completed our acquisition of Nurses Network, Inc, a
California corporation, which operated a healthcare staffing operation in
Northern California. The transaction, for which we paid 118,084 shares of
our common stock, was consummated pursuant to the terms of the Agreement and
Plan of Reorganization dated July 16, 2003, as amended on September 9, 2003.
In December 2003, we completed our acquisition of PSR Nurse Recruiting,
Inc., a Texas corporation, and PSR Nurses Holdings Corp., a Texas
corporation, which hold the limited partner and general partner interests in
PSR Nurses, Ltd., which operated a healthcare staffing business in Texas.
The transactions, for which we paid 3,418,789 shares of our common stock,
were consummated pursuant to the terms of the Agreement and Plan of
Reorganization dated November 4, 2003. This acquisition expanded our
presence in travel nursing and provided us with a complete back-office
operation.
We were incorporated under the laws of the State of Delaware on November
10, 1997 under the name of Digivision International, Ltd. Our name was
changed to Lifen, Inc. on June 22, 2000 and to Crdentia Corp. on May 28,
2003. Our principal executive offices are located at 14114 Dallas Parkway,
Suite 600, Dallas, Texas 75254 and our telephone number is 972/850-0780
Industry Overview
The Staffing Industry Report, an independent staffing industry
publication, estimates that the healthcare segment of the temporary staffing
industry was $10.6 billion in 2002, an increase of 25% from $8.5 billion in
2001. Nurse staffing represents over 70% of the revenue generated in the
temporary medical staffing industry.
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The most common temporary nurse staffing alternatives available to
hospital administrators are travel nurses and per diem nurses.
- Travel nurse staffing involves placement of registered nurses on a
contracted, fixed-term basis. Assignments may range from several weeks
to one year, but are typically 13 weeks long and involve temporary
relocation to the geographic area of the assignment. The staffing
company generally is responsible for providing travel nurses with
customary employment benefits and for coordinating and providing
travel and housing arrangements.
- Per diem staffing involves placement of locally based healthcare
professionals on very short-term assignments, often for daily shift
work, with little advance notice of assignments by the client.
Supply and Demand Factors
Beginning in the mid-1990s, changes in the healthcare industry prompted
a fundamental shift in staffing models that led to an increased usage of
temporary staffing at hospitals and other healthcare facilities. We believe
that these changes in the healthcare industry will continue over the long-
term because of the following factors:
Shortage of Nurses. There is a pronounced shortage of registered
nurses, especially experienced acute care specialty nurses, who staff
operating rooms, emergency rooms, intensive care and pediatric units. This
shortage is expected to grow over the coming decades to an estimated 20%
below requirements by the year 2015 and 29% below requirements by the year
2020, according to a July 2002 report by the U.S. Department of Health and
Human Services (HHS). Similarly, a 2002 report to the Joint Commission on
Accreditation of Healthcare Organizations (JCAHO) titled "Health Care at
the Crossroads-Strategies for Addressing the Evolving Nursing Shortage,"
quantified this shortage by stating that by the year 2020 there will be at
least 400,000 fewer nurses available to provide care than will be needed.
Several factors have contributed to the decline in the supply of nurses:
- The nurse pool is getting older and approaching retirement age.
Several factors contribute to the aging of the registered nurse
workforce: (1) the decline in number of nursing school graduates, (2)
the higher age of recent graduates, and (3) the aging of the existing
pool of licensed nurses. The largest source of new registered nurses,
associate-degreed nurses, are on average 33 years old when they
graduate , which is considerably older than in 1980 when the average
age was 28. The JCAHO report outlined the average age of a working
registered nurse at 43.3 and increasing at a rate more than twice
that of other workforces in this country. By the year 2010, it is
projected that the average age of working registered nurses will
be 50.
- Approximately 60% of nurses work in hospitals. Many registered nurses
are leaving the hospital workforce through retirement, death or by
choosing careers outside of acute care hospitals or in professions
other than direct patient care. There are currently more than 500,000
licensed nurses not employed in nursing. Generally, the primary
reasons nurses leave patient care, besides retirement, is to seek a
job that is less stressful and less physically demanding, to seek
more regular hours and more compensation.
- Enrollment levels in nursing schools declined in the last half of the
1990s, resulting in 26% fewer registered nurse graduates in 2000 than
in 1995. Similarly, the number of domestically educated candidates
taking the registered nurse licensing examination (NCLEX) for the
first time has declined at an average of 5.5% for each of the past
six years, as reported by the National Council of State Boards of
Nursing, Inc.
- There is an increasing shortage of nursing faculty. As a result of the
faculty shortage, nursing schools turned away 5,000 qualified
baccalaureate program applicants in 2001.
We believe the shortage of nurses increases demand for our services.
Hospitals are increasingly turning to temporary nurses as a flexible way to
manage changes in demand of their permanent staff and make up for budgeted
shortfalls in staffing.
Increasing Demand for Healthcare Services. There are a number of
factors driving an increase in the demand for healthcare services, including:
- A projected 18% increase in population in the United States between
the year 2000 and 2020, resulting in
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an additional 50 million people who will require health care -19 million
of which will be in the 65-and-over age group (according to the July 2002
Report by U.S. Department of Health and Human Services).
- The aging of America. Baby boomers are just entering the 55 to 64 age
group, where inpatient days per thousand are 58% higher than in the
45 to 54 age group, and 121% higher than in the 35 to 44 age group.
- Advances in medical technology and healthcare treatment methods that
attract a greater number of patients with complex medical conditions
requiring higher intensity of care.
Legislative Changes that will Increase Demand. In response to
concerns by consumer groups over the quality of care provided in healthcare
facilities and concerns by nursing organizations about the increased
workloads and pressures on nurses, a number of states have either passed or
introduced legislation related to prohibiting mandatory overtime and
addressing nurse-to-patient ratios. The passage of such legislation is
expected to increase the demand for nurses. California, in particular, has
passed legislation requiring minimum nurse-to-patient ratios at all
hospitals. Maine, New Jersey and Oregon have passed legislation limiting
mandatory overtime for nurses. Several states are considering, or have
already introduced similar legislation.
Business Overview
We are primarily a provider of healthcare staffing services to hospitals
and other healthcare facilities throughout the United States. The majority
of our assignments are at acute care hospitals in major metropolitan areas.
In 2003, approximately 61% of our revenue was derived from the placement of
travel nurses on assignment, typically 13 weeks in length. Such assignments
generally involve temporary relocation to the geographic area of the
assignment. In 2003, we also provided per diem nurses to satisfy the very
short-term needs of healthcare facilities. While per diem services provided
less than 11% of our revenue in 2003, we believe this market presents a
significant growth opportunity. The balance of our revenue in 2003 came from
providing clinical management and staffing to healthcare facilities and
private duty home care. We anticipate there are growth opportunities in
these areas as well and intend to pursue such opportunities as they arise.
With the existing and growing shortage of nurses in the United States,
we believe there is an opportunity to build a significant company in the
field of healthcare staffing services. We intend to pursue this opportunity
through organic growth of our existing businesses and through the continued
acquisition of complementary companies in this sector. We believe that
temporary staffing companies must consolidate in order to survive. The
success of the large industry leaders is indicative of the efficiency, both
in operations as well as capital formation, of this strategy. Smaller
companies in this sector will increasingly be at a competitive disadvantage
in the marketplace because technology, operating efficiency and breadth of
service will soon be the key to survival.
Growth Strategy
Our goal is to expand our position within the temporary healthcare
staffing sector in the United States. The key components of our business
strategy include:
- Expanding Our Network of Qualified Temporary Healthcare Professionals.
Through our recruiting efforts both in the United States and
internationally, we continue to expand our network of qualified
temporary healthcare professionals. We have a staff of professional
recruiters who establish contact with qualified healthcare
professionals by phone, by email and through the internet. Our best
source, however, is by referals from satisfied healthcare
professionals already associated with our company.
- Strengthening and Expanding Our Relationships with Hospitals and
Healthcare Facilities. We continue to strengthen and expand our
relationships with our hospital and healthcare facility clients, and
to develop new relationships. Hospitals and healthcare facilities are
seeking a strong business partner for outsourcing who can fulfill the
quantity and quality of their staffing needs and help them develop
strategies for the most cost-effective staffing methods. We believe
we are well positioned to offer our hospital and healthcare facility
clients effective solutions to meet their staffing needs.
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- Increasing Our Market Presence in the Per Diem Staffing Market. We
intend to expand our per diem services to the acute care hospital
market by opening or acquiring new per diem staffing offices in
selected markets . While we have not historically had a significant
presence in per diem staffing services, we believe that this market
presents a substantial growth opportunity.
- Acquiring Complementary Businesses. We continually evaluate
opportunities to acquire complementary businesses to strengthen and
broaden our market presence and suite of products.
- Expanding Service Offerings Through New Staffing Solutions. In order
to further enhance the growth in our business and improve our
competitive position in the healthcare staffing sector, we continue
to explore new service offerings. In addition, we believe there are
opportunities for growth in allied health (technicians and therapists)
and we have begun to pursue new initiatives in this area as well.
Competition
The healthcare staffing industry is highly competitive, with low barrier
s to entry. We compete with both national firms as well as local and
regional firms to attract nurses and other healthcare professionals as
temporary healthcare professionals and to attract hospital and healthcare
facility clients. We compete for temporary healthcare professionals on the
basis of service and expertise, the quantity, diversity and quality of
assignments available, compensation packages, and the benefits that we
provide to a temporary healthcare professional while they are on an
assignment. We compete for hospital and healthcare facility clients on the
basis of the quality of our temporary healthcare professionals, the timely
availability of our professionals with requisite skills, the quality, scope
and price of our services, our recruitment expertise and the geographic
reach of our services. Although we believe we compete favorably with respect
to these factors, we expect competition to continue to increase.
We also compete with national, regional and local firms who also seek to
acquire temporary healthcare companies. Many of these firms have greater
financial resources and market recognition than we do. However, we believe
that the combination of our management team and the growth plan that we
have established will be attractive to many of the acquisition candidates
that we encounter and that we will compete favorably in this environment.
Regulatory Issues
The healthcare industry is subject to extensive and complex federal and
state laws and regulations related to professional licensure, conduct of
operations, payment for services and payment for referrals. Our business,
however, is not generally impacted because we provide services on a
contract basis and are paid directly by our hospital and healthcare facility
clients.
Some states require state licensure for businesses that employ and/or
assign healthcare personnel to provide healthcare services on-site at
hospitals and other healthcare facilities. We have applied for or are
currently licensed in all states in which we do business that require such
licenses.
Most of the temporary healthcare professionals that we employ are
required to be individually licensed or certified under applicable state
laws. We take reasonable steps to ensure that our employees possess all
necessary licenses and certifications in all material respects.
With respect to our recruitment of international temporary healthcare
professionals, we must comply with certain United States immigration law
requirements, including the Illegal Immigration Reform and Immigrant
Responsibility Act of 1996.
Employees
At December 31, 2003, we employed 41 full-time employees, including
corporate office and field office employees. During the year ended December
31, 2003, we employed approximately 400 temporary healthcare professionals.
None of our employees, including our temporary healthcare professionals,
are represented by a labor union. We believe we have excellent relations
with our employees.
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Available Information
We maintain a corporate website at www.crdentia.com. Our annual reports
on Form 10-KSB, quarterly reports on Form 10-QSB, current reports on Form
8-K, and amendments to these reports, are made available, free of charge,
through this website as soon as reasonably practicable after being filed
with or furnished to the Securities and Exchange Commission. In addition,
on or before the date of our annual stockholders meeting in 2004, our Code
of Business Conduct, charters of the Audit Committee and Compensation
Committee will each be available on our website. We will provide
reasonable quantities of electronic or paper copies of filings free of
charge upon request. In addition, we will provide a copy of the above
referenced charters to stockholders upon request.
Forward Looking Statements
This Annual Report on Form 10-KSB contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as amended. Such
statements include statements regarding our expectations, hopes, beliefs or
intentions regarding the future, including but not limited to statements
regarding our market, strategy, competition, development plans (including
acquisitions and expansion), availability of temporary professionals,
financing, revenue, operations, and compliance with applicable laws.
Forward-looking statements involve certain risks and uncertainties, and
actual results may differ materially from those discussed in any such
statement. Factors that could cause actual results to differ materially
from such forward-looking statements include the risks described in greater
detail in the following paragraphs. All forward-looking statements in this
document are made as of the date hereof, based on information available to
us as of the date hereof, and we assume no obligation to update any forward-
looking statement. Market data used throughout this report, including
information relating to our relative position in the independent staffing
industry, is based on published third party reports or the good faith
estimates of management, which estimates are based upon their review of
internal surveys, independent industry publications and other publicly
available information. Although we believe that such sources are reliable,
we do not guarantee the accuracy or completeness of this information, and
we have not independently verified such information.
Risk Factors
We were formed in November, 1997, and commenced operations on August 7,
2003 following our acquisition of Baker Anderson Christie, Inc. Any
investment in our common stock involves a high degree of risk. You should
consider carefully the following information about these risks, together
with the other information contained in this report, before you decide to
buy our common stock. The risks and uncertainties described below are not
the only ones we face. Additional risks and uncertainties not presently
known to us or that we currently deem immaterial may also impair our
operations. If any of the following risks actually occur, our business
would likely suffer and our results could differ materially from those
expressed in any forward-looking statements contained in this report
including those contained in the section captioned "Management's Discussion
and Analysis of Operations" under Item 6. In such case, the trading price
of our common stock could decline, and you may lose all or part of the money
you paid to buy our common stock.
The ability to attract and retain highly qualified personnel to operate
and manage our operations is extremely important and our failure to do so
could adversely affect us.
Presently, we are dependent upon the personal efforts of our management
team. The loss of any of our officers or directors could have a material
adverse effect upon our business and future prospects. We do not presently
have key-person life insurance upon the life of any of our officers or
directors. Additionally, as we continue our planned expansion of commercial
operations, we will require the services of additional skilled personnel.
There can be no assurance that we can attract persons with the requisite
skills and training to meet our future needs or, even if such persons are
available, that they can be hired on terms favorable to us.
5
Our ability to execute upon our strategy of acquiring companies will
require us to obtain additional working capital.
Our business strategy will require substantial capital investment and
adequate financing for the completion of acquisitions, development and
integration of operations and technology as needed. In the event that we
cannot obtain the necessary capital to fund our operations as planned, we
may need to limit our operations and development activities. We cannot
guarantee that such capital investment will be available to us at all or
on terms that are acceptable to us. Our failure to obtain the necessary
amount of working capital to fund our operations as currently anticipated
could have a material, adverse effect upon our capacity to grow our
operations.
The means by which we raise additional working capital could cause
substantial dilution to stockholders or result in significant interest
expense or restrictive covenants.
Our ability to fund our planned operations will require that we obtain
substantial capital investment and financing. We may raise these funds
through public or private debt or equity offerings. Depending on the terms
negotiated with potential investors, such securities may be issued at a
price per share significantly less than the trading prices listed for our
common stock on the OTC Bulletin Board and thus may be significantly
dilutive to our current stockholders. In addition, such dilution could
likely have a depressive effect on the market price of our common stock,
should a public market continue for our shares of common stock. In
addition, any debt financing that we are able to obtain, if any, may
involve significant interest expense or restrictive covenants that may
limit our operations.
We may face difficulties integrating our acquisitions into our
operations and our acquisitions may be unsuccessful, involve significant
cash expenditures or expose us to unforeseen liabilities.
We continually evaluate opportunities to acquire healthcare staffing
companies that complement or enhance our business and frequently have
preliminary acquisition discussions with some of these companies. In
addition, last year we acquired four businesses.
These acquisitions involve numerous risks, including:
- potential loss of key employees or clients of acquired companies;
- difficulties integrating acquired personnel and distinct cultures
into our business;
- difficulties integrating acquired companies into our operating,
financial planning and financial reporting systems;
- diversion of management attention from existing operations; and
- assumption of liabilities and exposure to unforeseen liabilities of
acquired companies, including liabilities for their failure to comply
with healthcare regulations.
- These acquisitions may also involve significant cash expenditures,
debt incurrence and integration expenses that could seriously harm
our financial condition and results of operations. We may fail to
achieve expected efficiencies and synergies. Any acquisition may
ultimately have a negative impact on our business and financial
condition.
We have had a short operating history and no earnings.
We were formed in November, 1997 and commenced operations on August 7,
2003 with our acquisition of Baker Anderson Christie, Inc. Although we
acquired three more companies during the balance of the year, we only
operated each of those companies for a portion of the year. Therefore, we
are a "start-up" operation and subject to all the risks inherent in a new
business venture, many of which are beyond our control, including the
ability to implement successful operations, lack of capital to finance
acquisitions and failure to achieve market acceptance. In
6
addition, as a start-up venture we will face significant competition from
many companies virtually all of which are larger, better financed and have
significantly greater market recognition than us.
The successful implementation of our business strategy depends upon the
ability of our management to monitor and control costs.
With respect to our planned operations, management cannot accurately
roject or give any assurance with respect to our ability to control
development and operating costs and/or expenses in the future. Consequently,
as we expand our commercial operations, management may not be able to
control costs and expenses adequately, and such operations may generate
losses.
We may become subject to governmental regulations and oversight, which
could adversely affect our ability to continue or expand our business
strategy.
Although our operations are currently not subject to any significant
government regulations, it is possible that, in the future, such regulations
may be legislated. Although we cannot predict the extent of any such future
regulations, a possibility exists that future or unforeseen changes may
have an adverse impact upon our ability to continue or expand our operations
as presently planned.
There is a lack of an active public market for our common stock.
We received approval to list our common stock on the OTC Bulletin Board
and trading of shares began on February 24, 2003. There can be no
assurances, however, that a market will develop or continue for our common
stock. Our common stock may be thinly traded, if traded at all, even if we
achieve full operation and generate significant revenue and is likely to
experience significant price fluctuations. In addition, our stock is
defined as a "penny stock" under Rule 3a51-1 adopted by the Securities and
Exchange Commission under the Securities Exchange Act of 1934, as amended.
In general, a "penny stock" includes securities of companies which are not
listed on the principal stock exchanges or the National Association of
Securities Dealers Automated Quotation System ("NASDAQ") or National Market
System ("NASDAQ NMS") and have a bid price in the market of less than $5.00;
and companies with net tangible assets of less than $2,000,000 ($5,000,000
if the issuer has been in continuous operation for less than three years),
or which have recorded revenues of less than $6,000,000 in the last three
years. "Penny stocks" are subject to rule 15g-9, which imposes additional
sales practice requirements on broker-dealers that sell such securities to
persons other than established customers and "accredited investors"
(generally, individuals with net worth in excess of $1,000,000 or annual
incomes exceeding $200,000, or $300,000 together with their spouses, or
individuals who are officers or directors of the issuer of the securities).
For transactions covered by Rule 15g-9, a broker-dealer must make a special
suitability determination for the purchaser and have received the
purchaser's written consent to the transaction prior to sale. Consequently,
this rule may adversely affect the ability of broker-dealers to sell our
common stock, and therefore, may adversely affect the ability of our
stockholders to sell common stock in the public market.
Purchases of additional shares of common stock by our Chief Executive
Officer could cause significant dilution to our stockholders and cause our
stock price to decline.
Subject to the terms and conditions of a Common Stock Purchase Agreement
dated May 15, 2002 with James Durham, Mr. Durham had the right to purchase
at a purchase price of $0.0001 per share, up to a number of additional
shares of our common stock equal to twenty-five (25%) of the aggregate
number of additional shares of our common stock and other securities
convertible into common stock issued or issuable in connection with any
acquisitions we complete on or before August 7, 2004. We have issued an
aggregate of 11,069,110 shares as consideration for our four completed
acquisitions of Baker Anderson Christie, Inc., New Age Staffing, Inc.,
Nurses Network, Inc. and PSR Nurse Recruiting, Inc. and PSR Nurses Holdings
Corp. As a result of the completion of these acquisitions, Mr. Durham has
the right to purchase up to 2,767,278 shares of our common stock at $0.0001
per share. On December 31, 2003 the Common Stock Purchase Agreement dated
May 15, 2002 was modified such that Mr. Durham relinquished his rights to
purchase additional shares of common stock that were to accrue to him in
connection with acquisitions that occurred either before or after December
31, 2003. In consideration for this modification and based on extensive
analysis and review of our planned acquisition program, with the assistance
of a third-party compensation specialist, our board of directors granted
Mr. Durham an option to purchase up to
7
7,000,000 shares of common stock at an exercise price of $.10 per share.
Mr. Durham is fully vested in the option, which expires December 31, 2018.
One hundred percent (100%) of the shares of our common stock subject to the
option shall be exercisable by Mr. Durham on December 31, 2008.
Notwithstanding the foregoing, a certain number of shares subject to the
option may be exercised prior to December 31, 2008 upon the closing of
certain acquisitions by us. The difference between the purchase price of
the common stock and option ($0.0001 and $0.10 per share, respectively) and
the closing price of our common stock on the respective grant date, as
quoted on the OTC Bulletin Board, has been accounted for as a non-cash
compensation expense. The exercise by Mr. Durham of his right to purchase
our common stock per the Common Stock Purchase Agreement or to exercise the
option issued on December 31, 2003 may cause substantial dilution to our
stockholders and may have a depressive effect on the market price of our
securities, should a public market continue for our shares of common stock.
The effect of these purchase rights and options may also serve to make
financings or acquisitions more difficult to consummate or to make the
terms of such financings or acquisitions more onerous.
If we are unable to attract qualified nurses and healthcare
professionals for our healthcare staffing business, our business could be
negatively impacted.
We rely significantly on our ability to attract and retain nurses and
healthcare professionals who possess the skills, experience and licenses
necessary to meet the requirements of our hospital and healthcare facility
clients. We compete for healthcare staffing personnel with other temporary
healthcare staffing companies and with hospitals and healthcare facilities.
We must continually evaluate and expand our temporary healthcare
professional network to keep pace with our hospital and healthcare facility
clients' needs. Currently, there is a shortage of qualified nurses in most
areas of the United States, competition for nursing personnel is increasing,
and salaries and benefits have risen. We may be unable to continue to
increase the number of temporary healthcare professionals that we recruit,
decreasing the potential for growth of our business. Our ability to attract
and retain temporary healthcare professionals depends on several factors,
including our ability to provide temporary healthcare professionals with
assignments that they view as attractive and to provide them with
competitive benefits and wages. We cannot assure you that we will be
successful in any of these areas. The cost of attracting temporary
healthcare professionals and providing them with attractive benefit packages
may be higher than we anticipate and, as a result, if we are unable to pass
these costs on to our hospital and healthcare facility clients, our
profitability could decline. Moreover, if we are unable to attract and
retain temporary healthcare professionals, the quality of our services to
our hospital and healthcare facility clients may decline and, as a result,
we could lose clients.
The temporary staffing industry is highly competitive and the success
and future growth of our business depend upon our ability to remain
competitive in obtaining and retaining temporary staffing clients.
The temporary staffing industry is highly competitive and fragmented,
with limited barriers to entry. We compete in national, regional and local
markets with full-service agencies and in regional and local markets with
specialized temporary staffing agencies. Some of our competitors include
AMN Healthcare Services, Inc., Cross Country, Inc., Medical Staffing
Network Holdings, Inc. and On Assignment, Inc. All of these companies have
significantly greater marketing and financial resources than we do. Our
ability to attract and retain clients is based on the value of the service
we deliver, which in turns depends principally on the speed with which we
fill assignments and the appropriateness of the match based on clients'
requirements and the skills and experience of our temporary employees. Our
ability to attract skilled, experienced temporary professionals is based on
our ability to pay competitive wages, to provide competitive benefits, to
provide multiple, continuous assignments and thereby increase the retention
rate of these employees. To the extent that competitors seek to gain or
retain market share by reducing prices or increasing marketing expenditures,
we could lose revenues and our margins could decline, which could seriously
harm our operating results and cause the trading price of our stock to
decline. As we expand into new geographic markets, our success will depend
in part on our ability to gain market share from competitors. We expect
competition for clients to increase in the future, and the success and
growth of our business depend on our ability to remain competitive.
Our business depends upon our continued ability to secure and fill new
orders from our hospital and healthcare facility clients, because we do not
have long-term agreements or exclusive contracts with them.
8
We generally do not have long-term agreements or exclusive guaranteed
order contracts with our hospital and healthcare facility clients. The
success of our business depends upon our ability to continually secure new
orders from hospitals and other healthcare facilities and to fill those
orders with our temporary healthcare professionals. Our hospital and
healthcare facility clients are free to place orders with our competitors
and may choose to use temporary healthcare professionals that our
competitors offer them. Therefore, we must maintain positive relationships
with our hospital and healthcare facility clients. If we fail to maintain
positive relationships with our hospital and healthcare facility clients,
we may be unable to generate new temporary healthcare professional orders
and our business may be adversely affected.
Fluctuations in patient occupancy at our clients' hospitals and
healthcare facilities may adversely affect the demand for our services and
therefore the profitability of our business.
Demand for our temporary healthcare staffing services is significantly
affected by the general level of patient occupancy at our hospital and
healthcare clients' facilities. When occupancy increases, hospitals and
other healthcare facilities often add temporary employees before full-time
employees are hired. As occupancy decreases, hospitals and other healthcare
facilities typically reduce their use of temporary employees before
undertaking layoffs of their regular employees. In addition, we may
experience more competitive pricing pressure during periods of occupancy
downturn. Occupancy at our clients' hospitals and healthcare facilities
also fluctuates due to the seasonality of some elective procedures. We are
unable to predict the level of patient occupancy at any particular time and
its effect on our revenues and earnings.
Healthcare reform could negatively impact our business opportunities,
revenues and margins.
The U.S. government has undertaken efforts to control increasing
healthcare costs through legislation, regulation and voluntary agreements
with medical care providers and drug companies. In the recent past, the U.S.
Congress has considered several comprehensive healthcare reform proposals.
The proposals were generally intended to expand healthcare coverage for the
uninsured and reduce the growth of total healthcare expenditures. While the
U.S. Congress did not adopt any comprehensive reform proposals, members of
Congress may raise similar proposals in the future. If any of these
proposals are approved, hospitals and other healthcare facilities may react
by spending less on healthcare staffing, including nurses. If this were to
occur, we would have fewer business opportunities, which could seriously
harm our business.
State governments have also attempted to control increasing healthcare
costs. For example, the state of Massachusetts has recently implemented a
regulation that limits the hourly rate payable to temporary nursing agencies
for registered nurses, licensed practical nurses and certified nurses'
aides. The state of Minnesota has also implemented a statute that limits
the amount that nursing agencies may charge nursing homes. Other states have
also proposed legislation that would limit the amounts that temporary
staffing companies may charge. Any such current or proposed laws could
seriously harm our business, revenues and margins.
Furthermore, third party payers, such as health maintenance
organizations, increasingly challenge the prices charged for medical care.
Failure by hospitals and other healthcare facilities to obtain full
reimbursement from those third party payers could reduce the demand or the
price paid for our staffing services.
We operate in a regulated industry and changes in regulations or
violations of regulations may result in increased costs or sanctions that
could reduce our revenues and profitability.
The healthcare industry is subject to extensive and complex federal and
state laws and regulations related to professional licensure, conduct of
operations, payment for services and payment for referrals. If we fail to
comply with the laws and regulations that are directly applicable to our
business, we could suffer civil and/or criminal penalties or be subject to
injunctions or cease and desist orders.
Our business is generally not subject to the extensive and complex laws
that apply to our hospital and healthcare facility clients, including laws
related to Medicare, Medicaid and other federal and state healthcare
programs. However, these laws and regulations could indirectly affect the
demand or the prices paid for our services. For example, our hospital and
healthcare facility clients could suffer civil or criminal penalties or be
excluded from participating in Medicare, Medicaid and other healthcare
programs if they fail to comply with the laws and regulations applicable to
their businesses. In addition, our hospital and healthcare facility clients
could receive reduced reimbursements, or be excluded from coverage, because
of a change in the rates or conditions set by
9
federal or state governments. In turn, violations of or changes to these
laws and regulations that adversely affect our hospital and healthcare
facility clients could also adversely affect the prices that these clients
are willing or able to pay for our services.
Competition for acquisition opportunities may restrict our future growth
by limiting our ability to make acquisitions at reasonable valuations
Our business strategy includes increasing our market share and presence
in the temporary healthcare staffing industry through strategic acquisitions
of companies that complement or enhance our business. We have historically
faced competition for acquisitions. In the future, such competition could
limit our ability to grow by acquisitions or could raise the prices of
acquisitions and make them less attractive to us.
Significant legal actions could subject us to substantial uninsured
liabilities.
In recent years, healthcare providers have become subject to an
increasing number of legal actions alleging malpractice, product liability
or related legal theories. Many of these actions involve large claims and
significant defense costs. In addition, we may be subject to claims related
to torts or crimes committed by our employees or temporary healthcare
professionals. In some instances, we are required to indemnify our clients
against some or all of these risks. A failure of any of our employees or
healthcare professionals to observe our policies and guidelines intended to
reduce these risks, relevant client policies and guidelines or applicable
federal, state or local laws, rules and regulations could result in
negative publicity, payment of fines or other damages. Our professional
malpractice liability insurance and general liability insurance coverage
may not cover all claims against us or continue to be available to us at a
reasonable cost. If we are unable to maintain adequate insurance coverage
or if our insurers deny coverage we may be exposed to substantial
liabilities.
We may be legally liable for damages resulting from our hospital and
healthcare facility clients' mistreatment of our healthcare personnel.
Because we are in the business of placing our temporary healthcare
professionals in the workplaces of other companies, we are subject to
possible claims by our temporary healthcare professionals alleging
discrimination, sexual harassment, negligence and other similar activities
by our hospital and healthcare facility clients. The cost of defending such
claims, even if groundless, could be substantial and the associated
negative publicity could adversely affect our ability to attract and retain
qualified healthcare professionals in the future.
Execution of our business strategy and growth of our business are
substantially dependent upon our ability to attract, develop and retain
qualified and skilled sales personnel.
Execution of our business strategy and continued growth of our business
are substantially dependent upon our ability to attract, develop and retain
qualified and skilled sales personnel who engage in selling and business
development for our services. The available pool of qualified sales
personnel candidates is limited. We commit substantial resources to the
recruitment, training, development and operational support of our sales
personnel. There can be no assurance that we will be able to recruit,
develop and retain qualified sales personnel in sufficient numbers or that
our sales personnel will achieve productivity levels sufficient to enable
growth of our business. Failure to attract and retain productive sales
personnel could adversely affect our business, financial condition and
results of operations.
We have a substantial amount of goodwill and other intangible assets on
our balance sheet. Our level of goodwill and other intangible assets may
have the effect of decreasing our earnings or increasing our losses.
As of December 31, 2003, we had $11.9 million of unamortized goodwill
and other intangible assets on our balance sheet, which represents the
excess of the total purchase price of our acquisitions over the fair value
of the net assets acquired. At December 31, 2003, goodwill and other
intangible assets represented 68% of our total assets.
10
In July 2001, the Financial Accounting Standards Board issued SFAS No.
141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible
Assets. SFAS No. 141 requires that the purchase method of accounting be used
for all business combinations initiated after June 30, 2001, as well as all
purchase method business combinations completed after June 30, 2001. SFAS
No. 142 requires that, subsequent to January 1, 2002, goodwill not be
amortized but rather that it be reviewed annually for impairment. In the
event impairment is identified, a charge to earnings would be recorded. We
have adopted the provisions of SFAS No. 141 and SFAS No. 142. Although it
does not affect our cash flow, amortization of goodwill or an impairment
charge to earnings has the effect of decreasing our earnings or increasing
our losses, as the case may be. If we are required to write down a
substantial amount of goodwill, our stock price could be adversely affected.
Demand for medical staffing services is significantly affected by the
general level of economic activity and unemployment in the United States.
When economic activity increases, temporary employees are often added
before full-time employees are hired. However, as economic activity slows,
many companies, including our hospital and healthcare facility clients,
reduce their use of temporary employees before laying off full-time
employees. In addition, we may experience more competitive pricing pressure
during periods of economic downturn. Therefore, any significant economic
downturn could have a material adverse impact on our financial position and
results of operations.
ITEM 2. PROPERTIES
We believe that our properties are adequate for our current needs. In
addition, we believe that adequate space can be obtained to meet our
foreseeable business needs. We currently lease office space in four
locations, as identified in the chart below:
Location Square Feet
----------- ---------
Dallas, Texas (corporate headquarters and staffing administration) 16,522
San Francisco, California (staffing administration) 2,487
Birmingham, Alabama (staffing administration) 1,100
Newport, Rhode Island (staffing administration) 300
---------
Total 20,409
---------
ITEM 3. LEGAL PROCEEDINGS
We are parties to various legal proceedings arising in the ordinary
course of business. We believe that all pending claims, if adversely
decided, would not have a material adverse effect on our business,
financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
11
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
There is no organized or established trading market for our company
stock. We received approval to list our common stock on the OTC Bulletin
Board, and trading of such shares began on February 24, 2003 under the
symbol "LFEN". On June 3, 2003, we changed our name from Lifen, Inc. to
Crdentia Corp. and began trading under the symbol "CRNC". There currently
is a very limited public market for our common stock and no assurance can
be given that a large public market will develop in the future. The
trading market for the common stock is extremely thin. In view of the lack
of an organized or established trading market for the common stock and the
extreme thinness of whatever trading market may exist, the prices reflected
on the chart as reported on the OTC Bulletin Board may not be indicative of
the price at which any prior or future transactions were or may be effected
in the common stock. Stockholders are cautioned against drawing any
conclusions from the data contained herein, as past results are not
necessarily indicative of future stock performance.
The following table sets forth the high and low bid price for our common
stock for each quarter for the period from inception of trading under the
symbol "CRNC" on June 3, 2003 through December 31, 2003, as quoted on the
OTC Bulletin Board. Such over-the-counter market quotations reflect inter-
dealer prices, without retail mark-up, mark-down or commission and may not
necessarily represent actual transactions.
High Low
Year Ended December 31, 2003 ------ ------
----------------------------
Quarter ended June 30, 2003 $5.10 $5.00
Quarter ended September 30, 2003 $5.05 $4.75
Quarter ended December 31, 2003 $5.30 $2.00
As of the date of this report, there were approximately 130 record
holders of our common stock. Since inception, we have not paid and do not
expect to pay any dividends on our shares of common stock for the
foreseeable future as all earnings will be retained for use in the business.
Subject to the terms and conditions of a Common Stock Purchase
Agreement, executed effective May 15, 2002 and modified on December 31, 2003,
James Durham was granted the right, in 2003, to purchase up to 2,767,278
shares of our common stock at $0.0001 per share. On December 31, 2003, Mr.
Durham was granted an option to purchase up to 7,000,000 shares of common
stock at an exercise price of $0.10 per share. In 2003, we granted options
to purchase up to 818,224 shares of common stock at a weighted average
exercise price of approximately $.96 per share to various directors and
certain senior managers.
On December 3 and December 12, 2003, we issued $90,000 in principal
amount of Convertible Subordinated Promissory Notes (the "Notes") to four
investors. This issuance was in addition to the issuance of $820,000 of
Notes discussed in our Form 10-QSB filed on November 14, 2003. Subject to
the conversion provisions set forth in the Notes, the unpaid principal
together with all accrued interest on the Notes is due and payable in full
one year following the issuance date of each such Note. Interest accrues on
the unpaid principal balance at a rate of ten percent (10%) per year and is
payable in quarterly payments. The Notes are convertible into shares of our
common stock at the holder's option, prior to the maturity date, at an
initial conversion price of $1.50 per share. The conversion price was
subsequently adjusted to $1.00 per share upon the issuance of the Series A
Convertible Preferred Stock discussed below.
On December 17, 2003, we issued an aggregate of 1,750,000 shares of
Series A Convertible Preferred Stock at a per share price of $1.00 to two
investors. The holders of the Series A Convertible Preferred Stock are
entitled to receive a quarterly dividend in an amount equal to .025 shares
of common stock for each share of outstanding Series A Convertible
Preferred Stock held by them. Unless previously voluntarily converted prior
to such time, the Series A Convertible Preferred Stock will automatically
convert into shares of our common stock at
12
an initial conversion ratio of one-to-one, one year from the date of
issuance of such shares, subject to certain conversion price adjustments.
On December 2, 2003, we completed the acquisition of PSR Nurse
Recruiting, Inc. and PSR Nurses Holdings Corp., pursuant to an Agreement and
Plan of Reorganization dated November 4, 2003. The aggregate merger
consideration is an amount equal to 0.55 multiplied by the sum of the gross
revenues for PSR Nurses, Ltd., a Texas limited partnership, for the three
year fiscal period ending September 30, 2005 and will be payable solely in
shares of our common stock in up to three installments. At the closing, we
issued an aggregate of 3,418,789 shares of our common stock to the former
stockholders of PSR Nurse Recruiting, Inc. and PSR Nurses Holdings Corp. as
the initial installment of the merger consideration. We also issued an
additional 167,623 shares of our common stock in exchange for the
cancellation of some prior indebtedness of PSR Nurses, Ltd.
With respect to equity compensation plans as of December 31, 2003, see
table below:
Number of securities
remaining available for
Number of securities to be future issuance under
issued upon exercise of Weighted-average exercise equity compensation plans
outstanding options, price of outstanding options (excluding securities
warrants and rights warrants and rights reflected in column (a))
Plan Category (a) (b) (c)
------------------- -------------------------- ---------------------------- --------------------------
Equity compensation
plans approved by
security holders None N/A None
Equity compensation
plans not approved
by security holders 10,585,502 $ .14 N/A
------------------- -------------------------- ---------------------------- --------------------------
Total 10,585,502 $ .14 None
------------------- -------------------------- ---------------------------- --------------------------
The unregistered securities set forth above were sold or granted in
reliance on an exemption in the registration requirements of the Securities
Act of 1933, as amended (the "Securities Act") under Section 4(2) of the
Securities Act and/or Regulation D promulgated under the Securities Act.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS
GENERAL
We are a provider of healthcare staffing services, focusing on the
areas of travel nursing, per diem staffing, contractual clinical services,
and private duty home care. Our travel nurses are recruited domestically
as well as internationally, and placed on temporary assignments at
healthcare facilities across the United States. Our per diem nurses are
local nurses placed at healthcare facilities on short-term assignments.
Our contractual clinical services group provides complete clinical
management and staffing for healthcare facilities and our private duty home
care group provides nursing case management and staffing for skilled and
non-skilled care in the home. We consider the different services described
above to be one segment as each of these services relate solely to providing
healthcare staffing to customers that are healthcare providers and utilize
similar distribution methods, common systems, databases, procedures,
processes and similar methods of identifying and serving these customers.
At the beginning of 2003, we were a development stage company with no
commercial operations. During the year, we pursued our operational plan of
acquiring companies in the healthcare staffing field and completed the
acquisition of four companies. As a result, we are now providing temporary
healthcare in 25 states and have contracts with approximately 150 healthcare
facilities. Approximately 61% of our revenue in 2003 was derived from the
placement of travel nurses and approximately 11% from per diem services.
The balance came from a mix
13
of private duty nursing and complete clinical management. We anticipate
continuing our plan to acquire specialized companies in the healthcare
staffing field for the foreseeable future.
The companies we acquired in 2003 -- Baker Anderson Christie, Inc., New
Age Nurses, Inc., Nurses Network, Inc., and PSR Nurse Recruiting, Inc. and
PSR Nurses Holdings Corp., which hold the limited partner and general
partner interests in PSR Nurses, Ltd. -- provide the foundation for our
continued growth. During the year we began operating the acquired
companies, combining the various back offices and support staff into a
central location and began streamlining the operations. By the end of 2003
we were recording revenue at a monthly rate that is equivalent to $24
million per year.
PLAN OF OPERATIONS
Our success in achieving profitability will depend on our ability to
consummate acquisitions of healthcare companies, to implement our marketing
strategy and to achieve a revenue stream from the sale of services, while
not exceeding budgeted expenses. During the implementation of our business
plan, we will be subject to all of the risks inherent in an emerging
business, including the need to provide reliable and effective services, to
develop marketing expertise, and to generate sales. In the event that our
market declines significantly or fails to grow as anticipated, our business,
financial condition and results of operations could be materially adversely
affected.
During 2003, most of our customers were acute care hospitals located
throughout the continental United States. As we grow, we anticipate that
acute care facilities will continue to be the majority of our customer base
but that the overall percentage will decline as we increase our presence in
the home health and nursing home areas.
Our overall gross profit margin in 2003 was approximately 24.2%, which
we anticipate will increase in 2004. Our gross margin is the difference
between the revenue we realize when we bill our customers for the services
of our healthcare professionals and our direct operating costs, which
include the cost of the healthcare professionals and the related housing
and travel costs, certain employment related taxes and workers compensation
insurance coverage. Any increase in margin will be the result of our
continuing efforts to enhance our margins by increasing the number of
international nurses under contract and to slightly alter our overall
product mix to include more home health and allied health services, which
generally have higher margins.
In 2003, our selling, general and administrative expense was comprised,
primarily, of personnel costs, legal and audit fees related to being a
public company, the long-term bonus payable to our Chief Executive Officer
and various other office and administrative expenses. Approximately 17.5%
or $595,000 of the selling, general and administrative expense in 2003 was
incurred when the company was still in its formative stage, prior to the
completion of our first acquisition. We consider the long-term payable to
be a one-time event that is unlikely to be repeated.
In 2003, we incurred significant non-cash compensation expense primarily
from a compensation agreement with our Chairman and Chief Executive Officer,
related to our initial acquisitions. For a more extensive explanation of
this agreement, see Item 5. Market for Registrants Common Equity and Related
Stockholders Matters. In the future we intend to use stock options as an
incentive to our employees and, therefore, could incur additional non-cash
compensation expense. However, we do not believe that such additional
expense will be at the level incurred in 2003.
During the next twelve months, we intend to continue growing the
businesses acquired in 2003 and to further expand our operations through
acquisitions. Our goal is to acquire at least four additional companies in
2004, generally in the areas of travel nursing, per diem staffing and
private duty home care. We are also exploring opportunities in the allied
health and home health areas. As we acquire companies, we expect to realize
immediate savings in their operations as we integrate them into our
operations and as we decrease their general and administrative costs by
merging their back office and support operation into ours. We have engaged
an independent consulting firm to assist us in identifying acquisition
targets that meet general guidelines with regard to revenue, gross profit
margin and projected earnings. We have begun the process of contacting the
companies that have been so identified.
14
In 2003 the cash flow generated by our operations was not sufficient to
fund our operations and was supplemented by $910,000 of convertible debt
raised in September through December 2003 and by $1.75 million of
convertible preferred stock sold in December 2003. We currently utilize
several factoring relationships and one banking relationship to fund our
cash needs on a short-term basis. We intend to consolidate these into a
single relationship that we have identified, early in the second quarter of
2004, to simplify the record keeping and decrease the overall cost. At
December 31, 2003, we owed approximately $5.4 million to the selling
shareholders of several of the companies we acquired in 2003, of which
approximately $1.8 million will be repaid in 2004. Although at December 31,
2003 we had negative working capital of $1,220,865, several mitigating
factors should be considered: (i) in February 2004 we raised an additional
$1 million of Series A Convertible Preferred Stock, and (ii) of the $910,000
convertible debt outstanding, we believe that the holders of a majority of
this debt will convert to equity in 2004, even though we cannot compel such
conversion. At December 31, 2003, our cash balance was $1,469,076. We
believe that these funds plus the anticipated cash flow from operations in
2004, the sale of additional Series A Convertible Preferred Stock and the
anticipated conversion of at least a portion of the convertible debt will
be sufficient to service the selling shareholder debt and fund our
operations for the foreseeable future, except for the cash required to
prospect for and complete the anticipated acquisitions discussed above.
Based on our current acquisition pipeline, we believe that additional
capital will be required to acquire additional companies. We are currently
exploring various debt and equity options for raising this capital. While
we believe we will be successful in raising additional capital, there is no
assurance that we will be able to raise the amount of capital required to
meet our objectives. If additional capital is not readily available, we
will be forced to scale back our acquisition activities and our operations
until our income exceeds our expenses. This would result in an overall
slowdown of our development.
As a result of certain account collection issues, we are currently
working to end the relationship with one of our hospital group customers.
As of March 23, 2004, this customer owed us approximately $459,198, all
within the payment terms of the contract. We anticipate that this contract
will terminate by the end of May, 2004 and we have a signed agreement from
the customer to pay a set amount each week until the balance is paid in
full. We will be monitoring these payments closely and will take appropriate
action if payments become delinquent.
Our capital commitments for the next twelve months are minimal as our
business does not require the purchase of plants, factories, extensive
capital equipment or inventory.
CRITICAL ACCOUNTING POLICIES AND MANAGEMENT JUDGEMENT
The preparation of the financial statements in accordance with
accounting principles generally accepted in the United States of America
requires us to make judgments, estimates, and assumptions regarding
uncertainties that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities, and the reported amounts
of revenues and expenses. Areas that require significant judgments,
estimates, and assumptions include the assignment of fair values upon
acquisition of goodwill and other intangible assets, testing for impairment
and valuation of the stock used to consummate our acquisitions. We use
historical experience, qualified independent consultants and all available
information to make these judgments and estimates, and actual results will
inevitably differ from those estimates and assumptions that are used to
prepare the company's financial statements at any given time.
Accounts Receivable
Accounts receivable are reduced by an allowance for doubtful accounts
that provides a reserve with respect to those accounts for which revenue
was recognized but with respect to which management subsequently determines
that payment is not expected to be received. We analyze the balances of
accounts receivable to ensure that the recorded amounts properly reflect
the amounts expected to be collected. This analysis involves the
application of varying percentages to each accounts receivable category
based on the age of the uncollectible accounts receivable. The amount
ultimately recorded as the reserve is determined after management also
analyzes the collectibility of specific large or problematic accounts on an
individual basis, as well as the overall business climate and other
15
factors. Our estimate of the percentage of uncollectible accounts may
change from time to time and any such change could have a material impact
on our financial condition and results of operations.
Accounting for Stock Options
We have used stock grants and stock options to attract and retain
directors and key executives and intend to use stock options in the future
to attract, retain and reward employees for long-term service. In 2003 the
grant prices were significantly under the publicly traded market value per
share of our stock. Therefore, we calculated the intrinsic value of the
stock and options granted and recorded non-cash compensation expense for
the difference between the grant price and the market value at issuance.
In the future, we may issue additional shares under market, at which time
we would incur additional non-cash compensation expense, but we anticipate
that the preponderance of future issues will be at the prevailing market
price of our stock.
Purchase Accounting, Goodwill and Intangible Assets
All business acquisitions have been accounted for using the purchase
method of accounting and, accordingly, the statements of operations include
the results of each acquired business since the date of acquisition. The
assets acquired and liabilities assumed are recorded at their estimated
fair value as determined by management based on an independent third-party
valuation. We determined to use third-party valuations because in 2003 our
common stock had just begun to trade and it was thinly traded throughout
the year. We finalize the allocation of the purchase price to the fair
value of the assets acquired and liabilities assumed when we obtain
information sufficient to complete the allocation, but in any case,
within one year after acquisition. In 2003, this allocation was also based
on an independent third-party valuation.
Goodwill arising from the acquisitions of businesses is recorded as the
excess of the purchase price over the estimated fair value of the net
assets of the businesses acquired. Statement of Financial Accounting
Standards No. 142 ("Goodwill and Other Intangible Assets") provides that
goodwill is to be tested for impairment annually or more frequently if
circumstances indicate potential impairment. Consistent with this standard, we
will review goodwill, as well as other intangible assets and long-term assets,
for impairment annually or more frequently as warranted, and if circumstances
indicate that the recorded value of any such other asset is impaired, such asset
is written down to its new, lower fair value.
The Company currently does not believe any impairment of its goodwill or
any such other asset existed at December 31, 2003. Nevertheless, future
conditions or events could adversely affect the recorded value of goodwill
or such other assets. If any item of goodwill or such other asset is
determined to be impaired, an impairment loss would be recognized equal to
the amount by which the recorded value exceeds the estimated fair market
value.
ITEM 7. FINANCIAL STATEMENTS
Audited financial statements for the year ended December 31, 2003 and
2002 are submitted herein as PART F/S on Pages F-1 to F-24.
16
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
At our Annual Meeting on May 28, 2003, our shareholders ratified the
recommendation of our Board of Directors to dismiss our independent
accountant, Sanford H. Feibusch, CPA, PC and to appoint BDO Seidman, LLP
("BDO") as our independent accountants, effective May 28, 2003, for the
fiscal year ended December 31, 2003.
In connection with his services to us in the fiscal year ended December
31, 2002, Mr. Feibusch prepared a report dated February 5, 2003 on our
consolidated financial statements for the four months ended December 31,
2002 and 2001, and for the period from November 10, 1997 (date of inception)
to December 31, 2002. The report did not contain an adverse opinion or
disclaimer of opinion nor was it qualified to audit scope, or accounting
principles. The opinion was qualified, however, as to our ability to
sustain ourselves as a going concern without securing additional funding.
In addition, with respect to the report and the subsequent interim period
ended May 28, 2003, there were no disagreements with Mr. Feibusch on any
matters of accounting principles or practices, financial statement
disclosure, or auditing scope or procedures, which disagreements if not
resolved to the satisfaction of Mr. Feibusch would have caused him to make
reference thereto in his report on the financial statements for such
periods. From February 5, 2003 through May 28, 2003, Mr. Feibusch did not
perform any services or provide any advice, either verbally or in writing,
to our officers or directors.
We provided Mr. Feibusch with a copy of the foregoing disclosures and
requested that he furnish a letter addressed to the Securities and Exchange
Commission stating whether or not he agrees with the above statements. A
copy of such letter, dated May 28, 2003 (as amended June 4, 2003) was filed
as Exhibit 16 to the Form 8-K/A filed on June 4, 2003.
In March, 2003, we engaged BDO to perform an audit of New Age Staffing,
Inc. ("New Age") which we had proposed to acquire. New Age was a privately
owned company and was not subject to the reporting requirements of the
Securities Exchange Act of 1934.
In the course of our relationship with BDO, we decided to engage BDO as
our new independent accountants as of May 28, 2003, subject to the signing
of a definitive engagement letter.
During the two most recent fiscal years and through May 28, 2003, we
have not consulted with BDO regarding either (i) the application of
accounting principles to a specified transaction, either completed or
proposed; or the type of audit opinion that might be rendered on our
financial statements, and neither a written report was provided to us or
oral advice was provided that BDO concluded was an important factor
considered by us in reaching a decision as to the accounting, auditing or
financial reporting issue; or (ii) any matter that was either the subject
of a disagreement, or a reportable event.
ITEM 8A. CONTROLS AND PROCEDURES
Subsequent to December 31, 2003 and prior to the filing of this Report,
we conducted an evaluation of the effectiveness of the design and operation
of its disclosure controls and procedures under the supervision of, and
with the participation of, our management, including the Chief Executive
Officer and Chief Financial Officer. Based on that evaluation, our
management, including the Chief Executive Officer and Chief Financial
Officer, concluded that its disclosure controls and procedures were
effective at December 31, 2003, and during the period prior to the
execution of this Report. There have been no changes in our internal
controls over financial reporting during our most recent fiscal year that
have materially affected or are likely to materially affect our internal
control over financial reporting.
17
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this item is incorporated by reference to the
Proxy Statement to be distributed in connection with our 2004 annual
meeting of stockholders.
ITEM 10. EXECUTIVE COMPENSATION
Information required by this item is incorporated by reference to the
Proxy Statement to be distributed in connection with our 2004 annual
meeting of stockholders.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this item is incorporated by reference to the
Proxy Statement to be distributed in connection with our 2004 annual
meeting of stockholders.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item is incorporated by reference to the
Proxy Statement to be distributed in connection with our 2004 annual
meeting of stockholders.
ITEM 13. EXHIBITS, LISTS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description
----------- ------------
2.1(1) Agreement and Plan of Reorganization, dated as of June 19,
2003, by and among Crdentia Corp., Baker Anderson Christie,
Inc., BAC Acquisition Corporation and certain stockholders of
Baker Anderson Christie, Inc. (the "BAC Merger Agreement").
Certain schedules and exhibits referenced in the BAC Merger
Agreement have been omitted in accordance with Item 601(b)(2)
of Regulation S-K. A copy of any omitted schedule and/or
exhibit will be furnished supplementally to the Securities
and Exchange Commission upon request.
2.2(2) Amendment No. 1 to the BAC Merger Agreement made and entered
into effective as of July 31, 2003.
2.3(3) Letter of Intent dated March 13, 2003 by and between Crdentia
Corp. and New Age Staffing, Inc., as amended on May 5, 2003.
2.4(4) Agreement and Plan of Reorganization, dated as of July 16,
2003, by and among Crdentia Corp., Nurses Network, Inc., NNI
Acquisition Corporation and certain shareholders of Nurses
Network, Inc. (the "NNI Merger Agreement"). Certain
schedules and exhibits referenced in the NNI Merger Agreement
have been omitted in accordance with Item 601(b)(2) of
Regulation S-K. A copy of any omitted schedule and/or exhibit
will be furnished supplementally to the Securities and
Exchange Commission upon request.
2.5(5) Agreement and Plan of Reorganization, dated as of September
15, 2003, by and among Crdentia Corp., New Age Staffing, Inc.,
NAS Acquisition Corporation and the shareholders of New Age
Staffing, Inc. (the "NAS Merger Agreement"). Certain
schedules and exhibits referenced in the NAS Merger Agreement
have been omitted in accordance with Item 601(b)(2) of
Regulation S-K. A copy of any omitted schedule and/or exhibit
will be furnished supplementally to the Securities and
Exchange Commission upon request.
2.6(6) Amendment No. 1 to the NNI Merger Agreement made and entered
into effective as of September 9, 2003.
18
2.7(7) Agreement and Plan of Reorganization, dated as of November 4,
2003, by and among Crdentia Corp., PSR Acquisition
Corporation, PSR Holdings Acquisition Corporation, PSR Nurse
Recruiting, Inc. and PSR Nurses Holdings Corp. (the "Merger
Agreement"). Certain schedules and exhibits referenced in
the Merger Agreement have been omitted in accordance with
Item 601(b)(2) of Regulation S-K. A copy of any omitted
schedule and/or exhibit will be furnished supplementally to
the Securities and Exchange Commission upon request.
3.1(8) Restated Certificate of Incorporation.
3.2(9) Certificate of Amendment to Restated Certificate of
Incorporation.
3.3(10) Restated Bylaws.
4.1 Registration Rights Agreement dated September 22, 2003 by and
among Crdentia Corp. and the investors listed on Schedule A
attached thereto.
4.2 Registration Rights Agreement dated December 2, 2003 by and
among Crdentia Corp. and the investors listed on Schedule A
attached thereto.
4.2(11) Certificate of Designations, Preferences and Rights of Series
A Preferred Stock of Crdentia Corp.
4.3(12) Registration Rights Agreement by and among Crdentia Corp. and
the investors listed on Schedule A attached thereto.
4.4(13) Specimen Stock Certificate.
4.5 Specimen Series A Preferred Stock Certificate
10.1(14) Form Convertible Subordinated Promissory Note.
10.2(15) Agreement to Purchase Accounts and Security Agreement dated
February 8, 2002 between New Age Staffing, Inc. and Katz
Factoring, Inc.
10.3(16) Amendment to Agreement to Purchase Accounts and Security
Agreement, dated effective as of August 8, 2003, made by and
between New Age Staffing, Inc. and Katz Factoring, Inc.
10.5(17) Variable Rate Installment Note dated August 18, 2003 in the
principal amount of $250,000 made payable by Crdentia Corp.
to Comerica Bank-California.
10.6(18) Subordinated Promissory Note dated September 22, 2003 in the
principal amount of $1,650,000 made payable by Crdentia Corp.
to Nick Luizza, Jr.
10.7 Convertible Subordinated Promissory Note dated December 2,
2003 in the principal amount of $1,200,000 made payable by
Crdentia Corp. to Robin Riddle.
10.8 Convertible Subordinated Promissory Note dated December 2,
2003 in the principal amount of $2,525,000 made payable by
Crdentia Corp. to Professional Staffing Resources, Inc. and
Nursing Services Registry of Savannah, Inc.
10.9 Convertible Subordinated Promissory Note dated December 2,
2003 in the principal amount of $200,000 made payable by
Crdentia Corp. to Professional Staffing Resources, Inc. and
Nursing Services Registry of Savannah, Inc.
10.10# Notice of Stock Option Award and Stock Option Award Agreement
dated December 16, 2003 by and between Crdentia Corp. and
Thomas H. Herman.
19
10.11# Notice of Stock Option Award and Stock Option Award Agreement
dated December 16, 2003 by and between Crdentia Corp. and C.
Fred Toney.
10.12# Executive Employment Agreement dated December 22, 2003 by and
between Crdentia Corp. and Pamela Atherton.
10.13# Notice of Stock Option Award and Stock Option Award Agreement
dated December 22, 2003 by and between Crdentia Corp. and
Pamela Atherton.
10.14(19)# Notice of Stock Option Award dated December 31, 2003 by and
between Crdentia Corp. and James Durham.
10.15(20)# Stock Option Plan and Award Agreement dated December 31, 2003
by and between Crdentia Corp. and James Durham.
10.16(21)# Bonus and Other Agreement dated December 31, 2003 by and
between Crdentia Corp. and James Durham.
10.17# Employment Agreement dated November 7, 2003 by and between
Crdentia Corp. and William S. Leftwich.
10.18 Commercial Receivables Sale Agreement dated November 8, 2001
by and between Alamo Capital Corporation and PSR Nurses, Ltd.
10.19 Office Lease Agreement dated February 1, 2002 by and between
Merit 99 Office Portfolio, L.P. and PSR Nurses, Ltd.
10.20(22) Amendment to Agreement with Health Care Investment Visions,
LLC dated April 29, 2003, terminating the original Agreement
dated January 2, 2003.
14.1 Crdentia Corp. Code of Business Conduct and Ethics.
16.1(23) Letter dated May 28, 2003 from Sanford H. Feibusch, CPA, PC
to the U.S. Securities and Exchange Commission.
22.1 List of subsidiaries of Crdentia Corp.
31.1 Certification of Chief Executive Officer pursuant to Rules
13a-14(a) and 15d-14(a) promulgated pursuant to the
Securities Exchange Act of 1934, as amended.
31.2 Certification of Chief Financial Officer pursuant to Rules
13a-14(a) and 15d-14(a) promulgated pursuant to the
Securities Exchange Act of 1934, as amended.
32.1 Certification of Chief Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
--------------------------------------------
# Indicates management contract or compensatory plan.
(1) Previously filed as Exhibit 2.1 to the Form 8-K filed with the
Securities and Exchange Commission on June 20, 2003 and incorporated
herein by reference.
(2) Previously filed as Exhibit 2.3 to the Form 10-QSB filed with the
Securities and Exchange Commission on
20
August 12, 2003 and
incorporated herein by reference.
(3) Previously filed as Exhibit 1.0 to the Form 8-K filed with the
Securities and Exchange Commission on March 19, 2003 and
incorporated herein by reference.
(4) Previously filed as Exhibit 2.1 to the Form 8-K filed with the
Securities and Exchange Commission on July 18, 2003 and incorporated
herein by reference.
(5) Previously filed as Exhibit 2.1 to the Form 8-K filed with the
Securities and Exchange Commission on September 16, 2003 and
incorporated herein by reference.
(6) Previously filed as Exhibit 2.2 to the Form 8-K filed with the
Securities and Exchange Commission on October 8, 2003 and
incorporated herein by reference.
(7) Previously filed as Exhibit 2.1 to the Form 8-K filed with the
Securities and Exchange Commission on November 6, 2003 and
incorporated herein by reference.
(8) Previously filed as Exhibit 3.1 to the Form 8-K filed with the
Securities and Exchange Commission on August 22, 2002 and
incorporated herein by reference.
(9) Previously filed as Exhibit 3.2 to the Form 10-QSB filed with the
Securities and Exchange Commission on August 12, 2003 and
incorporated herein by reference.
(10) Previously filed as Exhibit 3.2 to the Form 8-K filed with the
Securities and Exchange Commission on August 22, 2002 and
incorporated herein by reference.
(11) Previously filed as Exhibit 4.1 to the Form 8-K filed with the
Securities and Exchange Commission on December 30, 2003 and
incorporated herein by reference.
(12) Previously filed as Exhibit 4.2 to the Form 8-K filed with the
Securities and Exchange Commission on December 30, 2003 and
incorporated herein by reference.
(13) Previously filed as Exhibit 4.0 to the Form 10-QSB filed with the
Securities and Exchange Commission on May 5, 2003 and incorporated
herein by reference.
(14) Previously filed as Exhibit 10.1 to the Form 8-K filed with the
Securities and Exchange Commission on September 3, 2003 and
incorporated herein by reference.
(15) Previously filed as Exhibit 10.2 to the Form 10-QSB filed with the
Securities and Exchange Commission on November 14, 2003 and
incorporated herein by reference.
(16) Previously filed as Exhibit 10.3 to the Form 10-QSB filed with the
Securities and Exchange Commission on November 14, 2003 and
incorporated herein by reference.
(17) Previously filed as Exhibit 10.5 to the Form 10-QSB filed with the
Securities and Exchange Commission on November 14, 2003 and
incorporated herein by reference.
(18) Previously filed as Exhibit 10.6 to the Form 10-QSB filed with the
Securities and Exchange Commission on November 14, 2003 and
incorporated herein by reference.
(19) Previously filed as Exhibit 10.1 to the Form 8-K filed with the
Securities and Exchange Commission on January 12, 2004 and
incorporated herein by reference.
(20) Previously filed as Exhibit 10.2 to the Form 8-K filed with the
Securities and Exchange Commission on January 12, 2004 and
incorporated herein by reference.
(21) Previously filed as Exhibit 10.3 to the Form 8-K filed with the
Securities and Exchange Commission on January 12, 2004 and
incorporated herein by reference.
(22) Previously filed as Exhibit 10.12 to the Form 10-QSB filed with the
Securities and Exchange Commission on May 5, 2003 and incorporated
herein by reference.
(23) Previously filed as Exhibit 16.1 to the Form 8-K filed with the
Securities and Exchange Commission on May 30, 2003 and incorporated
herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information required by this item is incorporated by reference to the
Proxy Statement to be distributed in connection with our 2004 annual meeting
of stockholders.
21
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.
CRDENTIA CORP.
Dated: March 30, 2004 By: /s/ James D. Durham
-------------------------------
James D. Durham
Chief Executive Officer and
Chairman of the Board
(Principal Executive Officer)
Dated: March 30, 2004 By: /s/ Pamela G. Atherton
-------------------------------
Pamela G. Atherton
President
Dated: March 30, 2004 By: /s/ William S. Leftwich
-------------------------------
William S. Leftwich
Chief Financial Officer and
Secretary
(Principal Financial Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Dated: March 30, 2004 By: /s/ Robert J. Kenneth
-------------------------------
Robert J. Kenneth
Director
Dated: March 30, 2004 By: /s/ Robert P. Oliver
-------------------------------
Robert P. Oliver
Director
Dated: March 30, 2004 By: /s/ Joseph M. DeLuca
-------------------------------
Joseph M. DeLuca
Director
Dated: March 30, 2004 By: /s/ Thomas Herman
-------------------------------
Thomas Herman
Director
Dated: March 30, 2004 By: /s/ C. Fred Toney
-------------------------------
C. Fred Toney
Director
22
EXHIBIT 31.1
------------
CERTIFICATION PURSUANT TO RULE 13a-14 AND 15d-14
------------------------------------------------
UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
-----------------------------------------------------
I, James D. Durham, Chief Executive Officer and Chairman of Board of
Crdentia Corp., certify that:
1. I have reviewed this annual report on Form 10-KSB of Crdentia Corp.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedure to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which this annual report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such
evaluation; and
(c) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial reporting,
to the registrant's auditors and the audit committee of the registrant's
board of directors (or persons performing the equivalent function):
(a) all significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls over financial reporting.
Dated: March 30, 2004 By: /s/ James D. Durham
-------------------------------
James D. Durham
Chief Executive Officer and
Chairman of the Board
23
EXHIBIT 31.2
------------
CERTIFICATION PURSUANT TO RULE 13a-14 AND 15d-14
------------------------------------------------
UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
-----------------------------------------------------
I, William S. Leftwich, Chief Financial Officer and Secretary of Crdentia
Corp., certify that:
1. I have reviewed this annual report on Form 10-KSB of Crdentia Corp.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the Registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedure to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which this annual report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such
evaluation; and
(c) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
function):
(a) all significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant's ability
to record, process, summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls over financial reporting.
Dated: March 30, 2004 By: /s/ William S. Leftwich
-------------------------------
William S. Leftwich
Chief Financial Officer
and Secretary
24
EXHIBITS 32.1 and 32.2
----------------------
CERTIFICATE PURSUANT TO
-----------------------
18 U.S.C. SECTION 1350,
-----------------------
AS ADOPTED PURSUANT TO
-----------------------
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
---------------------------------------------
In connection with the Annual Report of Crdentia Corp. (the "Company")
on Form 10-KSB for the year ended December 31, 2003, as filed with the
Securities and Exchange Commission (the "Report"), each of the undersigned,
in the capacities and on the dates indicated below, hereby certifies
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, that:
1. the Report fully complies with the requirements of Section 13(a) or
15(d), as applicable, of the Securities Exchange Act of 1934; and
2. the information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations
of the Company at the dates and for the period indicated.
This Certificate has not been, and shall not be deemed, "filed" with the
Securities and Exchange Commission.
Dated: March 30, 2004 By: /s/ James D. Durham
-------------------------------
James D. Durham
Chief Executive Officer and
Chairman of the Board
Dated: March 30, 2004 By: /s/ William S. Leftwich
-------------------------------
William S. Leftwich
Chief Financial Officer and
Secretary
25
Report of Independent Certified Public Accountants
Board of Directors
Crdentia Corp.
Dallas, Texas
We have audited the accompanying consolidated balance sheet of Crdentia Corp. as
of December 31, 2003 and the related consolidated statements of operations,
stockholders' equity, and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Crdentia Corp. at
December 31, 2003, and the results of its operations and its cash flows for the
year then ended in conformity with accounting principles generally accepted in
the United States of America.
/s/ BDO Seidman, LLP
March 24, 2004
San Francisco, California
F-1
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Crdentia Corp.
I have audited the accompanying balance sheet of Crdentia Corp. (formerly known
as Lifen, Inc.) as of December 31, 2002 and the related statement of operations,
stockholders' equity and cash flow for the year then ended. These Financial
Statements are the responsibility of the Company's management. My
responsibility is to express an opinion on these financial statements based on
my audit.
I conducted my audit in accordance with generally accepted auditing standards.
Those standards require that I plan and perform the audit to obtain reasonable
assurance about whether the Financial Statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
I believe that my audit provides a reasonable basis for my opinion.
In my opinion, the financial statements referred to above present fairly in all
material respects, the financial position of Crdentia Corp. (formerly Lifen,
Inc.) as of December 31, 2002 and results of operations, changes in
stockholders' equity and cash flows for the year then ended, in conformity with
generally accepted accounting principles.
The accompanying Financial Statements have been prepared assuming the Company
will continue as a going concern. As discussed in the Liquidity section of Note
1 to the Financial Statements, as of December 31, 2002 conditions existed that
raised substantial doubt about its ability to continue as a going concern.
Management's actions and plans regarding this matter are also described in Note
1. The Financial Statements as of December 31, 2002 do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ Sanford H. Feibusch
----------------------------
Certified Public Accountant
Monsey, New York
February 5, 2003 (except for
the Liquidity section of
Note 1, which is dated
as of March 29, 2004)
F-2
CRDENTIA CORP.
Consolidated Balance Sheets
December 31,
-------------------------------
2003 2002
-------------- --------------
Current assets:
Cash and cash equivalents $ 1,469,076 $ 125,463
Accounts receivable, net of allowance 3,058,086 -
for doubtful accounts of $195,465
Unbilled receivables 268,590 -
Other current assets 333,379 33,126
-------------- --------------
Total current assets 5,129,131 158,589
Property and equipment, net 363,815 6,418
Goodwill 8,519,821 -
Intangible assets, net 3,485,334 -
Other assets 98,297 48,803
-------------- --------------
Total assets $ 17,596,398 $ 213,810
============== ==============
Current liabilities:
Accounts payable and accrued expenses $ 756,686 $ 53,713
Accrued employee compensation and benefits 828,884 -
Revolving lines of credit 2,871,890 -
Current portion of notes payable to lenders 191,667 -
Subordinated convertible notes, net of discount 250,833 -
Current portion of notes payable to sellers 1,435,115 -
Other current liabilities 14,921 -
-------------- --------------
Total current liabilities 6,349,996 53,713
Note payable to lender, less current portion 27,777 -
Long term bonus payable 801,000 -
Notes payable to sellers, less current portion 3,925,983 -
-------------- --------------
Total liabilities 11,104,756 53,713
Commitments and contingencies
Series A Convertible Preferred Stock
$0.0001 par value, 10,000,000 shares
authorized, 1,750,000 issued and
outstanding (liquidation preference
of $1,750,000) 1,750,000 -
-------------- --------------
Stockholders' equity:
Common stock, par value $0.0001, 2,207 1,100
50,000,000 shares authorized in
2003 and 2002,
22,067,276 shares issued and
18,838,057 shares outstanding in 2003
10,998,166 shares issued and
outstanding in 2002
Additional paid in capital 60,545,887 821,344
Treasury Stock - -
Deferred non-cash stock compensation (828,000) -
Accumulated deficit (54,978,452) (662,347)
-------------- --------------
Total stockholders' equity 4,741,642 160,097
-------------- --------------
Total liabilities and stockholders' equity $ 17,596,398 $ 213,810
============== ==============
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
CRDENTIA CORP.
Consolidated Statements of Operations
Year Ended December 31,
-------------------------------
2003 2002
-------------- --------------
Revenue from services $ 4,711,972 $ -
Direct operating expenses 3,571,281 -
-------------- --------------
Gross profit 1,140,691 -
-------------- --------------
Operating expenses:
Selling, general, and administrative expenses 3,409,707 433,773
Non-cash stock based compensation 51,638,254 -
-------------- --------------
Total operating expenses 55,047,961 433,773
-------------- --------------
Loss from operations (53,907,270) (433,773)
Interest expense, net 408,835 -
-------------- --------------
Loss from operations before income taxes (54,316,105) (433,773)
Income tax expense - -
-------------- --------------
Net loss $ (54,316,105) $ (433,773)
============== ==============
Deemed dividend related to beneficial conversion
feature on Series A convertible preferred stock 1,750,000 -
-------------- --------------
Net loss attributable to common stockholders $ (56,066,105) $ (433,773)
============== ==============
Basic and diluted loss per common share
attributable to common stockholders $ (4.32) $ (0.05)
============== ==============
Weighted average number of common
shares outstanding 12,992,111 8,562,822
============== ==============
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
CRDENTIA CORP.
STATEMENT OF STOCKHOLDERS' EQUITY
Common Stock
Par Value $.0001 Additional Deferred
------------------- Paid-In Treasury Non-cash Accumulated
Shares Amount Capital Stock Compensation Deficit Total
----------- ------ ------------ -------- ------------ ------------- ------------
Balance December 31, 2001 7,424,000 $ 743 $ 367,239 $ - $ - $ (228,574) $ 139,408
Restricted stock issued in
Private Placement net of
issuance costs of $54,455 2,574,286 257 447,438 447,695
Restricted stock issued to
officers and directors for
services 999,880 100 6,667 6,767
Net Loss (433,773) (433,773)
----------- ------ ------------ -------- ------------ ------------- ------------
Balance December 31, 2002 10,998,166 1,100 821,344 - - (662,347) 160,097
Restricted stock issued in
acquistion of Baker,
Anderson, Christie, Inc. 480,000 48 172,752 172,800
Restricted stock issued in
acquistion of New Age
Staffing, Inc. 6,884,614 688 2,477,773 2,478,461
Restricted stock issued in
acquistion of Nurses
Network, Inc. 118,084 12 42,498 42,510
Restricted stock issued in
acquistion of PSR Nurses
Recruiting, Inc. and
PSR Nurses Holdings Corp. 3,418,789 342 3,247,491 3,247,833
Restricted stock issued in
conversion of debt 167,623 17 408,983 409,000
F-5
CRDENTIA CORP.
STATEMENT OF STOCKHOLDERS' EQUITY
(Continued)
Common Stock
Par Value $.0001 Additional Deferred
------------------- Paid-In Treasury Non-cash Accumulated
Shares Amount Capital Stock Compensation Deficit Total
----------- ------ ------------ -------- ------------ ------------- ------------
Restricted stock repurchased
from terminated employee (181,219) (1,208) - (1,208)
Beneficial conversion feature
of subordinated convertible
notes 910,000 910,000
Common stock returned to
company and related
compensation expense (3,048,000) 5,750,593 - 5,750,593
Compensation expense related
to restricted stock and
options issued to directors
and employees 2,770,176 (828,000) 1,942,176
Compensation expense related
to restricted stock purchase
rights issued to Chief
Executive Officer 13,495,485 13,495,485
Compensation expense related
to stock options issued
to Chief Executive Officer 30,450,000 30,450,000
Benefit and deemed dividend
of beneficial conversion price
of Series A convertible 1,750,000 1,750,000
preferred stock (1,750,000) (1,750,000)
Net loss (54,316,105) (54,316,105)
----------- ------ ------------ -------- ------------ ------------- ------------
Balance December 31, 2003 18,838,057 $2,207 $60,545,887 $ - $ (828,000) $(54,978,452) $ 4,741,642
=========== ====== ============ ======== ============ ============= ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
CRDENTIA CORP.
Consolidated Statement of Cash Flows
Year Ended December 31,
-------------------------------
2003 2002
-------------- --------------
Operating activities
Net loss $ (54,316,105) $ (433,773)
Adjustments to reconcile net loss to
net cash used in operating activities:
Amortization of subordinated convertible
note discounts 250,833 -
Depreciation and amortization 111,827 -
Bad debt expense 195,465 -
Non-cash stock based compensation 51,638,254 -
Changes in operating assets and liabilities,
net of effects of
purchases of subsidiaries:
Accounts receivable 313,254 -
Unbilled receivables (268,590) -
Other current assets 398,597 61,274
Accounts payable and accrued expenses (388,773) 48,848
Accrued employee compensation and benefits 107,354 -
Long term bonus payable 801,000 -
-------------- --------------
Net cash used in operating activities (1,156,884) (323,651)
-------------- --------------
Investing activities
Purchases of property and equipment (50,435) (5,554)
Cash paid for acquisition of subsidiaries,
net of cash received (13,700) -
-------------- --------------
Net cash used in investing activities (64,135) (5,554)
-------------- --------------
Financing activities
Issuance of preferred stock 1,750,000 -
(Repurchase)/Issuance of common stock (1,208) 454,462
Net increase in revolving lines of credit 39,404 -
Proceeds from notes payable to lenders 275,000 -
Repayment of notes payable to lenders (60,328) -
Proceeds from subordinated convertible notes 910,000 -
Repayment of notes to sellers (325,638) -
Debt issuance costs (22,598) -
-------------- --------------
Net cash provided by financing activities 2,564,632 454,462
-------------- --------------
Net increase in cash 1,343,613 125,257
Cash and cash equivalents at beginning of year 125,463 206
-------------- --------------
Cash and cash equivalents at end of year $ 1,469,076 $ 125,463
============== ==============
Supplemental disclosures:
Stock issued to effect business acquisitions
10,901,487 shares of common stock $ 5,941,604 $ -
Stock issued on the conversion of note payable
167,623 shares of common stock $ 409,000 $ -
Notes payable issued and assumed in acquisitions $ 5,683,173 $ -
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
CRDENTIA CORP.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
Note 1. Summary of Significant Accounting Policies
--------------------------------------------------
Organization
------------
Crdentia Corp. (the "Company") was incorporated under the laws of the State of
Delaware on November 10, 1997 under the name Digivision International, Ltd. The
Company's name was changed to Lifen, Inc. on June 22, 2000 and changed to
Crdentia Corp. on May 28, 2003. The Company commenced commercial operations on
August 7, 2003 with the first of four acquisitions:
. On August 7, 2003, Baker Anderson Christie, Inc., a San Francisco based
home health care agency
. On September 22, 2003, New Age Staffing, Inc., a Nashville, TN,
Birmingham, AL, and New Orleans, LA based travel nurse and per diem
staffing company
. On October 2, 2003, Nurses Network, Inc., a San Francisco based clinical
staffing company
. On December 2, 2003, PSR Nurse Recruiting, Inc. and PSR Nurses Holdings
Corp. the general and limited partner to PSR Nurses, Ltd., a Dallas, TX
based travel nurse operation.
With the operational integration of these acquisitions, Crdentia Corp. provides
healthcare staffing services in the area of travel nursing, per diem staffing,
contractual clinical services, and private duty home care. Our healthcare
employees are recruited domestically as well as internationally and placed in
assignments in local markets and in facilities across the United States.
Basis of Presentation
---------------------
The accompanying financial statements include the results of operations of the
wholly owned subsidiaries listed above from their respective dates of
acquisition through the end of this reporting period. All material intercompany
transactions have been eliminated in consolidation. The Company has only one
operating segment.
Use of Estimates
----------------
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the amount of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. The most significant estimates relate to the allowance for doubtful
accounts, the valuation and allocation of acquired intangible assets and
goodwill, the stock valuation of the shares used to consummate the company's
acquisitions, and analysis of impairment of goodwill and other intangible
assets. Actual results could differ from those estimates.
Liquidity
---------
The audit report for the year ended December 31, 2002 contained an opinion that
was qualified as to the Company's ability to sustain itself as a going concern
without securing additional funding. During 2003 the Company was able to secure
additional funding to fund its operations as it began executing its business
plan to acquire and grow companies involved in healthcare staffing. Although the
Company ended 2003 with negative working capital of $1,220,865, the following
are considered to be mitigating factors: (i) in February 2004 the Company raised
an additional $1 million of Series A Convertible Preferred Stock, and (ii) of
the $910,000 convertible debt outstanding, the Company believes that the holders
of a majority of this debt will convert to equity in 2004. The Company believes
that these two factors, coupled with its cash on hand at December 31, 2003 and
its anticipated cash flow from operations in 2004, will be sufficient to service
its debt and fund its operations for the foreseeable future.
Fair Value of Financial Instruments
-----------------------------------
The Company's financial instruments at December 31, 2003, consist of cash and
cash equivalents, accounts receivable, accounts payable, revolving lines of
credit, notes payable, and long term bonus payable. The Company believes the
reported carrying amounts of its cash and cash equivalents, accounts receivable,
and accounts payable approximates fair value, based upon the maturities and
short-term nature of those instruments. The Company believes that the fair
value of the revolving lines of credit and notes payable approximates the fair
value based on the terms and conditions the Company feels could be attained from
other institutions.
F-8
CRDENTIA CORP.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
Cash and Cash Equivalents
-------------------------
The Company considers all highly liquid investments with an original maturity of
three months or less at the date of maturity to be cash equivalents. At times,
the Company's cash balances may exceed the Federal Deposit Insurance Corporation
(FDIC) insured limit of $100,000. However, management presently believes that
the risk of loss is not significant. To date, the Company has not experienced
any losses in such accounts.
Property and Equipment
----------------------
Property and equipment is stated at cost. Depreciation is provided by utilizing
the straight-line method over the estimated useful life of the assets (generally
three to ten years). Amortization of leasehold improvements is being provided on
the straight-line method over the various lease terms or estimated useful lives,
if shorter. The cost of maintenance and repairs is charged to operations as
incurred.
Goodwill and Intangible Assets
------------------------------
Intangible assets other than goodwill consist of customer relationships and
international nurse contracts and are presented net of accumulated amortization.
Intangibles are amortized over their respective useful lives estimated to be 5
years. Goodwill will be assessed for impairment at least annually. The
valuation of these intangibles is determined based upon valuations performed by
third-party specialists and management's best estimates of fair value. As a
result the ultimate value and recoverability of these assets is subject to the
validity of the assumptions used.
Long-Lived Assets
-----------------
Long-lived assets, including property and equipment, are assessed for possible
impairment whenever events or changes in circumstances indicate that the
carrying amounts may not be recoverable or whenever management has committed to
a plan to dispose of the assets. Such assets are carried at the lower of book
value or fair value as estimated by management based on appraisals, current
market value, and comparable sales value, as appropriate. Long-lived assets
affected by such impairment loss are depreciated or amortized at their new
carrying amount over the remaining estimated life. Assets to be sold or
otherwise disposed are not subject to further depreciation or amortization.
Income Taxes
------------
The Company accounts for income taxes under an asset and liability approach that
requires the recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been recognized in the Company's
financial statements or tax return. A valuation allowance is recorded, based on
currently available information, when it is more likely than not that any or all
of a deferred tax asset will not be realized. The Company files a consolidated
Federal income tax return with its subsidiaries.
Stock Based Compensation
------------------------
As permitted under the provisions of SFAS 123, Accounting for Stock-Based
Compensation, the Company continues to account for employee stock-based
transactions under Accounting Principles Board Opinion ("APB") No. 25,
Accounting for Stock Issued to Employees. However, SFAS 123 requires the
Company to disclose pro forma net income and earnings per share as if the fair
value method had been adopted. Under the fair value method, compensation cost
is measured at the grant date based on the fair value of the award and is
recognized over the service period, which is usually the vesting period. For
non-employees, cost is also measured at the grant date, using the fair value
method, but is actually recognized in the financial statements over the vesting
period, or immediately if no further services are required.
If the Company had elected the fair value method of accounting for employee
stock-based compensation, compensation cost would be accrued at the estimated
fair value of the stock award grants over the service period, regardless of
later changes in stock prices and price volatility. The date of grant fair
values for options granted in 2003 have been estimated based on a Black-
Scholes pricing model with the assumptions identified in the following
table.
F-9
CRDENTIA CORP.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
2003
----------
Dividend Yield -
Volatility 60%
Risk-Free Interest Rates 4.5%
Expected Lives in Years 0-5 years
The table below shows net income per share for 2003 as if the Company had
elected the fair value method of accounting for stock options.
2003
--------------
Net loss as reported $ (56,066,105)
Add: stock-based employee compensation included in
reported net income, net of related tax effects 51,638,254
Deduct: total stock-based employee compensation
determined under fair value method for all awards,
net of related tax effects (51,974,747)
Proforma net loss, as adjusted $ (56,402,598)
Earnings per share:
Basic and diluted, as reported $ (4.32)
Basic and diluted, as adjusted $ (4.34)
--------------
Revenue Recognition and Allowances
----------------------------------
The Company recognizes revenue generally on the date the Company's healthcare
staff provides services to healthcare facilities or individuals in their home.
The Company recognizes revenue at the gross amounts billed, as our healthcare
staff are employees of the Company.
Accounts receivable are uncollateralized customer obligations due under normal
trade terms. The Company provides services to various public and private medical
facilities such as hospitals, nursing care facilities, etc. Management performs
continuing credit evaluations of the customers' financial condition. In
addition, the Company provides home healthcare to individuals on a private pay
arrangement. The Company collects one week of services in advance for this type
of service.
Senior management reviews accounts receivable on a regular basis to determine if
any receivables will potentially be uncollectible. An allowance for possible
doubtful accounts is recorded based upon management's evaluation of current
industry conditions, historical collection experience and other relevant factors
which, in the opinion of management, require recognition in estimating the
allowance. After all attempts to collect a receivable have failed, the
receivable is written off against the allowance.
Earnings Per Share
------------------
The Company adopted the standards set by the Financial Accounting Standards
Board and computes earnings per share data in accordance with SFAS No. 128
"Earning per Share." The basis per share data has been computed on the loss for
the period divided by the historic weighted average number of shares of common
stock outstanding.
F-10
CRDENTIA CORP.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
Excluded from basic earning per share data is the unvested portion of restricted
stock grants totaling 466,617 shares. The Company does not report fully diluted
loss per share as to do so would be anti-dilutive as a result of the net loss
for each of the respective periods included herein.
Reclassifications
-----------------
Certain of the prior year financial statement amounts have been reclassified to
conform to the current year presentation. These reclassifications had no impact
on previously reported net loss or accumulated deficit.
New Accounting Pronouncements
-----------------------------
In November 2002, the FASB issued FASB Interpretation ("FIN") No. 45,
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others. FIN 45 requires a guarantor to
recognize, at the inception of a qualified guarantee, a liability for the fair
value of the obligation undertaken in issuing the guarantee. FIN 45 is effective
on a prospective basis for qualified guarantees issued or modified after
December 31, 2002. The adoption of this Interpretation did not have a material
impact on the Company's financial condition or results of operations.
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, which requires the consolidation of certain special
purpose or variable interest entities. FIN 46 is applicable to financial
statements issued after 2002, however, disclosures are required currently if
the Company expects to consolidate any variable interest entities. The Company
has no variable interest entities and therefore, there are no entities that will
be consolidated with the Company's financial statements as a result of FIN 46.
In May 2003, the FASB issued SFAS 150, Accounting For Certain Financial
Instruments with Characteristics of Both Liabilities and Equity, which
establishes standards for how an issuer of financial instruments classifies and
measures certain financial instruments with characteristics of both liabilities
and equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances) if, at
inception, the monetary value of the obligation is based solely or predominantly
on a fixed monetary amount known at inception, variations in something other
than the fair value of the issuer's equity shares or variations inversely
related to changes in the fair value of the issuer's equity shares. SFAS 150 is
effective for financial instruments entered into or modified after May 31, 2003,
and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. The adoption of SFAS 150 did not have a material
impact on the Company's financial position or results of operations.
Note 2. Acquisitions
---------------------
During the year ended December 31, 2003, the Company commenced commercial
operations by acquiring four companies.
Baker Anderson Christie, Inc.
-----------------------------
On August 7, 2003, the Company acquired Baker Anderson Christie, Inc. ("BAC") in
exchange for 480,000 shares of its common stock, which was valued based upon an
appraisal performed by an independent, third-party professional valuation firm.
The primary purpose of the acquisition was to enable the Company to enter the
home health care segment of the nurse staffing industry. The following table
summarizes the assets acquired and liabilities assumed as of the closing date:
Cash acquired $ 77,257
Tangible assets acquired 171,395
Customer related intangible assets 5,000
Goodwill 45,444
--------------
Total assets acquired 299,096
Liabilities assumed 126,296
--------------
Net assets acquired $ 172,800
==============
F-11
CRDENTIA CORP.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
The acquisition was accounted for using the purchase method of accounting.
Customer related intangible assets will be amortized over their useful life of
five years. Allocation of the excess of merger consideration over the net book
value of assets acquired between goodwill and customer relationships was
determined by management's estimate. As the merger consideration was paid
entirely in shares of the Company's common stock, the goodwill acquired may not
be amortized for federal income tax purposes. The Company may issue additional
shares of its common stock to the former stockholders of BAC should its results
of operations exceed performance standards established in the merger agreement.
New Age Staffing, Inc.
----------------------
On September 22, 2003, the Company acquired New Age Staffing, Inc. ("NAS") in
exchange for $400,000 in cash, $265,000 in notes payable maturing during the
current year, $1,025,000 in notes payable maturing during the next year, a
$360,000 note payable maturing in two years, and 6,884,614 shares of the
Company's common stock, which was valued based upon an appraisal performed by
an independent, third-party professional valuation firm. The notes due in 2004
and 2005, totaling $1,385,000, were amended in January, 2004. Beginning January
31, 2004, the revised note is paid in equal installments for 21 months at 4%
interest. The primary purpose of the acquisition was to enable the Company to
enter the travel nurse segment of the nurse staffing industry. The following
table summarizes the assets acquired and liabilities assumed as of the closing
date:
Cash acquired $ 61,887
Tangible assets acquired 1,410,491
Customer related intangible assets 460,000
Goodwill 3,592,287
--------------
Total assets acquired 5,524,665
Liabilities assumed 877,615
--------------
Net assets acquired $ 4,647,050
==============
The acquisition was accounted for using the purchase method of accounting.
Customer related intangible assets will be amortized over their useful life of
five years. Allocation of the excess of merger consideration over the net book
value of assets acquired between goodwill and customer relationships was
determined by an independent, third-party professional valuation firm. As a
material portion of the merger consideration was paid in shares of the Company's
common stock, the goodwill acquired may not be amortized for federal income tax
purposes.
Nurses Network, Inc.
--------------------
On October 2, 2003, the Company acquired Nurses Network, Inc. in exchange for
$114,432 in notes payable due in 2004 and 118,084 shares of its common stock,
which was valued based upon an appraisal performed by an independent, third-
party professional valuation firm. The primary purpose of the acquisition was
to enhance the Company's presence in the San Francisco market by combining the
Nurses Network operations of per diem clinical staffing with Baker Anderson
Christie, Inc. The following table summarizes the assets acquired and
liabilities assumed as of the closing date:
Tangible assets acquired $ 11,081
Goodwill 113,414
--------------
Total assets acquired 124,495
Liabilities assumed 22,211
--------------
Net assets acquired $ 102,284
==============
F-12
CRDENTIA CORP.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
The acquisition was accounted for using the purchase method of accounting. As a
material portion of the merger consideration was paid in shares of the Company's
common stock, the goodwill acquired may not be amortized for federal income tax
purposes. The excess of merger consideration over the net book value of assets
acquired was allocated in entirety to goodwill based on the estimate of the
Company's management. The Company may issue additional shares of its common
stock to the former stockholders of Nurses Network, Inc. should its results of
operations exceed performance standards established in the merger agreement.
PSR Nurse Recruiting, Inc. and PSR Nurses Holdings Corp.
--------------------------------------------------------
On December 2, 2003, the Company acquired PSR Nurse Recruiting, Inc. and PSR
Nurses Holdings Corp., which held the general and limited partnership interests
in PSR Nurses, Ltd., in exchange for 3,418,789 shares of the Company's common
stock, which was valued based upon an appraisal performed by an independent,
third-party professional valuation firm. The primary purpose of the acquisition
was to expand the Company's presence in the travel nurse segment of the nurse
staffing industry. The following table summarizes the assets acquired and
liabilities assumed as of the closing date:
Cash acquired $ 262,721
Tangible assets acquired 2,995,043
Customer related intangible assets 1,260,000
International nurse intangible assets 1,820,000
Goodwill 4,549,239
--------------
Total assets acquired 10,887,003
Liabilities assumed 6,854,039
--------------
Net assets acquired $ 4,032,964
==============
The acquisition was accounted for using the purchase method of accounting.
Customer related and international nurse contract intangible assets will be
amortized over their useful life of five years. Allocation of the excess of
merger consideration over the net book value of assets acquired between
goodwill, customer relationships, and international nurse contracts was
determined by an independent, third-party professional valuation firm. As the
merger consideration was paid entirely in shares of the Company's common stock,
the goodwill acquired may not be amortized for federal income tax purposes. The
Company may issue additional shares of its common stock to the former
stockholders of PSR Nurse Recruiting, Inc. and PSR Nurses Holdings Corp. should
the results of operations exceed performance standards established in the merger
agreement.
The following unaudited pro forma summary approximates the consolidated results
of operations as if the Baker Anderson Christie, Inc., New Age Staffing, Inc,
Nurses Network, Inc., PSR Nurse Recruiting, Inc., and PSR Nurses Holdings Corp.
acquisitions had occurred as of the beginning of each period presented, after
giving effect to certain adjustments, including amortization of specifically
identifiable intangibles, and non-cash stock compensation. The pro forma
financial information does not purport to be indicative of the results of
operations that would have occurred had the transactions taken place at the
beginning of the periods presented or of future results of operations.
F-13
CRDENTIA CORP.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
Year ended Year ended
December 31, December 31,
2003 2002
------------ ------------
Revenue $26,239,927 $26,163,881
Net Loss (43,098,069) (17,664,278)
Basic and diluted loss per common share ($2.00) ($0.90)
Weighted average number of common shares 21,540,435 19,631,932
Note 3. Accounts Receivable and Concentration of Credit Risk
------------------------------------------------------------
During 2003, one hospital accounted 32.8% of the total revenue. The large
percentage is based on the date of acquisitions and the relationship to total
revenue for 2003. At December 31, 2003 this same hospital and one hospital group
have a concentration of accounts receivable of 13.9% and 21.7%, respectively.
Because of management's assessment of the risk of collection from two of the
above mentioned hospitals, the Company has provided for an additional allowance
of $120,085. Based on the information currently available, the Company believes
the allowance for doubtful accounts as of December 31, 2003 is adequate.
However, actual write-offs might exceed the recorded allowance.
Note 4. Property and Equipment
------------------------------
Property and equipment consisted of the following:
2003 2002
------------ ------------
Leasehold improvements $ 21,688 $ 0
Computers, office furniture and equipment 371,691 6,795
------------ ------------
393,379 6,795
Less accumulated depreciation and amortization (29,564) (377)
------------ ------------
363,815 6,418
============ ============
F-14
CRDENTIA CORP.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
Note 5. Goodwill and Other Intangible Assets
--------------------------------------------
Goodwill and other intangible assets were all acquired in 2003 and consist of:
2003
--------------
Goodwill $ 8,519,821
==============
--------------
Customer relationships 1,725,000
International nurse contracts 1,820,000
Other intangibles 22,598
--------------
$ 3,567,598
Less accumulated amortization (82,264)
--------------
Net other intangible assets $ 3,485,334
==============
All of the Company's business combinations were accounted for using the purchase
method. There were no intangible assets as of December 31, 2002.
Following is a table of estimated amortization expense for the next five years:
Year Estimated Amortization Expense
---- ------------------------------
2004 $ 724,084
2005 709,000
2006 709,000
2007 709,000
2008 634,250
Note 6. Revolving Lines of Credit
---------------------------------
The Company has a line of credit with a financial institution secured by the
accounts receivable and fixed assets of the Company. Interest accrues at the
financial institution's Base Rate plus 1% (5% at December 31, 2003) and is
payable monthly. The Company may, at its option and within the covenants of the
loan agreement, repay principal at its discretion. On a quarterly basis, the
Company must comply with certain financial and operating covenants. As of
December 31, 2003, the Company failed to comply with certain financial and
operating covenants of the line of credit and the financial institution has
waived all such non-compliance. At December 31, 2003, the outstanding balance
was $86,272. The entire line of credit was paid in full on March 12, 2004.
In addition, the Company has credit facilities with two commercial financing
institutions for the financing of eligible accounts receivable. These accounts
receivables serve as security for the lines of credit. The Company pays interest
monthly at 24% per annum on one obligation and approximately 10.% on the other,
based on daily outstanding balance. Customer payments are used to repay the
advances from the financing institutions after deducting charges for bad debts,
reserves for chargebacks, and interest expense. At December 31, 2003, $2,146,617
was payable by the Company on these two credit facilities.
The Company assumed a note in connection with the PSR acquisition from a
commercial finance entity, which holds a second secured position on the
Company's accounts receivable, in the amount of $689,001 with an interest rate
of 20% per annum. Interest is accrued and payable monthly on the outstanding
balance. The Company paid $50,000 of principal at the acquisition closing. The
Company was further obligated to make a principal payment in the amount of
$139,000 on December 31, 2003. The payment was made on January 1, 2004. An
additional principal payment in the amount of $161,000 is due February 29, 2004
with the balance paid over 10 months.
F-15
CRDENTIA CORP.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
Note 7. Notes Payable
---------------------
On August 18, 2003, the Company executed a variable rate installment note with
the same financial institution as the line of credit in the amount of $250,000.
The note is subject to the same security and covenants as the line of credit.
On September 12, 2003, the Company received a loan for this amount. Under the
terms of the note, the Company is required to make monthly payments of $13,889
plus accrued interest on the unpaid principal at the institution's Base Rate
plus 2% (6% at December 31, 2003). The principal balance at December 31, 2003
is $194,444.
On June 30, 2003, the Company executed a Promissory Note in favor of one of its
stockholders, Atlantic International Capital Holdings, Ltd., in the principal
amount of $25,000 in exchange for cash in the same amount. This Promissory Note
accrued interest at 12% per annum and matured on August 13, 2003 at which time
the principal plus accrued interest would have been payable in full. On
September 29, 2003, the scheduled repayment date was extended by the maker until
November 30, 2003. The maker further extended the repayment until January 31,
2004. The note, plus accrued interest, was paid in full on February 2, 2004.
Note 8. Subordinated Notes
--------------------------
On September 2, 2003, the Company issued $675,000 in principal amount of
Convertible Subordinated Promissory Notes (the "Notes") to six investors. On
September 29, 2003 and October 16, 2003, the Company issued additional Notes in
the principal amounts of $25,000 and $120,000, respectively, to two additional
investors. On December 3 and December 12, 2003, the Company issued additional
Notes in the principal amount of $90,000 to four additional investors. Subject
to the conversion provisions set forth in the Notes, the unpaid principal
together with all accrued interest on the Notes is due and payable in full one
year following the issuance date of each such Note. Interest accrues on the
unpaid principal balance at a rate of ten percent (10%) per annum, simple
interest, and is payable in quarterly payments. The notes are convertible to our
common stock at the holder's option, prior to the due date, at an initial
conversion price of $1.50 per share. The conversion price was subsequently
adjusted to $1.00 per share upon the issuance of the Series A Convertible
Preferred Stock discussed in Note 12. Stockholders' Equity and Preferred Stock.
The Company recorded a beneficial conversion charge of $910,000, which
represents the lesser of the proceeds or benefit conversion feature of $3.4
million. The conversion was calculated as the difference between the conversion
price and the Company's common stock market price at the date note proceeds were
received. However, the charge is limited to the total proceeds of the
subordinated convertible notes. The beneficial conversion charge is amortized
over the one year life of the notes, resulting in interest expense of $250,833.
Note 9. Notes to Sellers
------------------------
As partial consideration for the acquisition of New Age Staffing, Inc. on
September 22, 2003, the Company issued unsecured subordinated notes to the
former stockholders as more fully described below:
$265,000 payable upon the earlier of the closing of additional financing or
October 15, 2003. The Company rendered a payment of approximately $97,000
on October 15, 2003, and the holders of the note agreed to defer the
remaining balance of $168,000 until such time as the Company secured
additional financing. The $168,000 principal plus interest at 10% was paid
on December 22, 2003.
A note, with a total principal amount of $1,385,000, was established with
$665,000 payable in equal installments on March 19, 2004 and September 22,
2004 with interest accruing at a rate of 5% per annum, and payable semi-
annually and $720,000 payable in equal installments on September 22, 2004
and 2005, respectively, which was non-interest bearing. The former
stockholders and the Company agreed to a new note with the principal amount
of $1,385,000 payable in equal installments of $65,952, beginning January
31, 2004, for 21 months plus interest at 4%.
F-16
CRDENTIA CORP.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
As partial consideration for the acquisition of Nurses Network, Inc. on October
2, 2003, the Company issued unsecured subordinated notes to the former
stockholders as more fully described below:
A note was issued in the amount of $64,000 due in three equal installments
on the first, second and third anniversary of the date of acquisition.
Interest is accrued at a financial institution's Base Rate plus 1% (5% at
December 31, 2003).
A second note in the amount of $50,432 plus interest accrued at a financial
institution's Base Rate plus 1% (5% at December 31, 2003) due and payable
on July 2, 2004.
The Company assumed the following debt in the acquisition of PSR Nurse
Recruiting, Inc. and PSR Nurses Holdings Corp. on December 2, 2003:
The Company assumed notes to the original seller of assets to the PSR
entities. The first note, with an approximate balance of $195,000, is
based on outstanding credit card balances owed by the original seller. The
Company will make at least minimum payments on the credit card balances
until they are paid in full. The second note is in the principal amount of
$2,525,000. Interest only payments are payable each month at a rate of 8%.
Principal and interest payments begin on December 1, 2004 for 8 years. The
outstanding balance at December 31, 2003 on the first note was $192,659.
In connection with the acquisition of the PSR entities, the Company assumed
a debt obligation to a stockholder. As noted in Note 12. Stockholders
Equity and Preferred Stock, $409,000 of the principal amount was converted
to 167,623 shares of common stock. The balance of the debt obligation,
after conversion of the $409,000, was comprised of a note payable with a
principal amount of $1,200,000. Payments of interest, at a rate of 12%,
and principal began on November 30, 2003 and will continue for 3 years.
The outstanding balance at December 31, 2003 was $1,144,007.
At December 31, 2003, the long-term debt discussed in Notes 7, 8, and 9 consists
of the following:
2003
------------
Variable Rate Installment Note, maturity date March 1, 2005 $ 194,444
Promissory Note, 12% interest, maturity date January 31, 2004 25,000
Subordinated Convertible Notes 910,000
Seller Note - New Age Staffing 1,385,000
Seller Note - Nurses Network 114,432
Seller Note - PSR Nurses original seller 2,717,659
Seller Note - PSR Nurses 1,144,007
------------
6,490,542
Less subordinated convertible notes discount 659,167
Less current portion 1,877,615
------------
$ 3,953,760
============
F-17
CRDENTIA CORP.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
Amounts reconcile to the financial statements as follows:
2003
------------
Current portion of notes payable to lenders $ 191,667
Subordinated convertible notes, net of discount 250,833
Current portion of notes payable to sellers 1,435,115
Note payable to lender, less current portion 27,777
Note payable to sellers, less current portion 3,925,983
Discount 659,167
------------
$ 6,490,542
============
The aggregate scheduled maturities of long-term debt and notes payable as of
December 31, 2003 are as follows:
Year ending December 31:
------------
2004 $ 2,536,782
2005 1,306,516
2006 633,513
2007 277,263
2008 300,276
Thereafter 1,436,192
------------
$ 6,490,542
============
Note 10. Long Term Bonus Payable
--------------------------------
On December 16, 2003, the board of directors granted the Chief Executive Officer
two cash bonuses in the amount of $540,000 each. The bonuses are to be paid on
December 31, 2006 and January 4, 2007. The present value of bonuses has been
recorded at our estimated incremental cost of borrowing of 10%.
Note 11. Income Taxes
---------------------
The Company did not record an income tax provision or benefit for 2002 or 2003.
The difference between the recorded amount and the income tax benefit that would
result based on statutory rates is caused primarily by the valuation allowance
increase in each year.
At December 31, 2003, the Company had net operating loss carryfowards for
federal and state income tax purposes of approximately $2,067,000, which expire
in varying amounts beginning in 2019 through 2023. The Company has undergone an
ownership change as defined in Section 382 of the Internal Revenue Code.
Therefore, utilization of its tax net operating loss carryforwards incurred
prior to August 2003 will be limited.
F-18
CRDENTIA CORP.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
Deferred taxes comprise the following (in thousands):
2003 2002
------------ ------------
Net operating loss carryforwards $ 765,000 $ 245,000
Deferred compensation stock options and rights 19,413,000 -
Accrued Bonuses 296,000 -
Other 78,000 -
------------ ------------
Total deferred tax assets 20,552,000 245,000
Less: Valuation allowance (20,552,000) (245,000)
------------ ------------
Net deferred tax assets 0 0
The Company believes that, based on a number of factors, the available objective
evidence creates sufficient uncertainty regarding the realizability of the
deferred tax assets such that a full valuation allowance has been recorded.
These factors include the Company's history of losses, and relatively high
expense levels, the fact that the market in which the Company competes is
intensely competitive and the lack of carryback capacity to realize deferred
tax assets. The Company will continue to assess the realizability of the
deferred tax assets based on actual and forecasted operating results.
Note 12. Stockholders' Equity and Preferred Stock
-------------------------------------------------
Preferred Stock
---------------
The Company is authorized to issue 10,000,000 shares of preferred stock at a par
value of $0.0001. Currently there are 1,750,000 shares issued and outstanding.
On December 17, 2003, the Company issued an aggregate of 1,750,000 shares of
Series A Convertible Preferred Stock at a per share price of $1.00 to two
investors. The holders of the Series A Convertible Preferred Stock are entitled
to receive a quarterly dividend in an amount equal to .025 shares of common
stock for each share of outstanding Series A Convertible Preferred Stock held
by them. Unless previously voluntarily converted prior to such time, the Series
A Convertible Preferred Stock will automatically convert into common stock at an
initial conversion ratio of one-to-one, one year from the date of issuance of
such shares. The holders of the Series A Convertible Preferred Stock have been
granted registration rights by the Company. Once the Preferred Stock has been
converted into Common Stock, the Company is obligated to register the Common
Stock on a "best efforts" basis. In the event of any liquidation or winding up
of the Company, the holders of the Series A Convertible Preferred Stock will be
entitled to receive in preference to the holders of Common Stock an amount equal
to their initial purchase price plus any declared but unpaid dividends. The
Company recorded a beneficial conversion charge of $1,750,000 as a result of
this issuance. The Company recorded a deemed dividend due to the beneficial
conversion price of $1,750,000, which represents the lesser of the proceeds or
the beneficial conversion of $5.2 million.
Common Stock
------------
The Company is authorized to issue 50,000,000 shares of common stock at a par
value of $0.0001. Currently there are 22,067,276 shares issued with 18,838,057
outstanding. The difference of 3,229,219 shares is discussed in detail below.
These shares are held by the Company in treasury.
In August, 2002 the Company sold 2,000,000 shares of its common stock to two
investors at a price of $0.05 per share and received total proceeds of $100,000,
pursuant to a Common Stock Purchase Agreement, executed effective May 15, 2002.
In August, 2002 the Company sold 574,286 shares of its common stock to one
foreign investor at a price of $0.70 per share and received total proceeds of
$402,000. The shares were sold pursuant to Regulation S promulgated under the
Securities Act of 1933, as amended.
F-19
CRDENTIA CORP.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
On August 6, 2003, a number of the Company's stockholders agreed to return an
aggregate of 3,048,000 shares of the Company's common stock to treasury for no
consideration, thus reducing the total number of the Company's then issued and
outstanding shares of common stock from 10,998,166 to 7,950,166. These
stockholders determined in consultation with the Company's management that, in
connection with the Company's acquisition program and on-going financing
efforts, it would be in the Company's best interests to reduce the overall
number of shares of the Company's issued and outstanding common stock. In
accordance with the provisions of APB Statement No. 25, the effect of this
return of shares to the Company's treasury was to generate non-cash compensation
expense of $5,750,593 due to the imputed increase in ownership percentage of the
Company's stock held by its officers and directors at the date of return.
On August 7, 2003, the Company completed the acquisition of Baker Anderson
Christie, Inc. pursuant to which 480,000 shares of the Company's common stock
were issued to the stockholders of Baker Anderson Christie, Inc. as an advance
payment of the merger consideration. The Company may be obligated to issue
additional shares of its common stock as merger consideration in subsequent
fiscal quarters.
On September 22, 2003, the Company completed the acquisition of New Age
Staffing, Inc. pursuant to which 6,884,614 shares of the Company's common stock
were issued to the stockholders of New Age Staffing, Inc.
On October 2, 2003, the Company completed the acquisition of Nurses Network,
Inc. pursuant to which 118,084 shares of the Company's common stock were issued
to the stockholders of Nurses Network, Inc. as an advance payment of the merger
consideration. The Company may be obligated to issue additional shares of its
common stock as merger consideration in subsequent fiscal quarters.
On December 2, 2003, the Company completed the acquisition of PSR Nurse
Recruiting, Inc. and PSR Nurses Holdings Corp. pursuant to which 3,418,789
shares of the Company's common stock were issued to the stockholders of PSR
Nurse Recruiting, Inc. and PSR Nurses Holdings Corp. as an advance payment of
the merger consideration. The Company may be obligated to issue additional
shares of its common stock as merger consideration in subsequent fiscal years.
The Company granted the holder of a debt obligation of the Company, the right to
convert outstanding principal debt to common stock. The conversion agreement is
based on the per share price of $2.44. The debt holder elected, on December 2,
2003, to exchange $409,000 of principal note balance for 167,623 shares of
common stock.
On September 2, September 29, October 16, December 3, and December 12, 2003,
the Company issued convertible subordinated notes in the aggregate amount of
$910,000 to twelve investors. The conversion privilege enables the holders of
the note to exchange their notes for the Company's common stock at an initial
price of $1.50 per share. As a result of the issuance of the Series A
Convertible Preferred Stock discussed below, the conversion price, per the terms
of the note agreement, was reduced to $1.00 per share. To date, none of the
holders has exercised its conversion privileges, but should all of the note
holders elect to do so, a total of at least 910,000 shares of the Company's
common stock would be issued.
Stock Based Awards
------------------
In October, 2002 the Company authorized the issuance of 100,000 restricted
shares of its common stock to three directors for a total of 300,000 shares in
exchange for providing services to the Company. The shares were valued at $700
($0.007 per share) for each of the three directors for a total value of $2,100,
and are subject to a three year vesting period commencing at the date of
issuance. The Company recorded a non-cash stock based compensation expense in
the amount of $22,165.
In November, 2002 the Company authorized the issuance of 399,931 restricted
shares of its common stock to its President and 299,949 restricted shares of its
common stock to its then Chief Financial Officer and Secretary for $0.0067 per
share. The Company recorded $71,521 in expense in connection these grants. With
the resignation of the Chief Financial Officer and Secretary, the Company
reached an agreement for full vesting of 118,730 shares as of the date of
termination. The remaining shares were repurchased by the Company.
F-20
CRDENTIA CORP.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
Subject to the terms and conditions of a Common Stock Purchase Agreement dated
May 15, 2002 with the Chief Executive Officer, the Company granted the right to
purchase, at a purchase price of $0.0001 per share, up to a number of additional
shares of our common stock equal to twenty-five (25%) of the aggregate number of
additional shares of our common stock and other securities convertible into
common stock issued or issuable in connection with any acquisitions we complete
on or before August 7, 2004. The Company has issued an aggregate of 11,069,110
shares as consideration for our four completed acquisitions of Baker Anderson
Christie, Inc., New Age Staffing, Inc., Nurses Network, Inc., PSR Nurse
Recruiting, Inc. and PSR Nurses Holdings Corp. As a result of the completion of
these acquisitions, the Chief Executive Officer has the right to purchase up to
2,767,278 shares of our common stock at $0.0001 per share. On December 31, 2003
the Common Stock Purchase Agreement dated May 15, 2002 was modified such that
the Chief Executive Officer relinquished his rights to purchase additional
shares of common stock that were to accrue to him in connection with
acquisitions that occurred either before or after December 31, 2003. In
consideration for this modification and based on extensive analysis and review
of the Company's planned acquisition program by the Board of Directors and with
the assistance of a third-party compensation specialist, the Chief Executive
Officer was granted an option to purchase up to 7,000,000 shares of common stock
at an exercise price of $.10 per share. The options are fully vested and expire
December 31, 2018. One hundred percent (100%) of the shares of our common stock
subject to the option shall be exercisable by the Chief Executive Officer on
December 31, 2008. Notwithstanding the foregoing, a certain number of shares
subject to the option may be exercised prior to December 31, 2008 upon the
closing of certain acquisitions by us. The difference between the purchase
price of the common stock and option ($0.0001 and $0.10 per share, respectively)
and the closing price of our common stock on the respective grant date, as
quoted on the OTC Bulletin Board, has been accounted for as a non-cash
compensation expense. The total amount of expense recorded by the Company at
December 31, 2003 is $43,945,485.
The Company's President has the option to purchase shares at the fair market
value of common stock from the Company equal to 4.167% of the number of shares
of the Company's common stock issued or issuable in connection with certain
acquisitions completed by the Company on or before August 7, 2004. The
difference between the purchase price of the option ($.96 per share) and the
closing price of our common stock on the grant date, has been accounted for as
a non-cash compensation expense totaling $1,848,490.
On December 16, 2003, the Company issued options to purchase shares to two
directors in exchange for providing services to the Company. The options vest
over a three year period. The difference between the purchase price of the
option ($0.96 per share) and the closing price of our common stock on the grant
date, has been accounted for as a non-cash compensation expense of $828,000.
F-21
CRDENTIA CORP.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
The following table shows activity in outstanding options during 2003:
2003
------------------------
Weighted
Average
Exercise
Shares Price
---------- ----------
Outstanding at beginning of year - $ -
Granted 7,818,224 0.19
Exercised - -
Canceled or expired - -
---------- ----------
Outstanding at end of year 7,818,224 $ 0.19
---------- ----------
Options exercisable at year end 167,436 $ 0.96
---------- ----------
Weighted average fair value of
options granted during the year $ 4.43
----------
The following table shows information for options outstanding or exercisable as
of December 31, 2003
Options Outstanding Options Exercisable
-------------------------------- --------------------------------
Weighted Weighted
Average Weighted Average Weighted
Remaining Average Remaining Average
Exercise Number of Contractual Exercise Number of Contractual Exercise
Prices Shares Life Price Shares Life Price
--------- --------- ----------- -------- --------- ----------- --------
$0.10 7,000,000 15 years $0.10 - - -
$0.96 818,224 10 years $0.96 167,436 10 years $0.96
--------- ----------- -------- --------- ----------- --------
7,818,224 14.5 years $0.19 167,436 10 years $0.96
Note 13. Commitments and Contingencies
--------------------------------------
Employment Agreement
--------------------
On August 14, 2002, the Company entered into an Agreement for a period of two
years with its Chairman and Chief Executive Officer, which provided for
compensation of $200,000 per year. The agreement also provided for severance
benefits upon termination other than for cause of a payment equal to two times
his then current base salary and an automatic acceleration of all unvested
options and stock grants. On December 16, 2003, the board of directors adjusted
the compensation to $320,000 per year beginning January 1, 2004. In addition on
December 31, 2003, the board of directors granted two cash bonuses of $540,000
payable on December 31, 2006 and January 4, 2007. The Company has recorded the
two cash bonuses at their present value in the amount of $801,000.
Operating Leases
----------------
In 2002, the Company entered into a sublease as successor in interest to
premises in San Francisco, California. This sublease expires on July 31, 2004.
F-22
CRDENTIA CORP.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
The Company assumed several operation leases in connection to the acquisition of
Baker, Anderson, Christie, Inc., New Age Staffing, Inc., and PSR Nurses Holdings
Corp. The Company moved the corporate headquarters to Dallas, Texas. This lease
expires on November 30, 2004.
Minimum lease payments are as follows:
2004 2005
------------ ------------
Corporate Office - Dallas, Texas $ 219,604 $ -
Other locations 106,620 44,240
------------ ------------
Total $ 326,224 $ 44,240
============ ============
Indemnification
---------------
Pursuant to its bylaws, the Company has agreed to indemnify its officers and
directors for certain events or occurrences arising as a result of the officer
or director serving in such capacity. The term of the indemnification period is
for the officer's or director's lifetime. To date, the Company has not incurred
any costs as there have been no lawsuits or claims that would invoke these
indemnification agreements. Accordingly, the Company has no liabilities recorded
for these agreements as of December 31, 2003.
The Company enters into indemnification provisions under (i) its agreements with
other companies in its ordinary course of business, typically with business
partners, contractors and customers, its sublandlord and (ii) its agreements
with investors. Under these provisions the Company has agreed to generally
indemnify and hold harmless the indemnified party for losses suffered or
incurred by the indemnified party as a result of the Company's activities or, in
some cases, as a result of the indemnified party's activities under the
agreement. These indemnification provisions often include indemnifications
relating to representations made by the Company with regard to intellectual
property rights. These indemnification provisions generally survive termination
of the underlying agreement. The maximum potential amount of future payments the
Company could be required to make under these indemnification provisions is
unlimited. To date, the Company has not incurred any costs as there have been no
lawsuits or claims related to these indemnification agreements. Accordingly, the
Company has no liabilities recorded for these agreements as of December 31,
2003.
Note 14. Related Party Transactions
-----------------------------------
Ameristar Group Incorporated ("Ameristar") is a corporation that is an affiliate
of a corporate stockholder of the Company's common stock and is considered to be
a related party. During the year ended December 31, 2003, the Company paid
Ameristar financial consulting fees totaling $50,000, with an additional $10,000
accrued but unpaid at year end.
On November 1, 2001, the Company reached an agreement with Ameristar to provide
the Company with management services needed for its continuing development. A
Management Services Agreement was executed on that date with Ameristar to
provide consulting services, office space, and administrative services for a
two-year period. The monthly cost of these services was $5,500, consisting of
$2,500 for consulting services, $1,000 for rent, and $2,000 for administrative
services. The consulting services included such activities as business plans;
introductions to financial community; strategic planning; evaluation of
potential business relationships, such as joint ventures, mergers and
acquisitions; business projections; review of marketing plans; and general
advisory and management services as required. Effective August 15, 2002, the
Management Services Agreement with Ameristar was terminated in accordance with a
Termination Agreement executed between the Company and Ameristar on that date.
As part of the Termination Agreement, the debt owed to the Company by Ameristar
in the amount of $94,165 was cancelled in full payment of compensation owed to
Ameristar for additional services provided to the Company.
F-23
CRDENTIA CORP.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
On September 9, 2003, the audit committee of the Company's board of directors
approved a Consulting Agreement with Ameristar pursuant to which they will
provide the Company with assistance relating to the Company's filing
requirements with the Securities and Exchange Commission in exchange for a fee
of $5,000 per month. This Agreement expires on March 31, 2004 and continues on
a month-to-month basis thereafter.
On June 30, 2003, the Company executed a Promissory Note in favor of one of its
stockholders, Atlantic International Capital Holdings, Ltd., in the principal
amount of $25,000 in exchange for cash in the same amount. This Promissory Note
accrued interest at 12% per annum and matured on August 13, 2003 at which time
the principal plus accrued interest would have been payable in full. On
September 29, 2003, the scheduled repayment date was extended by the maker until
November 30, 2003. The maker further extended the repayment until January 31,
2004. The note, plus accrued interest, was paid in full on February 2, 2004.
On July 21, 2003, the Company executed a Promissory Note in favor of one of its
stockholders, Gable International Holdings, Ltd., in the principal amount of
$25,000 in exchange for cash in the same amount. This Promissory Note accrued
interest at 12% per annum and matured on September 3, 2003 at which time the
principal plus accrued interest would have been payable in full. On September
29, 2003, the scheduled repayment date was extended by the maker until November
30, 2003. The note, plus accrued interest, was paid in full on December 12,
2003.
On September 2, 2003, the Company issued $675,000 in principal amount of
Convertible Subordinated Promissory Notes (the "Notes") to six investors. The
Company issued additional Notes in the principal amounts of $25,000 and $120,000
on September 29 and October 16, 2003, respectively. Subject to the conversion
provisions set forth in the Notes, the unpaid principal together with all
accrued interest on the Notes is due and payable in full one year following the
issuance date of each such Note. Interest accrues on the unpaid principal
balance at a rate of ten percent (10%) per annum, simple interest, and is
payable in quarterly payments. Three of the investors included Joseph M. DeLuca,
Robert P. Oliver and James D. Durham. Messrs. DeLuca and Oliver are current
members of the Company's board of directors and its audit committee. Each of
them purchased, together with an affiliate of Mr. DeLuca's, Notes in the
aggregate principal amount of $125,000. James D. Durham, a member of the
Company's board of directors and its Chairman and Chief Executive Officer,
purchased a Note in the principal amount of $50,000.
The Company currently sub-leases 1,980 square feet of office space at Dallas,
Texas to Rison Management Services for $2,392.50 per month. The principal of
Rison Management Services is a stockholder of the Company. The monthly rental
amount is based on the Company's rental obligation to the landlord.
Note 15. Employee Benefits
--------------------------
The Company has maintained the established 401(k) plans of Baker, Anderson,
Christie, Inc. and PSR Nurses, Ltd. The Baker, Anderson, Christie, Inc. plan
is maintained only for those who were participating on the acquisition date of
August 7, 2003. The plan allows for voluntary contribution of up to the maximum
dollar amount allowable by the Internal Revenue Service or $12,000 in 2003. Any
matching contribution is discretionary and none were made during 2003. All
other employees are eligible to participant in the PSR Nurses, Ltd. plan once
they have completed one year or 1,000 hours of service. Participants may
contribute from 1% to 20% of pretax annual compensation, as defined in the Plan
with a maximum deferral determined annually by the Internal Revenue Service.
The maximum dollar limit allowable in 2003 was $12,000. The Company may
contribute a discretionary matching contribution and none were made during 2003.
Note 16. Subsequent Events
--------------------------
On February 4, 2004, the Company issued an aggregate of 1,000,000 shares of
Series A Convertible Preferred Stock at a per share price of $1.00 to one
investor. The holder of the Series A Convertible Preferred Stock is entitled to
receive a quarterly dividend in an amount equal to .025 shares of common stock
for each share of outstanding Series A Convertible Preferred Stock held by them.
Unless previously voluntarily converted prior to such time, the Series A
Convertible Preferred Stock will automatically convert into common stock at an
initial conversion ratio of one-to-one, one year from the date of issuance of
such shares.
F-24