**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

| **x**                                                  | ** ** | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|--------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------|
| ** **                                             | ** ** | ** **                                                                                    |
| **For the quarterly period ended September 30,  2007** |
| ** **                                             | ** ** | ** **                                                                                    |
| **o**                                                  | ** ** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

** **

**Commission file number: 0-31152**

 

**CRDENTIACORP.**

(Exact name of registrant as specified in its charter)

 

| **Delaware**                                                    | ** ** | **76-0585701**                    |
|-----------------------------------------------------------------|------------|-----------------------------------|
| (State or other jurisdiction of incorporation or  organization) |       | (IRS Employer Identification No.) |

 

**5001 LBJ Freeway, Suite 850, Dallas, Texas 75244**

(Address of principal executive offices)

 

**(972) 850-0780**

(Registrant’s telephone number, including area code)

 

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

Yes   **x**      No **o**

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Checkone):

 
| Large  accelerated filer  **o** | Accelerated filer  **o** | Non-accelerated filer  **x** |
|-------------------------------------------|------------------------------------|----------------------------------------|

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act).

Yes    **o        **No **x**

 

Indicatethe number of shares outstanding of each of the issuer’s classes of commonequity, as of the latest practicable date. At November 12, 2007, 47,769,150shares of common stock, $.0001 par value, were outstanding.

 

 

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**CRDENTIA CORP.**

 

Form 10-Q Quarterly Report

For Quarterly Period Ended September 30, 2007

 

**Table of Contents**

 
| ** **                                                                                                                 | **Page** |
|----------------------------------------------------------------------------------------------------------------------------|----------|
|                                                                                                                       |     |
| **PART I - FINANCIAL INFORMATION**                                                                                         | 3        |
|                                                                                                                       |     |
| Item 1. Financial Statements                                                                                               | 3        |
|                                                                                                                       |     |
| Unaudited Condensed  Consolidated Balance Sheets at September 30, 2007 and December 31, 2006                               | 3        |
|                                                                                                                       |     |
| Unaudited Condensed Consolidated  Statements of Operations for the Three and Nine Months Ended September 30, 2007 and 2006 | 4        |
|                                                                                                                       |     |
| Unaudited Condensed  Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2007 and 2006           | 5        |
|                                                                                                                       |     |
| Notes to Unaudited Condensed  Consolidated Financial Statements                                                            | 6        |
|                                                                                                                       |     |
| Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of  Operations                       | 19       |
|                                                                                                                       |     |
| Item 3.  Quantitative and Qualitative Disclosures About Market Risk                                                        | 28       |
|                                                                                                                       |     |
| Item 4. Controls  and Procedures                                                                                           | 28       |
|                                                                                                                       |     |
| **PART II - OTHER INFORMATION**                                                                                            | 29       |
|                                                                                                                       |     |
| Item 1. Legal Proceedings                                                                                                  | 29       |
|                                                                                                                       |     |
| Item 1A. Risk Factors                                                                                                      | 30       |
|                                                                                                                       |     |
| Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds                                                       | 37       |
|                                                                                                                       |     |
| Item 3.  Defaults Upon Senior Securities                                                                                   | 37       |
|                                                                                                                       |     |
| Item 4.  Submission of Matters to a Vote of Security Holders                                                               | 37       |
|                                                                                                                       |     |
| Item 5. Other Information                                                                                                  | 37       |
|                                                                                                                       |     |
| Item 6. Exhibits                                                                                                           | 38       |
|                                                                                                                       |     |
| **SIGNATURES**                                                                                                             | 40       |

 

2

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**PART I –FINANCIAL INFORMATION**

Item 1.                    Financial Statements

 

Crdentia Corp.

UnauditedCondensed Consolidated Balance Sheets

 
| ** **                                                                                                                                                                                                             | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                             | ** ** | **2007**               | ** ** | **2006**              | ** ** |
|                                                                                                                                                                                                                   |       |                   |       |                  |       |
| Current assets:                                                                                                                                                                                                        |       |                   |       |                  |       |
| Cash and cash equivalents                                                                                                                                                                                              |       | $                      | 3,450      |                  | $          | 198,068 |   |
| Accounts receivable, net of allowance for  doubtful accounts of $150,000 at September 30, 2007 and $450,000 at December  31, 2006                                                                                      |       | 4,372,585              |       | 5,776,473             |       |
|                                                                                                                                                                                                                   |
| Other current assets                                                                                                                                                                                                   |       | 2,096,352              |       | 700,524               |       |
| Total current assets                                                                                                                                                                                                   |       | 6,472,387              |       | 6,675,065             |       |
|                                                                                                                                                                                                                   |       |                   |       |                  |       |
| Property and equipment, net                                                                                                                                                                                            |       | 343,090                |       | 469,396               |       |
| Goodwill                                                                                                                                                                                                               |       | 11,432,917             |       | 14,532,917            |       |
| Intangible assets, net                                                                                                                                                                                                 |       | 812,637                |       | 1,581,954             |       |
| Other assets                                                                                                                                                                                                           |       | 260,035                |       | 628,764               |       |
|                                                                                                                                                                                                                   |       |                   |       |                  |       |
| Total assets                                                                                                                                                                                                           |       | $                      | 19,321,066 |                  | $          | 23,888,096 |   |
|                                                                                                                                                                                                                   |       |                   |       |                  |       |
| Current liabilities:                                                                                                                                                                                                   |       |                   |       |                  |       |
| Revolving lines of credit                                                                                                                                                                                              |       | $                      | 3,137,814  |                  | $          | 6,412,029 |   |
| Accounts payable and accrued expenses                                                                                                                                                                                  |       | 2,804,599              |       | 3,807,253             |       |
| Due to iVOW                                                                                                                                                                                                            |       | —                 |       | 791,943               |       |
| Accrued employee compensation and benefits                                                                                                                                                                             |       | 815,477                |       | 896,260               |       |
| Current portion of notes payable including  amounts due to significant                                                                                                                                                 |       |                   |       |                  |       |
| shareholder of $935,425 at September 30,  2007 and $1,234,078 at December 31, 2006                                                                                                                                     |       | 1,410,000              |       | 1,234,078             |       |
| Notes payable to lender, net of discount of  $80,150 at December 31, 2006                                                                                                                                              |       | 2,175,000              |       | 701,717               |       |
| Debentures, net of discount of $1,109,313  at December 31, 2006                                                                                                                                                        |       | —                 |       | 554,687               |       |
| Other current liabilities                                                                                                                                                                                              |       | 636,196                |       | 345,643               |       |
| Total current liabilities                                                                                                                                                                                              |       | 10,979,086             |       | 14,743,610            |       |
|                                                                                                                                                                                                                   |       |                   |       |                  |       |
| Debentures, net of discount of $318,750 at  September 30, 2007                                                                                                                                                         |       | 446,250                |       | —                |       |
| Long term bonus payable                                                                                                                                                                                                |       | 969,659                |       | 903,455               |       |
| Other long-term liabilities                                                                                                                                                                                            |       | —                 |       | 757,954               |       |
|                                                                                                                                                                                                                   |       |                   |       |                  |       |
| Total liabilities                                                                                                                                                                                                      |       | 12,394,995             |       | 16,405,019            |       |
|                                                                                                                                                                                                                   |       |                   |       |                  |       |
| Commitments and contingencies                                                                                                                                                                                          |       |                   |       |                  |       |
|                                                                                                                                                                                                                   |       |                   |       |                  |       |
| Stockholders’ equity:                                                                                                                                                                                             |       |                   |       |                  |       |
| Common stock, par value $0.0001,  150,000,000 shares authorized;   30,023,275 shares issued and outstanding at September 30, 2007 and 14,538,313  shares issued and 14,430,672 shares outstanding at December 31, 2006 |       | 3,002                  |       | 1,454                 |       |
| Additional paid-in capital                                                                                                                                                                                             |       | 139,112,319            |       | 126,768,011           |       |
| Treasury stock, no shares at September 30,  2007 and 107,641 shares at cost at December 31, 2006                                                                                                                       |       | —                 |       | —                |       |
| Accumulated deficit                                                                                                                                                                                                    |       | (132,189,250           | )          | (119,286,388          | )          |
| Total stockholders’ equity                                                                                                                                                                                        |       | 6,926,071              |       | 7,483,077             |       |
|                                                                                                                                                                                                                   |       |                   |       |                  |       |
| Total liabilities and stockholders’ equity                                                                                                                                                                        |       | $                      | 19,321,066 |                  | $          | 23,888,096 |   |

 

The accompanying notes are an integral partof these unaudited condensed consolidated financial statements.

 

3

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Crdentia Corp.

UnauditedCondensed Consolidated Statements of Operations

 
| ** **                                                                   | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                                   | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                                                   | ** ** | **2007**                         | ** ** | **2006**                        | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                                         |       |                             |       |                            |       |   |   |   |   |
| Revenue from services                                                        |       | $                                | 7,329,161  |                            | $          | 9,139,047 |   | $ | 22,666,012 |   | $ | 27,212,527 |   |
| Direct operating expenses                                                    |       | 5,758,239                        |       | 7,269,173                       |       | 17,931,381 |   | 21,664,185 |   |
| Gross profit                                                                 |       | 1,570,922                        |       | 1,869,874                       |       | 4,734,631 |   | 5,548,342 |   |
|                                                                         |       |                             |       |                            |       |   |   |   |   |
| Operating expenses:                                                          |       |                             |       |                            |       |   |   |   |   |
| Selling, general, and administrative  expenses                               |       | 2,864,197                        |       | 3,099,303                       |       | 8,524,901 |   | 8,504,760 |   |
| Loss on impairment of intangibles                                            |       | —                           |       | —                          |       | 3,100,000 |   | 123,000 |   |
| Gain from settlement of claims                                               |       | (20,498                          | )          | —                          |       | (643,525 | ) | (1,064,693 | ) |
| Gain from extinguishment of debt                                             |       | —                           |       | —                          |       | — |   | (3,215,490 | ) |
| Non-cash stock based compensation                                            |       | 256,859                          |       | 505,586                         |       | 4,320,159 |   | 1,335,215 |   |
| Total operating expenses                                                     |       | 3,100,558                        |       | 3,604,889                       |       | 15,301,535 |   | 5,682,792 |   |
|                                                                         |       |                             |       |                            |       |   |   |   |   |
|                                                                         |       |                             |       |                            |       |   |   |   |   |
| Loss from continuing operations before  interest and taxes                   |       | (1,529,636                       | )          | (1,735,015                      | )          | (10,566,904 | ) | (134,450 | ) |
|                                                                         |       |                             |       |                            |       |   |   |   |   |
| Interest expense, net                                                        |       | (327,116                         | )          | (866,204                        | )          | (2,643,100 | ) | (2,510,158 | ) |
| Loss from continuing operations before  income taxes                         |       | (1,856,752                       | )          | (2,601,219                      | )          | (13,210,004 | ) | (2,644,608 | ) |
|                                                                         |       |                             |       |                            |       |   |   |   |   |
| Income tax expense                                                           |       | —                           |       | —                          |       | — |   | — |   |
| Loss from continuing operations                                              |       | (1,856,752                       | )          | (2,601,219                      | )          | (13,210,004 | ) | (2,644,608 | ) |
|                                                                         |       |                             |       |                            |       |   |   |   |   |
| Income from discontinued operations                                          |       | —                           |       | 78,721                          |       | 180,697 |   | 211,451 |   |
| Gain from sale of discontinued operations                                    |       | —                           |       | —                          |       | 126,446 |   | — |   |
|                                                                         |       |                             |       |                            |       |   |   |   |   |
| Net loss                                                                     |       | $                                | (1,856,752 | )                               | $          | (2,522,498 | ) | $ | (12,902,861 | ) | $ | (2,433,157 | ) |
|                                                                         |       |                             |       |                            |       |   |   |   |   |
| Deemed dividend on preferred stock                                           |       | —                           |       | —                          |       | — |   | (45,554,618 | ) |
|                                                                         |       |                             |       |                            |       |   |   |   |   |
| Net loss attributable to common  stockholders                                |       | $                                | (1,856,752 | )                               | $          | (2,522,498 | ) | $ | (12,902,861 | ) | $ | (47,987,775 | ) |
|                                                                         |       |                             |       |                            |       |   |   |   |   |
| Net loss per share - basic and diluted:                                      |       |                             |       |                            |       |   |   |   |   |   |   |   |   |
| Loss from continuing operations                                              |       |                             | $          | (0.07                           | )          |   | $ | (0.19 | ) |   | $ | (0.57 | ) |   | $ | (4.70 | ) |
| Income from discontinued operations                                          |       |                             | —     |                            |       | 0.01 |   |   | 0.01 |   |   | 0.02 |   |
|                                                                         |       |                             |       |                            |       |   |   |   |   |   |   |   |   |
| Basic and diluted loss per common share attributable  to common stockholders |       | $                                | (0.07      | )                               | $          | (0.18 | ) | $ | (0.56 | ) | $ | (4.68 | ) |
|                                                                         |       |                             |       |                            |       |   |   |   |   |
| Weighted average number of common shares  outstanding                        |       | 27,123,194                       |       | 13,899,960                      |       | 22,918,352 |   | 10,250,945 |   |
|                                                                              |            |                                  |            |                                 |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Theaccompanying notes are an integral part of these unaudited condensedconsolidated financial statements.

 

4

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Crdentia Corp.

UnauditedCondensed Consolidated Statements of Cash Flows

 
| ** **                                                                    | ** ** | **Nine Months Ended September 30,** | ** **  |
|-------------------------------------------------------------------------------|------------|---------------------------------------------------------|-------------|
| ** **                                                                    | ** ** | **2007**                                                | ** **  | **2006** | ** ** |
|                                                                          |       |                                                    |        |   |   |
| Operating activities:                                                         |       |                                                    |        |   |   |
| Net loss                                                                      |       | $                                                       | (12,902,861 | ) | $ | (2,433,157 | ) |
| Adjustments to reconcile net loss to net  cash used in operating activities:  |       |                                                    |        |   |   |
| Non-cash interest expense                                                     |       | 1,274,981                                               |        | 1,583,799 |   |
| Depreciation and amortization                                                 |       | 720,069                                                 |        | 764,641 |   |
| Loss (gain) on disposal of fixed assets                                       |       | 5,557                                                   |        | (500 | ) |
| Loss on impairment of intangibles                                             |       | 3,100,000                                               |        | 123,000 |   |
| Gain on disposal of operations                                                |       | (126,446                                                | )           | — |   |
| Gain on settlement of acquisition claim                                       |       | (643,525                                                | )           | (1,064,693 | ) |
| Gain on extinguishment of debt                                                |       | —                                                  |        | (3,215,490 | ) |
| Bad debt expense                                                              |       | 177,804                                                 |        | — |   |
| Non-cash stock based compensation                                             |       | 4,320,159                                               |        | 1,335,215 |   |
| Changes in operating assets and  liabilities, net of effects of acquisitions: |       |                                                    |        |   |   |
| Accounts receivable                                                           |       | 1,226,085                                               |        | (1,046,664 | ) |
| Other current assets and liabilities                                          |       | 210,314                                                 |        | (425,133 | ) |
| Accounts payable and accrued expenses                                         |       | (1,008,925                                              | )           | 862,116 |   |
| Accrued employee compensation and benefits                                    |       | (80,783                                                 | )           | 221,050 |   |
| Long-term bonus payable                                                       |       | 66,204                                                  |        | 75,815 |   |
| Net cash used in operating activities:                                        |       | (3,661,367                                              | )           | (3,220,001 | ) |
|                                                                          |       |                                                    |        |   |   |
| Investing activities:                                                         |       |                                                    |        |   |   |
| Purchases of property and equipment                                           |       | (57,233                                                 | )           | (167,503 | ) |
| Net cash received through acquisition of  subsidiaries                        |       | —                                                  |        | 370,864 |   |
| Proceeds from sale of operations                                              |       | 300,000                                                 |        | — |   |
| Net cash used in investing activities                                         |       | 242,767                                                 |        | 203,361 |   |
|                                                                          |       |                                                    |        |   |   |
| Financing activities:                                                         |       |                                                    |        |   |   |
| Proceeds from issuance of common stock, net  of costs                         |       | 4,790,471                                               |        | — |   |
| Advance of proceeds from common stock  offering                               |       | 470,000                                                 |        | — |   |
| Proceeds from issuance of preferred stock,  net of costs                      |       | —                                                  |        | 1,500,000 |   |
| Net increase (decrease) in revolving lines  of credit                         |       | (3,274,214                                              | )           | 1,121,731 |   |
| Proceeds from notes payable to lender                                         |       | 2,400,000                                               |        | — |   |
| Proceeds from debentures                                                      |       | —                                                  |        | 2,000,000 |   |
| Repayment of subordinated convertible notes                                   |       | —                                                  |        | (12,500 | ) |
| Repayment of note payable to lender                                           |       | (1,006,867                                              | )           | (1,778,438 | ) |
| Debt issuance costs                                                           |       | (155,408                                                | )           | (49,502 | ) |
| Net cash provided by financing activities                                     |       | 3,223,982                                               |        | 2,781,291 |   |
|                                                                          |       |                                                    |        |   |   |
| Net increase (decrease) in cash and cash  equivalents                         |       | (194,618                                                | )           | (235,349 | ) |
| Cash and cash equivalents at beginning of  period                             |       | 198,068                                                 |        | 434,921 |   |
| Cash and cash equivalents at end of period                                    |       | $                                                       | 3,450       |   | $ | 199,572 |   |

 

The accompanying notes are an integral partof these unaudited condensed consolidated financial statements.

 

5

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**Crdentia Corp.**

**Notes toUnaudited Condensed Consolidated Financial Statements**

**September 30, 2007**

 

**Note 1    Organization and Summary of SignificantAccounting Policies**

 

Organization

 

Crdentia Corp (the “Company”), a Delawarecorporation, is a provider of healthcare staffing services in the United States.Such services include travel nursing, per diem staffing, contractual clinicalservices, locum tenens (physician staffing), allied services (diagnosticimaging, respiratory, laboratory, therapies and administrative modalities), andprivate duty home health care. The Company considers these services to be onesegment. Each of these services relate solely to providing healthcare staffingto customers and the Company utilizes common systems, databases, procedures,processes and similar methods of identifying and serving these customers.

 

At the beginning of 2003, the Company was adevelopment stage company with no commercial operations. During that year, theCompany pursued its operational plan of acquiring companies in the healthcarestaffing field and completed the acquisition of four operating companies. In2003, the Company acquired Baker Anderson Christie, Inc., New Age Nurses, Inc.,Nurses Network, Inc., and PSR Nurse Recruiting, Inc. and PSR Nurses HoldingsCorp., which holds the limited partner and general partner interests in PSRNurses, Ltd. to provide the foundation for future growth. During 2004, theCompany completed the acquisitions of Arizona Home Health Care/Private Duty,Inc. and Care Pros Staffing, Inc. On March 29, 2005, the Company acquiredTravMed USA, Inc. and Health Industry Professionals, LLC. On May 4, 2005, theCompany acquired Prime Staff, LP and Mint Medical Staffing Odessa. In April2006, the Company acquired the assets of Staff Search Ltd.

 

During 2006 the Company terminated theoperations it acquired in 2003 from Baker Anderson Christie, Inc. and NursesNetwork, Inc. In addition, during 2006 the Company returned to the sellers theshares of TravMed USA, Inc. that it had acquired from the sellers in March 2005and the notes payable to the sellers were cancelled. On June 30, 2007 theCompany sold certain assets of Health Industry Professionals, LLC back to theoriginal sellers.

 

The accompanying financial statements includethe results of the wholly-owned subsidiaries discussed above from their respectivedates of acquisition. All intercompany transactions have been eliminated inconsolidation.

 

Basisof Presentation

 

Theaccompanying unaudited financial data as of September 30, 2007 and for thethree and nine months ended September 30, 2007 and 2006 have been prepared bythe Company pursuant to the rules and regulations of the Securities andExchange Commission. Certain information and footnote disclosures normallyincluded in financial statements prepared in accordance with accountingprinciples generally accepted in the United States of America have beencondensed or omitted pursuant to such rules and regulations. These unauditedcondensed consolidated financial statements should be read in conjunction withthe audited financial statements and the notes thereto included in the Company’sannual report on Form 10-K for the year ended December 31, 2006.

 

Inthe opinion of management, all adjustments (which include normal recurringadjustments) necessary to present fairly the financial position, results ofoperations, and cash flows as of September 30, 2007 and for the three and ninemonths ended September 30, 2007 and 2006 have been made. The results ofoperations for the three and nine months ended September 30, 2007 are notnecessarily indicative of the expected operating results for the full year.

 

Certainreclassifications have been made to conform prior year data to the current yearpresentation.

 

6

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GoingConcern

 

The Company generated a net loss of $12,902,861and used cash in operations of $3,661,367 during the nine months endedSeptember 30, 2007. Additionally, although the Company ended September 30, 2007with a significant working capital deficit of $4,506,699, it was able to secureadditional funding during the nine months ended September 30, 2007 to financeits operations as it continued to attempt to execute its business plan and toacquire and grow companies involved in healthcare staffing. The Company willneed to raise additional funds during the next twelve months to satisfy debtservice requirements of approximately $2.5 million due in January 2008 andworking capital needs of between $500,000 and $1,000,000 over the next twelvemonths. There is no assurance that the Company will be able to raise the amountof debt or equity capital required to meet its objectives. The Company’schallenging financial circumstances may make the terms, conditions and cost ofany available capital unfavorable. If additional debt or equity capital is notreadily available, the Company will be forced to scale back its acquisitionactivities and its operations. This would result in an overall slowdown of theCompany’s development. The Company’s short-term need for capital may force itto consider and potentially pursue other strategic options sooner than it mightotherwise have desired. These conditions raise substantial doubt about theCompany’s ability to continue as a going concern. The financial statements donot include any adjustments to reflect the possible future effects on therecoverability and classification of assets, or the amounts and classificationof liabilities that may result from the outcome of this uncertainty.

 

Management has taken a number of steps toaddress the Company’s financial performance and to improve cash flow. Managementhas refinanced a majority of the Company’s debt with new debt that has a lowerinterest rate, restructured the operating management team, and implementedprograms to obtain expense savings which have provided the Company with accessto additional working capital. The Company’s new Chief Executive Officer hasstrong operations experience and will devote constant attention toward expensereduction and achieving growth both organically and through acquisitions sothat the Company can spread its corporate overhead over a larger base ofbusiness and achieve economies of scale. Subsequent to September 30, 2007 theCompany has acquired two profitable companies and has raised $5.7 million ofadditional equity. Of the amount raised, $1.6 million is to be used for workingcapital purposes and $4.1 million is to be used for the October 2007 acquisitions.

 

EarningsPer Share

 

Basic per share data has been computed on theloss attributable to common stockholders for each quarter divided by theweighted average number of shares of common stock outstanding for each quarter(excluding restricted common stock issued to certain directors, officers andconsultants in 2005 and 2007). Diluted earnings per common share includes boththe weighted average number of common shares and any dilutive common shareequivalents such as convertible securities, options or warrants in thecalculation. As the Company recorded net losses for the three and nine monthsended September 30, 2007 and 2006, common share equivalents outstanding wouldbe anti-dilutive, and as such, have not been included in diluted weightedaverage shares outstanding. Common share equivalents that were excluded in thethree and nine months ended September 30, 2007 calculations were 7,185,026 and5,611,234, respectively, and in the calculations for the three and nine monthsended September 30, 2006 1,847,445 and 1,890,778 were excluded, respectively.

 

Income Taxes

 

In January 2007, the Company adopted the FinancialAccounting Standards Board Interpretation No. 48, “Accounting for Uncertaintyin Income Taxes — An Interpretation of FASB Statement No. 109” (FIN 48). ThisInterpretation clarifies the accounting for uncertainty in income taxesrecognized in a company’s financial statements. FIN 48 requires companies todetermine whether it is “more likely than not” that a tax position will besustained upon examination by the appropriate taxing authorities before anypart of the benefit can be recorded in the financial statements. It alsoprovides guidance on the recognition, measurement and classification of incometax uncertainties, along with any related interest and penalties. The Companydid not recognize any adjustments to its financial statements as a result ofits implementation of FIN 48.

 

7

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**Note 2    Acquisitions**

 

StaffSearch Ltd.

 

OnApril 18, 2006 the Company acquired the assets of Staff Search Ltd. for$2,386,174, including acquisition costs. The Company issued a promissory notein the principal amount of $1,410,000 and issued 229,128 shares of its commonstock valued at $976,174 (determined by the average of $4.26 per share whichapproximates the average trading value as quoted on the OTC Bulletin Board forthe three days before and three days after the acquisition date). Subsequently,the promissory note was purchased from the seller by the Company’s significantstockholder. During 2006 and 2007, the significant stockholders distributed$474,575 of the promissory note to unrelated parties to settle certainobligations of the significant stockholders. The promissory note accruesinterest at a rate equal to 8.00% per annum. The principal amount of the noteowed at September 30, 2007 ($543,701 owed to MedCap Partners, L.P. and $391,724owed to MedCap Master Fund L.P.), plus all accrued interest ($112,251 atSeptember 30, 2007), is payable upon demand. The principal amount of the noteowed to unrelated parties at September 30, 2007 ($474,575), plus all accruedinterest, is payable upon demand after January 1, 2008. The note includesevents of default (with grace periods, as applicable) and provides that, uponthe occurrence of certain events of default, payment of all amounts due underthe notes shall become immediately payable. The primary purpose of theacquisition was to enable the Company to expand its market share in the nursestaffing industry. The following table summarizes the assets acquired andliabilities assumed as of the closing date:

 
| Tangible assets acquired           |   | $         | 345,075   |   |
|------------------------------------|--------|-----------|-----------|--------|
| Customer related intangible assets |   | 486,000   |      |
| Goodwill                           |   | 1,555,099 |      |
| Total assets acquired              |   | 2,386,174 |      |
| Liabilities assumed                |   | —    |      |
| Net assets acquired                |   | $         | 2,386,174 |   |

 

Theacquisition was accounted for using the purchase method of accounting. Customerrelated intangible assets will be amortized over their estimated useful life offive years. The purchase price allocated to customer relationships wasdetermined by management’s estimate based on a consistent model for allacquisitions and was initially developed by a professional valuation group. Goodwillrepresents the excess of merger consideration over the fair value of assetsacquired. The results of operations for Staff Search Ltd. fell belowperformance standards established in the merger agreement requiring the formerstockholder of Staff Search Ltd. to return a portion of the Company’s commonstock that was issued in connection with the acquisition. The Company willrecord a reduction to goodwill when the common stock is received. The goodwillacquired will be amortized for federal income tax purposes.

 

UnauditedPro Forma Summary Information

 

Thefollowing unaudited pro forma summary approximates the consolidated results ofoperations as if the acquisition disclosed above had occurred as of January 1,2006, after giving effect to certain adjustments, including amortization ofspecifically identifiable intangibles and interest expense. The pro formafinancial information does not purport to be indicative of the results ofoperations that would have occurred had the transactions taken place at thebeginning of the period presented or of future results of operations.

 

8

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| ** **                                                                       | ** ** | **Nine Months**             | ** ** |
|----------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                       | ** ** | **Ended**                        | ** ** |
| ** **                                                                       | ** ** | **September 30, 2006** | ** ** |
|                                                                             |       |                             |       |
| Revenue from services                                                            |       | $                                | 30,263,712 |   |
| Loss from operations                                                             |       | (2,431,245                       | )          |
| Net loss attributable to common  stockholders                                    |       | (47,796,412                      | )          |
| Basic and diluted net loss per common share  attributable to common stockholders |       | $                                | (4.62      | ) |
|                                                                             |       |                             |       |
| Weighted-average shares of common stock  outstanding                             |       | 10,343,268                       |       |

 

**Note 3    Disposal of Detroit Operations**

 

OnJune 30, 2007, the Company sold certain assets of its temporary nurse staffingbusiness in the Detroit, Michigan metropolitan area to the original sellers(Crdentia purchased Health Industry Professionals, LLC on March 29, 2005). Thesale price was comprised of (1) $300,000 in cash; (2) return and cancellationof 128,367 shares of the Company’s common stock held by the original sellerswith a fair value of $64,184 and (3) the assumption of certain leaseobligations.

 

TheCompany recognized a gain of $126,446, which was calculated by subtracting thenet book value of the furniture and fixtures ($39,130) and the unamortizedbalance of the intangibles assets associated with the customer contracts($198,608) from the proceeds of the transaction. The Company has reported thehistorical results of operations from the Detroit Operations as income fromdiscontinued operations in the accompanying Statements of Operations which iscomprised of the following:

 
| ** **                                     | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | **Nine Months Ended** | ** ** | ** ** | ** ** |
|------------------------------------------------|------------|----------------------------------|------------|------------|------------|---------------------------------|------------|------------|------------|
| ** **                                     | ** ** | **September 30,**           | ** ** | ** ** | ** ** | **September 30,**          | ** ** | ** ** | ** ** |
| ** **                                     | ** ** | **2007**                         | ** ** | **2006**   | ** ** | **2007**                        | ** ** | **2006**   | ** ** |
|                                           |       |                             |       |       |       |                            |       |       |       |
| Revenue                                        |       | $                                | —     |       | $          | 1,159,989                       |       | $          | 1,685,643  |   | $ | 3,384,012 |   |
| Direct operation expenses                      |       | —                           |       | 934,477    |       | 1,316,901                       |       | 2,739,479  |       |
| Gross profit                                   |       | —                           |       | 225,512    |       | 368,742                         |       | 644,533    |       |
|                                           |       |                             |       |       |       |                            |       |       |       |
| Selling, general, and administrative  expenses |       | —                           |       | 146,791    |       | 188,045                         |       | 433,082    |       |
|                                           |       |                             |       |       |       |                            |       |       |       |
| Income from discontinued operations            |       | $                                | —     |       | $          | 78,721                          |       | $          | 180,697    |   | $ | 211,451 |   |

 

**Note 4    Goodwill Impairment**

 

InJune 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 141,“*Business Combinations*,” and SFASNo. 142, “*Goodwill and Other IntangibleAssets*.”  Under these rules,goodwill and indefinite lived intangible assets are no longer amortized and arereviewed annually for impairment or more frequently if events or circumstancesindicate such assets may be impaired such as reductions in demand orsignificant economic slowdowns in the industry. Intangible assets that are notdeemed to have an indefinite life will continue to be amortized over theirestimated useful lives.

 

SFASNo. 142 requires the use of a two-step process to measure potential impairment.In the first step, the fair values of the Company’s reporting units arecompared to the units’ carrying amounts. Reporting units with similar economicand operating characteristics may be combined into a single segment levelevaluation. If the fair value of a reporting unit exceeds its carrying cost,goodwill is not considered impaired. If the carrying cost exceeds fair value, asecond step is used to determine the amount of impairment. The second stepdetermines the implied fair value of goodwill for a reporting unit by applying 

 

9

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theestimated fair value to the tangible and separately identifiable intangibleassets of the reporting unit, with any remaining amount considered goodwill.

 

AtJune 30, 2007, with the disposal of the Detroit operations, the Companydetermined that goodwill should be measured for a potential impairment. TheCompany utilized information from its December 31, 2006 analysis to completethe first step of the analysis under the requirements of the standard. TheCompany used an outside valuation firm to assist in the development of the primaryassumptions at December 31, 2006, such as projected cash flows andcapitalization rates and performed the valuation of the reporting unit. TheCompany next evaluated its tangible and identifiable intangible assets andliabilities to estimate their fair values. Based on the reduction of theprojected future cash flow primarily because of the disposal of the Detroitoperations, the Company recorded a $3,100,000 impairment charge in the quarterended June 30, 2007. The impairment charge was not included in the income fromdiscontinued operations as the Company’s operations are considered to be onereporting unit.

 

**Note 5    iVOW, Inc.**

 

On September 20, 2006, the Company entered intoan Agreement and Plan of Merger (“Merger Agreement”) with iVOW, Inc. (“iVOW”),a provider of services to employers, payors and unions to facilitate weightloss programs on a per patient direct basis. In connection with Crdentia’sentry into the Merger Agreement, the Company also entered into an InterimManagement Agreement (“IMA”), pursuant to which the Company had the sole andexclusive responsibility, authority and discretion to (a) conduct, manage,direct and control all aspects of the business and operations of iVOW and (b)utilize iVOW’s cash and working capital to defray Crdentia’s expenses and theexpenses of iVOW, prior to the closing of the merger. Pursuant to the originalMerger Agreement, the termination date of the Merger Agreement and IMA wasDecember 31, 2006. Crdentia and iVOW executed an amendment to the Merger Agreementon December 29, 2006, which extended the termination date for the MergerAgreement and IMA to March 31, 2007. In April 2007, the Company negotiated aSettlement Agreement with iVOW pursuant to which Crdentia and iVOW agreed toterminate the Merger Agreement and release the other party from any and allclaims arising under the Merger Agreement and related agreements, including theIMA. The settlement agreement required the Company to issue iVOW 1,500,000shares of the Company’s common stock with a fair value of $660,000 in April2007 which approximated the net amount of cash iVOW advanced to the Company. Allnegotiations with respect to a possible merger between Crdentia and iVOW havebeen terminated.

 

**Note 6    Settlement ofAcquisition Claim**

 

In2005, the Company asserted a claim against a seller of one of the Company’s2003 acquisitions. In January 2006, the Company and the seller settled with theseller returning 59,150 shares of the Company’s common stock that had beenissued in connection with the acquisition. The Company reported a gain onsettlement of acquisition claim of $1,064,693 representing the fair value ofthe stock returned on the date of the settlement. The offset to the gainrecorded was a reduction in common stock and additional paid-in capital. Thereturned shares were retired immediately.

 

**Note 7    Accounts Payable and Accrued Expenses**

 

Accountspayable and accrued expenses consist of the following:

 
| ** **                      | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                      | ** ** | **2007**               | ** ** | **2006**              | ** ** |
|                            |       |                   |       |                  |       |
| Accounts payable                |       | $                      | 1,553,087  |                  | $          | 1,968,731 |   |
| Accrued fee for placement agent |       | —                 |       | 864,589               |       |
| Other accrued expenses          |       | 1,251,512              |       | 973,933               |       |
|                            |       |                   |       |                  |       |
|                            |       | $                      | 2,804,599  |                  | $          | 3,807,253 |   |

 

10

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**Note 8    Revolving Line of Credit**

 

OnJune 16, 2004, the Company entered into a Loan and Security Agreement withBridge Healthcare Finance, LLC (“Bridge Healthcare”), pursuant to which theCompany obtained a revolving credit facility of up to $15,000,000 (the “Loan”).During the first quarter of 2005, the Loan was reduced to $10,000,000permitting the Company to lower its effective interest rate through lowerunused line fees. The Loan had an original term of three years and boreinterest at a rate equal to the greater of three percent (3.0%) per annum overthe prime rate or nine and one-half percent (9.5%) per annum. In December 2006,Bridge Healthcare increased the rate charged to the Company by 4% over the ratespecified in the agreement to 15.25%. Interest was payable monthly. Accountsreceivable served as security for the Loan and the Loan was subject to certainfinancial and reporting covenants. Customer payments were used to repay theadvances on the Loan after deducting charges for interest expense, unused lineand account management fees. Except in certain limited circumstances, the Loancould not be prepaid in full without incurring a significant prepayment penalty.The financial covenants were for the maintenance of minimum tangible net worth,minimum debt service coverage ratios, minimum EBITDA, maximum capitalexpenditure limits and maximum operating lease obligations.

 

During2006, Bridge Healthcare made $2,425,000 available to the Company in the form ofover-advances on the Loan. The over-advances were used for working capitalpurposes. The $2,425,000 of over-advances were partially secured by a guarantyfrom MedCap Partners L.P. (“MedCap”), Crdentia’s significant stockholder,partially secured by a personal guarantee from C. Fred Toney, Crdentia’scurrent Chairman of the Board of Directors, and the managing member of MedCapManagement & Research LLC, the general partner of MedCap, and partiallysecured by a personal guarantee from James D. Durham, the Company’s formerChief Executive Officer and former Chairman of the Board. Bridge Healthcarecharged the Company monthly fees in excess of normal Loan interest charges forall over-advances. As discussed in Note 11, over-advances of $2,400,000 wererefinanced with bank debt in early 2007 and the remaining $25,000 was repaid inearly 2007.

 

TheLoan included events of default (with grace periods as applicable) and providedthat, upon the occurrence of certain events of default, payment of all amountspayable under the Loan, including the principal amount of, and accrued intereston, the Loan could be accelerated. There were also cross default provisionsbetween the Loan and the Term Loan discussed below. Financial covenants wereviolated in a number of instances including at December 31, 2006 which had nocontinuing significance since all debt with this lender has been refinancedwith either bank debt as discussed in the preceding paragraph or a workingcapital facility as discussed below.

 

OnFebruary 8, 2007, the Second Amended and Restated Loan and Security Agreement -Revolving Loans, dated May 16, 2005, as amended by and among Crdentia, itsSubsidiaries and Bridge Healthcare Finance, LLC, and the Amended and RestatedLoan and Security Agreement - Term Loan, dated May 16, 2005, as amended, by andamong Crdentia, its Subsidiaries and Bridge Opportunity Finance, LLC, wereterminated, along with all related loan documents (including, withoutlimitation, promissory notes and pledge agreements). In connection with thistermination, Crdentia and its subsidiaries paid to Bridge Healthcare Finance,LLC and Bridge Opportunity Finance, LLC all principal outstanding under theBridge Loan Agreements (approximately $3.9 million), all accrued and unpaidinterest under the Bridge Loan Agreements (approximately $14,000) and certainfees (including a Make-Whole Fee of $490,000). During the first quarter of2007, the Company also wrote-off $84,012 of deferred financing fees and $60,150of debt discount associated with warrants issued to Bridge Healthcare Finance. Crdentiaand its Subsidiaries released Bridge Healthcare Finance, LLC and BridgeOpportunity Finance, LLC from any claims relating to any matter, including theBridge Loan Agreements.

 

**Note 9    Notes Payable to Lender**

 

Pursuantto a loan agreement dated August 31, 2004, the Company obtained a term loancredit facility (“Term Loan”) in the amount up to $10,000,000 from BridgeOpportunity Finance, LLC, an affiliate of Bridge Healthcare. The Companyobtained certain loans under the agreement to fund permitted acquisitions. Anyloans obtained under the Term Loan were due and payable in full on August 31,2007 

 

11

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andrequired interest at the rate of fifteen and one-quarter percent (15.25%) perannum. Interest was payable monthly. The Term Loan was secured by all of theCompany’s assets. On August 31, 2004, the Company received proceeds from theTerm Loan of $2,697,802 for the acquisitions of Arizona Home HealthCare/Private Duty, Inc. and Care Pros Staffing, Inc.

 

TheTerm Loan required that the Company issue warrants to purchase shares of commonstock to the lender up to 12% of the Company’s overall capitalization on thedate of borrowing. On August 31, 2004, the Company issued warrants to purchase90,578 shares of common stock at a price of $31.50 per share in connection withthe first borrowing under the credit facility. As a result, the Term Loan wasrecorded net of a discount of $810,000 which represents the estimated fairmarket value related to the warrants at the date of issuance. The discount wasamortized to interest expense over the life of the Term Loan. During the firstquarter of 2006, the Company used proceeds from a private offering as discussedin Note 13 to repay $1,350,000 of the Term Loan. As a result of this repayment,the Company recorded $200,168 of additional interest relating to theproportionate amount of unamortized discount associated with the repayment. Duringthe second quarter of 2006, Bridge Healthcare demanded further repayments ofthe Term Loan amounting to $300,000 and future monthly principal payments of$45,742 until the Term Loan was paid in full. The Term Loan was paid off infull in early 2007 as discussed in Note 8.

 

TheTerm Loan contained certain financial covenants, including the maintenance ofminimum tangible net worth, minimum debt service coverage ratios, minimumEBITDA, maximum capital expenditure limits and maximum operating leaseobligations. Financial covenants were violated in a number of instancesincluding at December 31, 2006 which have no continuing significance since alldebt with this lender has been refinanced. The Term Loan was classified as acurrent liability on the accompanying balance sheet as of December 31, 2006because of the covenant violations. The Company was charged fees by Bridge forthe various compliance violations and related waivers granted during 2005, 2006and 2007. The Term Loan included events of default (with grace periods asapplicable) and provided that, upon the occurrence of certain events of default,payment of all amounts payable under the Term Loan, including the principalamount of, and accrued interest on, the Term Loan could be accelerated. Therewere also cross default provisions between the Term Loan and the Loan.

 

**Note 10  Working Capital Facility**

 

OnFebruary 8, 2007, the Company entered into a $10 million working capitalfacility with Systran Financial Services Corporation (“Systran”), a subsidiaryof Textron Financial Corporation. Pursuant to the agreements, Systran agreed,at its sole discretion, to purchase certain receivables from the Company on arecourse basis. The agreements anticipate a minimum volume of purchases andalso contemplate the payment of certain service fees, including a minimum fee. Tosecure the payment and performance of Crdentia’s obligations to Systran underthe agreements, Crdentia granted Systran a security interest in all of itsassets. Crdentia also agreed to indemnify Systran against any liabilitiesarising out of claims relating to the receivables purchased by Systran underthe agreements. The agreements have an initial term of 48 months, and Crdentiais obligated to pay Systran an early termination premium in the event theagreements are terminated under certain circumstances prior to the end of theterm. Proceeds from this facility were used to refinance the Loan and Term Loanwith Bridge Healthcare Finance, LLC as discussed in Notes 8 and 9. The balancedue under this facility at September 30, 2007 was $3,137,814 which representedthe total amount available under the facility on that date. At September 30,2007, the fees and discounts equate to an annual percentage of approximately12.5%.

 

Theagreements include events of default (with grace periods, as applicable) andprovide that, upon the occurrence of certain events of default, Systran mayimmediately collect any obligation owing to Systran under the agreements. TheCompany is currently in compliance with all provisions of the agreements.

 

**Note 11  Master Revolving Note**

 

OnJanuary 19, 2007, Crdentia delivered a Master Revolving Note (the “Note”) inthe amount of $2.4 million to Comerica Bank. Proceeds from the borrowing wereused to refinance the over-advance amount outstanding under the revolving lineof credit with Bridge Healthcare Finance, LLC. The Note requires 

 

12

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principalpayments of $125,000 on March 31, 2007, $100,000 on June 30, 2007, September30, 2007 and December 31, 2007 and has a final maturity date of January 31,2008. The Note bears interest at a per annum rate equal to Comerica’s base ratefrom time to time in effect minus one-half of one (1/2%) percent (7.25% atSeptember 30, 2007). The Note includes events of default and provides that,upon the occurrence of certain events of default, Comerica may, at its optionand without prior notice to Crdentia, declare any or all of the indebtednessevidenced by the Note immediately due and payable. The Company is currently incompliance with all provisions of the agreement. The balance due under this facilityat September 30, 2007 was $2,175,000.

 

Assecurity for Crdentia’s prompt and complete payment of its obligations underthe Note, (i) James D. Durham, Crdentia’s former Chairman and Chief ExecutiveOfficer, pledged and granted to Comerica a security interest in all of hisright, title and interest in and to a $600,000 certificate of deposit withComerica, (ii) MedCap Partners LP (“MedCap”) pledged and granted to Comerica asecurity interest in all of its right, title and interest in and to a $250,000certificate of deposit with Comerica, and (iii) C. Fred Toney, Crdentia’sChairman of the Board of Directors and the managing member of MedCap Managementand Research LLC, the general partner of MedCap, pledged and granted toComerica a security interest in all of his right, title and interest in and toa $1,125,000 certificate of deposit with Comerica. In addition, MedCapdelivered a Guaranty to Comerica pursuant to which it agreed to unconditionallyand absolutely guarantee to Comerica payment when due of all existing andfuture indebtedness of Crdentia to Comerica up to a maximum of $400,000. Pursuantto terms of the Severance Agreement with Mr. Durham, the Company exercised itsoption to utilize Mr. Durham’s $600,000 certificate of deposit with Comerica assecurity for the Note through March 1, 2008 and paid Mr. Durham $100,000.

 

**Note 12  Notes Payable**

 

Asdiscussed in Note 2, the Company has demand notes totaling $543,701 atSeptember 30, 2007 due to MedCap Partners L.P. and $391,724 at September 30, 2007due to MedCap Master Fund L.P. Related party interest expense of $56,126 hasbeen included in interest expense in the accompanying consolidated statement ofoperations for the nine months ended September 30, 2007. The remainingprincipal amount totaling $474,575 at September 30, 2007 is due to unrelatedparties.

 

**Note 13  Subordinated Debentures**

 

InJanuary 2006, the Company completed a private placement totaling $4 million. Thefirst phase was completed on December 30, 2005 and consisted of $2 million, or333,333 shares of common stock and the second phase consisted of $2 million of8% convertible debentures. The convertible debentures have a term of threeyears and bear interest at a rate of 8% per year, payable semi-annually in cashor registered stock at the Company’s option. At September 30, 2007, $765,000 ofdebentures before discount were outstanding.

 

Thedebentures are convertible into common stock at a price of $6.00 per share. Thesale of convertible debentures included common stock warrant coverage grantingwarrants to purchase 500,000 common shares. Warrants to purchase 166,667 commonshares have a five year term and an exercise price of $7.50 per share. Warrantsto purchase 333,333 common shares at an exercise price of $6.00 per shareexpired on June 14, 2006 with none being exercised. The Company computed therelative fair value of the warrants at $1,443,265 and the beneficial conversionfeature related to the debentures at $556,735, and recorded these amounts as adiscount to the debentures which is being amortized over the term of thedebentures.

 

Termsof an agreement with the placement agent representing the Company requiredplacement fees upon a private placement of at least $5 million. Although theminimum was not achieved, fees were accrued and warrants recorded based on thelower amount of funding. Fees of $589,722 were recorded as deferred financingcosts associated with the debentures and fees of $294,867 were recorded as anoffset to proceeds from the equity portion of the funding. The $589,722 wasbeing amortized over the three year term of the debentures. A portion of theplacement fees were warrants to purchase 50,000 shares of common stock at $6.00per share. The warrants had a five year life and were valued at $629,589($419,722 recorded as deferred financing costs and $209,867 recorded as anoffset to proceeds from the equity offering). Since 

 

13

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theplacement agent was not successful in raising the minimum $5.0 million, therewas an on-going dispute concerning the amount of fees owed. As discussed inNote 17, in April 2007 the Company settled the liability with the placementagent for 400,000 shares of the Company’s common stock valued at $160,000 basedon the closing price of the Company’s common stock on the date of settlementwhich resulted in a gain on settlement of litigation of $356,144. The Companyalso reduced costs originally charged to equity by $223,987 and reducedunamortized deferred financing fees by $124,458 because of the reduction inactual costs of the transaction based on this settlement.

 

During2006, holders of the debentures converted $336,000 of the debentures into56,000 shares of the Company’s common stock. In March 2007, three of the fiveremaining debenture holders exchanged $899,000 of their debentures for1,498,333 shares of the Company’s common stock. The Company issued 44,311shares of its common stock as payment of $14,948 of accrued interest due to thedebenture holders through the date of the exchange. The Company recognizedexpense in the amount of $161,654 relating to the deferred financing feesassociated with the converted debentures and expense in the amount of $595,720related to the proportionate share of the unamortized discount on the converteddebentures. During the second quarter of 2007, the Company issued 85,000 sharesof its common stock as payment of $30,600 of accrued interest due to thedebenture holders. Under terms of the debenture agreements, at September 30,2007 all debenture holders may exchange their debentures for shares of theCompany’s common stock at $.60 per share, the price at which the Company soldits stock in the private placement offering mentioned in Note 14. At December31, 2006, due to cross default provisions in the debenture agreement and theviolation of covenants with the Bridge Revolving Line of Credit and Term Loan(as discussed in Notes 8 and 9), the Company classified the debentures as acurrent liability. At September 30, 2007, with the refinancing of all Bridgefacilities with the Working Capital Facility from Systran and the MasterRevolving Note from Comerica (as discussed in Notes 10 and 11) and the Company’scompliance with all provisions of these agreements, Bridge covenant violationswere no longer relevant and the Company has classified the debentures as along-term liability.

 

**Note 14  Common Stock and Stock Options**

 

Duringthe nine months ended September 30, 2007, the Company completed eleven closingsof a private placement pursuant to a Securities Purchase Agreement andRegistration Rights Agreement for 8,166,660 shares of common stock at a priceof $0.60 per share, with aggregate gross proceeds of $4,900,000. The Board ofDirectors of the Company had authorized the sale of up to $5,500,000 in commonstock in all closings of the private placement. Pursuant to the terms of theRegistration Rights Agreement, the Company filed a resale registrationstatement covering the shares on August 31, 2007.

 

MedCapPartners L.P. invested $1,885,000 in the private placement for 3,141,664 sharesof common stock, MedCap Master Fund L.P. invested $165,000 in the privateplacement for 274,999 shares and C. Fred Toney, Chairman of the Board ofDirectors, individually invested $1,800,000 in the private placement for3,000,000 shares of common stock. Mr. Toney abstained from the Board ofDirectors’ vote in favor of the private placement.

 

InJune 2007, the Company entered into a services agreement with AudioStocks, Inc.whereby AudioStocks will provide investment services, web based shareholdercommunications and public relations services for the Company in exchange for(i) $80,000 (ii) 1,247,500 restricted shares of the Company’s common stock ofwhich 975,000 were issued in June 2007 and 272,500 were issued in August 2007and (iii) a common stock purchase warrant to purchase up to 1,000,000 shares ofthe Company’s common stock at a purchase price of $0.60 per share. The term ofthe services agreement runs through June 24, 2008. The value of theconsideration for the services agreement totaling $1,213,262, includes $636,225for the 1,247,500 restricted shares (based on the closing price of the Company’scommon stock on the effective date of the agreement), $497,037 for the commonstock purchase warrant (based on fair value using the Black-Scholes optionpricing model) and the $80,000 of cash was recorded as a prepaid asset and isbeing amortized over the term of the services agreement (1 year).

 

Duringthe quarter ended March 31, 2007, the Company cancelled 107,641 shares oftreasury stock which are now available for reissuance.

 

14

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EmployeeStock Options and Restricted Stock Grants

 

Duringthe nine months ended September 30, 2007, the Board of Directors grantedoptions to purchase 1,646,531 shares of the Company’s Common Stock to employeesand Directors and 2,400,000 shares of restricted stock to three Directors whichwere valued using the trading price on the grant date. The exercise price forthese options ranged from $0.42 to $0.60. There were no stock options exercisedin the nine months ended September 30, 2007.

 

SeeNote 15 for a discussion of the Stock Options and Restricted Stock Grantsassociated with the severance agreement with the Company’s former Chairman ofthe Board and Chief Executive Officer as well as a Restricted Stock Grantawarded to the Company’s new Director and Chief Executive Officer.

 

ValuationAssumptions

 

TheCompany calculated the fair value of each option award on the date of grantusing the Black-Scholes option pricing model. The following assumptions wereused for the nine months ended September 30, 2007.

 
| ** **              | ** ** | **Nine Months Ended**  | ** ** |
|-------------------------|------------|----------------------------------|------------|
| ** **              | ** ** | **September 30, 2007** | ** ** |
|                    |       |                             |       |
| Risk-free interest rate |       | 4.60% - 5.25                     | %          |
| Expected lives          |       | 4 years                          |       |
| Dividend Yield          |       | 0.00                             | %          |
| Expected volatility     |       | 197% - 204                       | %          |

 

Stockoption activity is summarized as follows:

 
| ** **                                                  | ** ** | **Nine Months Ended**  | ** ** |
|-------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                  | ** ** | **September 30, 2007** | ** ** |
|                                                        |       |                             |       |
| Outstanding, January 1                                      |       | 809,894                          |       |
| Granted                                                     |       | 1,646,531                        |       |
| Exercised                                                   |       | —                           |       |
| Forfeited                                                   |       | (216,978                         | )          |
| Outstanding, September 30                                   |       | 2,239,447                        |       |
| Exercisable at September 30                                 |       | 1,570,886                        |       |
| Non-vested, September 30                                    |       | 668,561                          |       |
| Average exercise price per share:                           |       |                             |       |
| Outstanding, January 1                                      |       | $                                | 6.99       |   |
| Granted                                                     |       | $                                | 0.55       |   |
| Exercised                                                   |       | —                           |       |
| Forfeited                                                   |       | $                                | 5.07       |   |
| Outstanding, September 30                                   |       | $                                | 2.44       |   |
| Exercisable                                                 |       | $                                | 2.67       |   |
| Non-vested, January 1                                       |       | $                                | 4.81       |   |
| Non-vested, September 30                                    |       | $                                | 1.90       |   |
|                                                        |       |                             |       |
| Weighted-average remaining term of  outstanding options     |       | 8.69 years                       |       |
| Weighted-average remaining term of  exercisable options     |       | 8.53 years                       |       |
|                                                        |       |                             |       |
| Weighted-average grant date fair value                      |       | $                                | 0.44       |   |
| Total estimated future expense related to  unvested options |       | $                                | 500,285    |   |
| Weighted-average vesting period of unvested  options        |       | 3.06 years                       |       |
| Weighted-average remaining term of unvested  options        |       | 9.06 years                       |       |

 

15

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**Note 15  Retirement of Chairman of the Board ofDirectors and Chief Executive Officer**

 

On March 6, 2007, James D. Durham, the Company’sChief Executive Officer, announced his retirement, and the Company accepted hisresignation and retirement, effective March 1, 2007. Mr. Durham also steppeddown as Chairman of the Board and as a member of the Company’s Board ofDirectors, effective March 1, 2007. Mr. Durham served as a consultant to theCompany through October 2007. In connection with Mr. Durham’s resignation, Mr. Durham andthe Company executed a Severance Agreement and Mutual Release of Claims,effective March 14, 2007. The Severance Agreement provides for, among otherthings: (a) payment of an additional $60,161 within three days of the effectivedate of the Severance Agreement; (b) payment of $31,667 per month during theeight month consulting period; (c) payment of a lump sum severance amount of$250,000 within seven business days of November 1, 2007; (d) an additionalgrant of an option to purchase 1,000,000 shares of the Company’s common stockat an exercise price of $0.60 per share; (e) continuation of health insurancecoverage for a 24 month period following the effective date; and (f) vesting inthe****restricted stock awards granted to Mr. Durham onMarch 24, 2006 and May 31, 2005 will continue during the period Mr. Durhamprovides consulting services and shall cease as of October 31, 2007. AtSeptember 30, 2007 the Company has accrued liabilities of $281,667 related tothe future cash payments associated with the Severance Agreement and hasrecorded compensation expense of $1,715,177 associated with the option andvesting of the restricted stock.

 

TheCompany and Mr. Durham had previously entered into an employment agreementeffective August 1, 2002, as amended by the Amendment to Employment Agreementeffective August 1, 2004 and the Second Amendment to Employment Agreementeffective as of November 8, 2005. Mr. Durham’s employment agreement, asamended, has been terminated in connection with his resignation and entry intothe Severance Agreement.

 

TheSeverance Agreement did not affect the two cash bonuses in the amount of$540,000 each that were granted to Mr. Durham in 2003 and are due on December31, 2008 and January 4, 2009. The carrying amount of this liability is $969,659at September 30, 2007.

 

TheBoard of Directors of the Company elected C. Fred Toney, an existing director,as Chairman of the Board of Directors effective March 1, 2007, replacing Mr.Durham and the Board of Directors appointed John Kaiser to be the ChiefExecutive Officer effective March 26, 2007. The Company entered into anExecutive Employment Agreement with John Kaiser pursuant to which the Companyhas issued Mr. Kaiser 2,000,000 shares of restricted common stock valued at$900,000 which will be recorded as compensation expense over the vesting period.Twenty-five percent (25%) of the shares will vest after twelve months andone-thirty-sixth (1/36th) of the remaining unvested shares shall vest at theend of the 13th month and each month thereafter, such that the shares will beone hundred percent (100%) vested after 48 months of continuous services. Inthe event of a Corporate Transaction, all outstanding shares shallautomatically become fully vested and be released from any repurchase orforfeiture rights on the six (6) month anniversary of the effective date ofsuch Corporate Transaction (the “Transition Period”), subject to Mr. Kaiserremaining in Continuous Service with the Company or its successor for thepurpose of providing acquisition and transition support to the Company or itssuccessor throughout the Transition Period; provided, however, that if theCompany or its successor terminates Mr. Kaiser’s Continuous Service withoutCause prior to the end of the Transition Period, all outstanding shares shallbecome fully vested and be released from any repurchase or forfeiture rights onsuch termination date.

 

16

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**Note 16  Supplemental Disclosure to the Statements ofCash Flows**

 
| ** **                                                                                               | ** ** | **Nine Months ended** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                                               | ** ** | **September 30,**          | ** ** |
| ** **                                                                                               | ** ** | **2007**                        | ** ** | **2006** | ** ** |
|                                                                                                     |       |                            |       |   |   |
| Supplemental cash flow disclosures:                                                                      |       |                            |       |   |   |
| Cash paid for interest                                                                                   |       | $                               | 1,287,827  |   | $ | 935,005 |   |
| Cash paid for income taxes                                                                               |       | —                          |       | — |   |
|                                                                                                     |       |                            |       |   |   |
| Non-cash investing and financing  activities:                                                            |       |                            |       |   |   |
| Conversion of debentures into common stock                                                               |       | 899,000                         |       | 260,000 |   |
| Debenture interest paid in common stock                                                                  |       | 45,548                          |       | 69,600 |   |
| Common stock issued in connection with an  acquisition                                                   |       | —                          |       | 976,084 |   |
| Notes payable issued in connection with an  acquisition                                                  |       | —                          |       | 1,410,000 |   |
| Common stock issued in exchange for Series  C preferred stock, Series B-1 warrants and Series C warrants |       | —                          |       | 10,859,603 |   |
| Common stock issued as payment of preferred  stock dividends                                             |       | —                          |       | 800,748 |   |
| Costs associated with registration  statement                                                            |       | —                          |       | 100,037 |   |
| Value of debentures allocated to attached  common stock warrants and beneficial conversion features      |       | —                          |       | 2,000,000 |   |
| Prepaid consulting fees paid with issuance  of restricted stock and warrants                             |       | 1,133,262                       |       | — |   |
| Common stock received as consideration for  sale of Detroit operation                                    |       | 64,184                          |       | — |   |
| Common stock issued for payment of iVOW  liability                                                       |       | 660,000                         |       | — |   |
| Common stock issued for litigation  settlements                                                          |       | 537,112                         |       | — |   |
| Fair value of warrants accrued as placement  fee related to debentures                                   |       | —                          |       | 419,722 |   |
|                                                                                                          |            |                                 |            |  |  |  |  |

 

**Note 17  Litigation**

 

Thefollowing is a list of claims that were settled during the nine months endedSeptember 30, 2007:

 

*Crdentia Corp. and CRDE Corp. v. Robert Litton and SteveWilliams*; *Cause No.3-06-CV-1182-R; Pending in the United States District Court for the NorthernDistrict of Texas-Dallas Division.*

 

OnJanuary 27, 2006, Crdentia Corp. and CRDE Corp. filed suit against RobertLitton and Steve Williams, the former owners of TravMed, asserting claims forbreach of non-competition/solicitation agreements, breach of fiduciary duty,tortious interference with existing and prospective contracts and businessrelations, and declaratory relief arising out of an Agreement and Plan ofReorganization dated as of March 28, 2005. Among other things, the Companyalleged that the defendants violated their non-competition agreements that theyexecuted in connection with the Agreement and Plan of Reorganization bydiverting business opportunities to a competing business. The Company sought anundisclosed amount of damages. The defendants filed counterclaims againstCrdentia alleging breach of the Agreement and Plan of Reorganization andconversion. The Company settled this action in September 2007. Pursuant to theterms of the Settlement Agreement, Travmed agreed: (i) to release all claims,known or unknown, related to or arising out of the Litigation, (ii) toindemnify the Company from and against all matters or obligations related tocertain creditors expressly identified in the Settlement Agreement and (iii)that the Company shall not have any responsibility to indemnify or defendTravmed from any claims, demands or causes of action arising from any acts oromissions occurring, in whole or in part, during the time period from March 28,2005 to May 8, 2006. Also, pursuant to the terms of the Settlement Agreement,the Company paid Robert Litton and Steve Williams the sum of $275,000 duringthe quarter ended September 30, 2007.

 

17

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*CrdentiaCorp., CRDE Corp., and Arizona Home Health Care/Private Duty, Inc. v. WilliamW. Crocker and William C. Crocker*

 

OnJanuary 31, 2006, Crdentia Corp., CRDE Corp., and Arizona Home HealthCare/Private Duty, Inc. filed suit against William W. Crocker and William C.Crocker, the former owners of Arizona Home Health Care/Private Duty, Inc.,asserting claims for fraud, indemnity, and declaratory relief arising out of anAgreement and Plan of Reorganization dated August 6, 2004 and a Receivable AllocationAgreement entered into in connection therewith. Among other things, the Companyalleged that, prior to entering the Agreement and Plan of Reorganization, thedefendants failed to disclose that certain key employees had planned to leavethe company and that the defendants requested and/or instructed such employeesnot to leave prior to the closing of the merger. The Company also alleged thatthe defendants failed to disclose that their company did not possess certainstate licenses necessary to conduct a portion of its business. The Companysought an undisclosed amount of damages. This case was settled in April 2007 asdiscussed below under “*William W. Crocker v.Crdentia Corp.”*

 

*William W. Crocker, an individual, v. CrdentiaCorp., a Delaware Corporation, and Arizona Home Health Care/Private Duty, Inc.,an Arizona Corporation*

 

On February 23, 2006, William W. Crocker filed suitagainst Crdentia Corp. and Arizona Home Health Care/Private Duty, Inc.asserting claims for declaratory judgment, breach of contract, and conversionarising from a Receivable Allocation Agreement executed incident to anAgreement and Plan of Reorganization dated August 6, 2006. Mr. Crocker soughtdamages in the principal sum of $251,150, which was comprised of $114,019 forcollected accounts receivable and eighty percent (80%) of $171,414 ofuncollected accounts receivable, plus attorneys’ fees. The Company settled thiscase in April 2007. The Company issued 312,500 shares of common stock (valuedat $159,375 based on the trading value of stock on April 9, 2007) in exchangefor Crdentia retaining the proceeds from the collection of certain receivablesthat it collected on behalf of Mr. Crocker.

 

*Dawson James Securities, Inc. v. Crdentia Corp*

 

OnMarch 22, 2006, Dawson James filed suit against Crdentia Corp. seeking fees inconnection with raising investment capital for Crdentia. Dawson James contendedthat under terms of a contract they were owed cash of $235,000 and 50,000warrants to purchase Crdentia stock. In April 2007, the Company settled theliability with Dawson James for 400,000 shares of the Company’s common stockvalued at $160,000 based on the closing price of the Company’s common stock onthe date of settlement which was less than the recorded liability and resultedin a gain of $356,144.

 

**Note 18  Subsequent Events**

 

PrivatePlacement

 

OnOctober 26, 2007, the Company entered into and completed an initial closing ona Securities Purchase Agreement (the “Purchase Agreement”) with certaininvestors for the private placement of 15,666,667 shares of common stock at aprice of $0.30 per share and warrants to purchase up to 7,833,333 shares ofcommon stock (the “Warrants”), for aggregate proceeds of $4,700,000. OnNovember 13, 2007, the Company entered and completed a second closing of thePurchase Agreement with certain investors for the private placement of 3,500,000shares of common stock at a price of $0.30 per share and Warrants to purchaseup to 1,750,000 shares of common stock for aggregate proceeds of $1,050,000. TheWarrants are immediately exercisable, have an exercise price of $0.35 pershares and have a five (5) year term. The shares have been and will be issuedin a private placement transaction pursuant to Section 4(2) of theSecurities Act of 1933, as amended, and the rules and regulations promulgatedthereunder. The Company has also entered into a Registration Rights Agreementwith the investors, pursuant to which the Company has agreed to cause a resaleregistration statement covering the shares sold pursuant to the PurchaseAgreement and the shares issuable upon exercise of the Warrants to be filedwithin 30 days after the initial closing date.

 

18

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C.Fred Toney, the Chairman of the Company’s board of directors, individually andthrough affiliated entities invested $1,850,000 in the Purchase Agreement for6,166,667 shares of common stock and warrants to purchase 3,083,333 shares ofcommon stock. Mr. Toney abstained from the Board of Directors’ vote in favor ofthe private placement. The affiliated entities advanced $470,000 of fundsduring September 2007. These advances are reflected in accounts payable andaccrued liabilities on the accompanying balance sheet at September 30, 2007pending closing of the private placement and issuance of shares.

 

OnOctober 26, 2007, Crdentia issued a common stock warrant to FatBoy Capital, LPto purchase 1,000,000 shares of common stock of Crdentia with an exercise priceof $.45 per share. The warrant was issued as consideration for investmentadvisory services provided to Crdentia by FatBoy. The warrant is immediatelyexercisable and has a 5 year term.

 

OnOctober 29, 2007, Crdentia purchased all of the outstanding equity interests inATS Universal, LLC , a healthcare staffing firm providing services in Florida,North Carolina and Georgia, in exchange for $3.3 million in cash and 2.1million shares of Crdentia’s common stock valued at $700,000.

 

OnOctober 30, 2007, Crdentia announced that it had signed a definitive assetpurchase agreement to purchase specified assets and liabilities of MedicalPeople Healthcare Services, Inc., a healthcare staffing firm providing servicesin Alabama, for $750,000 cash and a promissory note in the amount of $500,000.

 

**Item 2.    Management’s Discussionand Analysis of Financial Condition and Results of Operations**

 

*This**report**contains forward-lookingstatements**.These statements relate to future events or our future financial performance. Insome cases, you can identify forward-looking statements by terminology such as “may,”“will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,”“potential,” or “continue,” the negative of such terms or other comparableterminology. These statements are only predictions. Actual events or results**may differ materially**.*

 

*Although we believe that the expectations reflected in theforward-looking statements are reasonable, we cannot guarantee future results,levels of activity, performance or achievements and we have failed to achieveprojected results in the past. Moreover, neither we, nor any other person,assume responsibility for the accuracy and completeness of the forward-lookingstatements. We are under no obligation to update any of the forward-lookingstatements after the filing of this Quarterly Report to conform such statementsto actual results or to changes in our expectations.*

 

*The following discussion of our financial condition andresults of operations should be read in conjunction with our consolidatedfinancial statements and the related notes and other financial informationappearing elsewhere in this Quarterly Report. Readers are also urged tocarefully review and consider the various disclosures made by us which attemptto advise interested parties of the factors which affect our business,including without limitation the disclosures made in Item 1A of Part II of thisQuarterly Report under the  Caption “RiskFactors” and under the captions “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations,” and “Risk Factors”  and in our audited consolidated financialstatements and related notes included in our Annual Report on Form 10-K for theyear ended December 31, 2006, previously filed with the U.S. Securities andExchange Commission (“SEC”).*

 

*Riskfactors that could cause actual results to differ from those contained in theforward-looking statements include but are not limited to: our ability tocontinue as a going concern; we have a history of losses; we face difficultiesidentifying and integrating acquisitions; our need to raise additional capitalin the future; our credit facility and revolving note impose significantexpenses on us; our convertible debentures contain covenants and restrictions;MedCap controls a significant amount of our outstanding capital stock; we needto continue to attract and retain key employees; we need to attract qualifiednurses; the temporary nurse staffing industry is highly competitive; our needto secure and fill new orders from hospitals and healthcare facilities; fluctuationsin patient occupancy; we have anti-takeover provisions in our charter*

 

19

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*andbylaws; we operate in a regulated industry; government regulation andregulatory reform could negatively impact our business; and legal actions couldsubject us to uninsured liabilities.*

 

Introduction

 

Management’sdiscussion and analysis of financial condition and results of operations isprovided as a supplement to our consolidated financial statements andaccompanying notes to help provide an understanding of our financial condition,changes in financial condition and results of operations.

 

Overview

 

Weare a provider of healthcare staffing services, focusing on the areas of travelnursing, per diem staffing, contractual clinical services, locum tenens(physician staffing), allied services and private duty home care. Our travelnurses are recruited domestically as well as internationally, and placed ontemporary assignments at healthcare facilities across the United States. Ourper diem nurses are local nurses placed at healthcare facilities on short-termassignments. Our contractual clinical services group provides staffing forhealthcare clinics, organizations and facilities. Under our locum tenensprogram, physicians contract with us to perform medical services for healthcareorganizations for a specified length of time. Our allied services primarilyconsist of diagnostic imaging, respiratory, laboratory, therapies andadministrative modalities and our private duty home care group provides nursingcase management and staffing for skilled and non-skilled care in the home. Weconsider the different services described above to be one segment as each ofthese services relate solely to providing healthcare staffing to customers thatare healthcare providers and utilize similar distribution methods, commonsystems, databases, procedures, processes and similar methods of identifyingand serving these customers.

 

We did not have any revenue in 2003 until wecompleted our first acquisition in August 2003. During 2003 we began operatingfour newly acquired companies, combining the various back offices and supportstaff into a central location and began streamlining the operations. We havecontinued to pursue our operational plan of acquiring companies in thehealthcare staffing field and purchased two companies in 2004, three companiesin 2005 and one company in 2006.

 

During 2006 we terminated the operations we hadacquired in 2003 from Baker Anderson Christie, Inc. and Nurses Network, Inc. Inaddition, in May 2006 we returned to the sellers the shares of TravMed USA,Inc. that we had acquired from the sellers in March 2005 in connection with ouracquisition of that company, and our notes payable to the sellers werecancelled. On June 30, 2007 we sold certain assets of Health IndustryProfessionals, LLC to the original sellers.

 

Somekey factors we are focusing on to improve performance are as follows:

 

•                  We continue to identify innovative ways toattract and retain nurses.

 

•                  We are managing the amounts billed tohealthcare facilities in relation to the payroll cost of our nurses in aneffort to improve gross margins.

 

•                  We are managing selling, general andadministrative costs at our field office locations with a goal of limitingthese expenses to no more than 10% of the revenue at each location.

 

•                  We are expanding our locum tenens business,our allied services and our home health business in an effort to improve grossmargins through a better mix of the services provided.

 

•                  We are devoting attention toward achievinggrowth both organically and through acquisitions so that we can spread ourcorporate overhead over a larger base of business and achieve economies ofscale.

 

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•                  We are seeking to raise capital to providefor working capital needs and to continue to pursue acquisitions.

 

Duringthe nine months ended September 30, 2007, we recorded several transactionswhich are of a non-recurring nature, including the following:

 

•                  Future cash severance costs associated withour former Chief Executive Officer in the amount of $503,333 recorded asselling, general and administrative costs.

•                  Stock compensation costs associated with ourformer Chief Executive Officer’s severance and the accelerated vesting ofrestricted stock in the amount of $3,024,177.

•                  Prepayment penalty and the write-off ofdeferred financing costs associated with refinancing our term note andrevolving credit facility and costs associated with the exchange for commonstock of a portion of our debentures for a total of $1,391,538 recorded asinterest costs.

•                  Gain on settlement of litigation in theamount of $643,525.

•                  Gain on sale of discontinued operations of$126,446 which was more than offset by impairment write-off of goodwill of$3,100,000.

 

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**RESULTSOF OPERATIONS**

 
| ** **                                                 | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                 | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                                 | ** ** | **2007**                         | ** ** | **2006**                        | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                       |       |                             |       |                            |       |   |   |   |   |
| Revenue from services                                      |       | $                                | 7,329,161  |                            | $          | 9,139,047 |   | $ | 22,666,012 |   | $ | 27,212,527 |   |
| Direct operating expenses                                  |       | 5,758,239                        |       | 7,269,173                       |       | 17,931,381 |   | 21,664,185 |   |
| Gross profit                                               |       | 1,570,922                        |       | 1,869,874                       |       | 4,734,631 |   | 5,548,342 |   |
|                                                       |       |                             |       |                            |       |   |   |   |   |
| Operating expenses:                                        |       |                             |       |                            |       |   |   |   |   |
| Selling, general, and administrative  expenses             |       | 2,864,197                        |       | 3,099,303                       |       | 8,524,901 |   | 8,504,760 |   |
| Loss on impairment of intangibles                          |       | —                           |       | —                          |       | 3,100,000 |   | 123,000 |   |
| Gain from settlement of claims                             |       | (20,498                          | )          | —                          |       | (643,525 | ) | (1,064,693 | ) |
| Gain from extinguishment of debt                           |       | —                           |       | —                          |       | — |   | (3,215,490 | ) |
| Non-cash stock based compensation                          |       | 256,859                          |       | 505,586                         |       | 4,320,159 |   | 1,335,215 |   |
| Total operating expenses                                   |       | 3,100,558                        |       | 3,604,889                       |       | 15,301,535 |   | 5,682,792 |   |
|                                                       |       |                             |       |                            |       |   |   |   |   |
| Loss from continuing operations before  interest and taxes |       | (1,529,636                       | )          | (1,735,015                      | )          | (10,566,904 | ) | (134,450 | ) |
|                                                       |       |                             |       |                            |       |   |   |   |   |
| Interest expense, net                                      |       | (327,116                         | )          | (866,204                        | )          | (2,643,100 | ) | (2,510,158 | ) |
| Loss from continuing operations before  income taxes       |       | (1,856,752                       | )          | (2,601,219                      | )          | (13,210,004 | ) | (2,644,608 | ) |
|                                                       |       |                             |       |                            |       |   |   |   |   |
| Income tax expense                                         |       | —                           |       | —                          |       | — |   | — |   |
| Loss from continuing operations                            |       | (1,856,752                       | )          | (2,601,219                      | )          | (13,210,004 | ) | (2,644,608 | ) |
|                                                       |       |                             |       |                            |       |   |   |   |   |
| Income from discontinued operations                        |       | —                           |       | 78,721                          |       | 180,697 |   | 211,451 |   |
| Gain from sale of discontinued operations                  |       | —                           |       | —                          |       | 126,446 |   | — |   |
|                                                       |       |                             |       |                            |       |   |   |   |   |
| Net loss                                                   |       | $                                | (1,856,752 | )                               | $          | (2,522,498 | ) | $ | (12,902,861 | ) | $ | (2,433,157 | ) |
|                                                       |       |                             |       |                            |       |   |   |   |   |
| Deemed dividend on preferred stock                         |       | —                           |       | —                          |       | — |   | (45,554,618 | ) |
|                                                       |       |                             |       |                            |       |   |   |   |   |
| Net loss attributable to common  stockholders              |       | $                                | (1,856,752 | )                               | $          | (2,522,498 | ) | $ | (12,902,861 | ) | $ | (47,987,775 | ) |

 

***Three months ended September 30, 2007 compared to the three monthsended September 30, 2006***

 

Revenuesfrom continuing operations in the three months ended September 30, 2007 were$7,329,161 compared to revenues of $9,139,047 in the three months endedSeptember 30, 2006. Revenues have decreased in 2007 compared to 2006 dueprincipally to decreases in revenue related to closing portions of ouroperations in California, the loss of customers related to litigationsurrounding the TravMed acquisition and a decrease in revenues from several ofour Texas hub locations due to turnover of key employees at such facilities. Thesedecreases were partially offset by increases in our locum tenens division. In2007 approximately 11.1% (23.5% in 2006) of our revenue was derived from theplacement of travel nurses on assignment, typically 13 weeks in length. Suchassignments generally involve temporary relocation to the geographic area ofthe assignment. We also provide per diem nurses to satisfy the very short-termneeds of healthcare facilities. Per diem services provided 72.5% of our revenuein 2007 (58.8% in 2006). The remaining amount of our revenue in 2007 came fromproviding staffing to healthcare facilities, private duty homecare, locumtenens contracts and allied services. In 2006 the remaining revenue came fromproviding clinical management and staffing to healthcare facilities and privateduty homecare. During 2007 and 2006, most of our customers were acute carehospitals located throughout the continental United States.

 

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Ouroverall gross profit in the three months ended September 30, 2007 was$1,570,922 or 21.4% of revenues compared to $1,869,874 or 20.5% of revenues inthe three months ended September 30, 2006. Our gross profit is the differencebetween the revenue we realize when we bill our customers for the services ofour healthcare professionals and our direct operating costs, which include thecost of the healthcare professionals and the related housing and travel costs,certain employment related taxes, professional liability insurance, healthinsurance for professionals and workers compensation insurance coverage. Wewere able to effectively manage our insurance costs which resulted in anincrease in our gross profit as a percentage of revenue during 2007.

 

Ourselling, general and administrative costs were $2,864,197 or 39.1% of revenuesin the three months ended September 30, 2007 compared to $3,099,303 or 33.9%******of revenues in the three monthsended September 30, 2006. Selling, general and administrative expenses arecomprised primarily of certain personnel costs, legal and accounting feesrelated to being a public company and various other office and administrativeexpenses. The increase in selling, general and administrative costs as apercentage of revenue is attributable to increased legal costs associated withsettlements, costs associated with a services agreement with Audiostocks, Inc.which provides investment services to us for a 12 month period as well as thefixed nature of some of the corporate overhead costs which did not decline withthe decline in revenue.

 

Duringthe three months ended September 30, 2007 we entered into a SettlementAgreement with TravMed pursuant to which we agreed to pay Robert Litton andSteve Williams the sum of $275,000. This settlement resulted in a gain of$20,498 since the liability recorded previously for this claim was more thanthe final settlement amount.

 

Non-cashstock based compensation costs were $256,859 in the three months endedSeptember 30, 2007 compared to $505,586 in the three months ended September 30,2006. The decrease is primarily due to the stock based compensation  awarded to our former Chief Executive Officerbeing expensed in the first quarter in conjunction with the severanceagreement.

 

Interestcosts were $327,116 in the three months ended September 30, 2007 compared to$866,204 in the three months ended September 30, 2006. This decrease ininterest expense is the result of lower interest rates associated with the newworking capital facility and master revolving note as well as reduced levels ofdebt.

 

OnJune 30, 2007 we sold certain assets of Health Industry Professionals, LLC backto the original sellers for $300,000 cash, the return of 128,367 shares of ourcommon stock held by the original sellers, and their assumption of certainliabilities. Operating income related to this business, in the amount of$78,721 for the three months ended September 30, 2006 has been reclassified toincome from discontinued operations.

 

***Nine months ended September 30, 2007 compared to the nine months endedSeptember 30, 2006***

 

Revenuesfrom continuing operations in the nine months ended September 30, 2007 were$22,666,012 compared to revenues of $27,212,527 in the nine months endedSeptember 30, 2006. Revenues have decreased in 2007 compared to 2006 dueprincipally to decreases in revenue related to closing portions of ouroperations in California, to the loss of customers related to litigationsurrounding the TravMed acquisition and a decrease in revenues from several ofour Texas hub locations due to turnover of key employees at such facilities. Thedecrease in revenue has been partially offset by revenue associated with theStaff Search acquisition completed in April 2006 and increases in our locumtenens division. In 2007 approximately 14.0% (30.6% in 2006) of our revenue wasderived from the placement of travel nurses on assignment, typically 13 weeksin length. Such assignments generally involve temporary relocation to thegeographic area of the assignment. We also provide per diem nurses to satisfythe very short-term needs of healthcare facilities. Per diem services provided71.0% of our revenue in 2007 (55.6% in 2006). The remaining amount of ourrevenue in 2007 came from providing staffing to healthcare facilities, privateduty homecare, locum tenens contracts and allied services. In 2006 theremaining revenue came from providing

 

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clinicalmanagement and staffing to healthcare facilities and private duty homecare. During2007 and 2006, most of our customers were acute care hospitals locatedthroughout the continental United States.

 

Ouroverall gross profit in the nine months ended September 30, 2007 was $4,734,631or 20.9% of revenues compared to $5,548,342 or 20.4% of revenues in the ninemonths ended September 30, 2006. Our gross profit is the difference between therevenue we realize when we bill our customers for the services of ourhealthcare professionals and our direct operating costs, which include the costof the healthcare professionals and the related housing and travel costs,certain employment related taxes, professional liability insurance, healthinsurance for professionals and workers compensation insurance coverage. Wewere able to effectively manage our insurance costs which resulted in anincrease in our gross profit as a percentage of revenue during 2007.

 

Ourselling, general and administrative costs were $8,524,901 or 37.6% of revenuesin the nine months ended September 30, 2007 compared to $8,504,760 or 31.3%******of revenues in the nine monthsended September 30, 2006. Selling, general and administrative expenses arecomprised primarily of certain personnel costs, legal and accounting feesrelated to being a public company and various other office and administrativeexpenses. The increase in selling, general and administrative costs as apercentage of revenue is attributable to increased legal costs associated withsettlements, an increase in health care claims and $503,333 of accrued expensesrelated to a severance agreement with our former Chief Executive Officer aswell as the fixed nature of some of the corporate overhead costs which did notdecline with the decline in revenue.

 

Primarilyas a result of the sale of certain assets of Health Industry Professionals, LLCat June 30, 2007, our impairment analysis of goodwill required a charge forimpairment of goodwill of $3.1 million. We lost certain customer relationshipsthat were obtained with the TravMed acquisition. We recorded a write-down of$123,000 in the nine months ended September 30, 2006 related to intangiblesassigned to these customer relationships.

 

Duringthe nine months ended September 30, 2007 we settled several litigation casesresulting in a gain of $643,525. In April 2007 we settled litigation withDawson James Securities, Inc. by issuing 400,000 shares of our common stock. Theseshares were valued at $160,000 and when measured against previous amountsaccrued resulted in a gain from settlement of litigation of $356,144. Alsoduring the second quarter our negotiations with TravMed resulted in ourestimated liability being reduced to approximately $300,000 resulting in a gainof $248,275. During the third quarter we entered into a Settlement Agreementwith TravMed pursuant to which we agreed to pay Robert Litton and SteveWilliams the sum of $275,000. This settlement resulted in an additional gain of$20,498. In 2005, we asserted a claim against a seller of one of our 2003acquisitions. In January 2006, we reached a settlement with the sellerreturning 59,150 shares of our stock that had been issued in connection withthe acquisition. We reported a gain on this settlement of $1,064,693representing the fair value of the stock returned on the date of thesettlement.

 

Duringthe nine months ended September 30, 2006, in connection with claims assertedagainst the sellers of TravMed, we returned to the sellers shares in TravMedthat we had acquired on March 29, 2005. Upon return of the shares to thesellers, $3,215,490 of seller notes payable were extinguished in accordancewith terms of the acquisition agreements. This resulted in a gain fromextinguishment of debt of $3,215,490 in 2006.

 

Non-cashstock based compensation costs were $4,320,159 in the nine months endedSeptember 30, 2007 compared to $1,335,215 in the nine months ended September30, 2006. In 2006, the volume of trading in the Company’s stock triggeredaccelerated vesting of some of the restricted shares and caused the Company tobegin amortizing the cost of the restricted grants over a shorter period oftime beginning in the fourth quarter of 2006. In addition, the severanceagreement for our former Chief Executive Officer included the granting of anoption to purchase 1,000,000 shares of the Company’s stock vesting immediatelyand accelerated vesting of restricted grants. Expense of $3,024,177 associatedwith the accelerated vesting of the restricted stock was recorded in 2007.

 

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Interestcosts were $2,643,100 in the nine months ended September 30, 2007 compared to$2,510,158 in the nine months ended September 30, 2006. This increase ininterest cost is due to a prepayment penalty and the write-off of deferredfinancing costs associated with the refinancing of our term note and revolvingcredit facility with Bridge Finance and costs associated with the conversion ofa portion of our debentures for a total of $1,391,538. These amounts werepartially offset by lower interest rates associated with the new workingcapital facility and master revolving note as well as reduced levels of debt.

 

OnJune 30, 2007 we sold certain assets of Health Industry Professionals, LLC backto the original sellers for $300,000 cash, the return of 128,367 shares of ourcommon stock held by the original sellers, and their assumption of certainliabilities. This transaction resulted in a gain on sale of discontinued operationsof $126,446 for the nine months ended September 30, 2007. Operating incomerelated to this business, in the amount of $180,697 for the nine months endedSeptember 30, 2007 and $211,451 for the nine months ended September 30, 2006has been reclassified to income from discontinued operations.

 

Duringthe nine months ended September 30, 2006 a special committee of the Board ofDirectors recommended, the Board of Directors approved and holders of thePreferred Stock and Warrants agreed to the exchange of all outstanding Series CConvertible Preferred Stock, Series C warrants and Series B-1 warrants intocommon stock. The exchange as approved by the Board of Directors varied fromexisting Preferred Stock conversion ratios and was based on recommendations fromthe special committee of the Board of Directors after they sought guidance froman outside firm. The effect of this exchange transferred the carrying value ofthe Convertible Preferred Stock and the Series C preferred stock warrants onour balance sheet to stockholders’ equity resulting in an increase instockholders’ equity of $10,859,603. This exchange also resulted in therecognition of a deemed dividend of $45,554,618. This deemed dividend wascalculated by valuing the 10,257,131 shares of common stock issued in theexchange at the closing price of the stock on the date of the exchange ($5.50)less the recorded value of the Convertible Preferred Stock and Warrants of$10,859,603.

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

Sinceinception, we have incurred losses from operations and have reported negativecash flows. As of September 30, 2007, we had an accumulated deficit of$132,189,250 and cash and cash equivalents of $3,450. We have financed ouroperations primarily through private placements of equity and debt securitiesand through credit facilities, including our current facility with SystranFinancial Services Corporation, a subsidiary of Textron Financial Corporation,and a term loan with Comerica Bank.

 

Duringthe nine months ended September 30, 2007, we completed eleven closings of aprivate placement pursuant to a Securities Purchase Agreement and RegistrationRights Agreement for 8,166,660 shares at a price of $0.60 per share, withaggregate proceeds of $4,900,000. Our Board of Directors had authorized thesale of up to $5,500,000 in common stock in all closings of the privateplacement. Pursuant to the terms of the Registration Rights Agreement, we fileda resale registration statement covering the shares on August 31, 2007.

 

OnOctober 26, 2007, we entered into and completed an initial closing on aSecurities Purchase Agreement (the “Purchase Agreement”) with certain investorsfor the private placement of 15,666,667 shares of common stock at a price of$0.30 per share and warrants to purchase up to 7,833,333 shares of common stock(the “Warrants”), for aggregate proceeds of $4,700,000. On November 13, 2007,we entered and completed a second closing of the Purchase Agreement withcertain investors for the private placement of 3,500,000 shares of common stockat a price of $0.30 per share and Warrants to purchase up to 1,750,000 sharesof common stock for aggregate proceeds of $1,050,000. The Warrants areimmediately exercisable, have an exercise price of $0.35 per share and have afive (5) year term. The shares have been and will be issued in a privateplacement transaction pursuant to Section 4(2) of the Securities Act of1933, as amended, and the rules and regulations promulgated thereunder. We havealso entered into a Registration Rights Agreement with the investors, pursuantto which we have agreed to cause a resale registration statement covering theshares sold pursuant to the Purchase Agreement and the shares issuable uponexercise of the Warrants to be filed within 30 days after the initial closing date.

 

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C.Fred Toney, the Chairman of our board of directors, individually and throughaffiliated entities invested $1,850,000 in the private placement for 6,166,667shares of common stock and warrants to purchase 3,083,333 shares of commonstock. Mr. Toney abstained from the board of directors’ vote in favor of theprivate placement.

 

OnOctober 29, 2007, we purchased all of the outstanding equity interests in ATSUniversal, LLC in exchange for $3.3 million in cash and 2.1 million shares ofour common stock valued at $700,000.

 

OnOctober 30, 2007, we announced that we had signed a definitive asset purchaseagreement to purchase specified assets and liabilities of Medical PeopleHealthcare Services, Inc. for $750,000 cash and a promissory note in the amountof $500,000,

 

OnFebruary 8, 2007, we entered into a $10 million working capital facility withSystran Financial Services Corporation, a subsidiary of Textron FinancialCorporation. Pursuant to the agreements, Systran agreed, at its solediscretion, to purchase certain receivables from us on a recourse basis. Theagreements anticipate a minimum volume of purchases and also contemplate thepayment of certain service fees, including a minimum fee. To secure the paymentand performance of our obligations to Systran under the agreements, we grantedSystran a security interest in all of our assets. We also agreed to indemnifySystran against any liabilities arising out of claims relating to thereceivables purchased by Systran under the agreements. The agreements have aninitial term of 48 months, and we are obligated to pay Systran an earlytermination premium in the event the agreements are terminated under certaincircumstances prior to the end of the term.

 

OnJanuary 19, 2007, we delivered a Master Revolving Note in the amount of $2.4million to Comerica Bank. Proceeds from the borrowing were used to refinancethe over-advance amount outstanding under the revolving line of credit withBridge Healthcare Finance, LLC. The Note has principal payments of $125,000 onMarch 31, 2007, $100,000 on June 30, 2007, September 30, 2007 and December 31,2007 and has a final maturity date of January 31, 2008 and bears interest at aper annum rate equal to Comerica’s base rate from time to time in effect minusone-half of one (1/2%) percent (7.25% at September 30, 2007). The Note includesevents of default and provides that, upon the occurrence of certain events ofdefault, Comerica may, at its option and without prior notice to us, declareany or all of the indebtedness evidenced by the Note immediately due andpayable. We are currently in compliance with all provisions of the agreementand expect to extend the maturity date of this debt or refinance it when thebalance becomes due on January 31, 2008.

 

We generated a net loss of $12,902,861 andused cash in operations of $3,661,367 during the nine months ended September30, 2007. Additionally, although we ended September 30, 2007 with a significantworking capital deficit of $4,506,699, we were able to secure additionalfunding during the nine months ended September 30, 2007 to finance ouroperations as we continued to attempt to execute our business plan and toacquire and grow companies involved in healthcare staffing. We will need toraise additional funds during the next twelve months to satisfy debt servicerequirements of approximately $2.5 million due in January 2008 and workingcapital needs of between $500,000 and $1,000,000 over the next twelve months. Thereis no assurance that we will be able to raise the amount of debt or equitycapital required to meet our objectives. Our challenging financialcircumstances may make the terms, conditions and cost of any available capitalunfavorable. If additional debt or equity capital is not readily available, wewill be forced to scale back its acquisition activities and its operations. Thiswould result in an overall slowdown of our development. Our short-term need forcapital may force it to consider and potentially pursue other strategic optionssooner than it might otherwise have desired. These conditions raise substantialdoubt about the our ability to continue as a going concern.

 

Management has taken a number of steps toaddress our financial performance and to improve cash flow. Management hasrefinanced a majority of our debt with new debt that has a lower interest rate,restructured

 

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the operating management team, andimplemented programs to obtain expense savings which have provided us withaccess to additional working capital. Our new Chief Executive Officer hasstrong operations experience and will devote constant attention toward expensereduction and achieving growth both organically and through acquisitions sothat we can spread our corporate overhead over a larger base of business andachieve economies of scale. Subsequent to September 30, 2007 we have acquiredtwo more profitable companies and have raised $5.7 million of additionalequity.

 

CashFlows

 

Forthe nine months ended September 30, 2007, we used cash in operations of$3,661,367, compared to $3,220,001 for the nine months ended September 30, 2006.Although we ended September 30, 2007 with a significant working capital deficitof $4,506,699 we were able to secure additional funding during this period tofinance our operations and subsequent to September 30, 2007 have raised anadditional $5.7 million of which $1.6 million has been allocated for workingcapital purposes.

 

Netcash provided by investing activities was $242,767 for the nine months endedSeptember 30, 2007 compared to net cash provided by investing activities of$203,361 for the nine months ended September 30, 2006. On June 30, 2007 we soldcertain assets of Health Industry Professionals, LLC back to the originalsellers for $300,000 cash, the return of 128,367 shares of our common stockheld by the original sellers, and the assumption of certain liabilities.

 

Duringthe nine months ended September 30, 2007 and 2006, we financed our workingcapital requirements primarily through the sale of common stock, convertibledebentures and through loans and credit facilities. Net cash provided byfinancing activities was $3,223,982 for the nine months ended September 30,2007 and $2,781,291 for the nine months ended September 30, 2006. In 2007, wereceived $2,400,000 from a note payable to lender and $5,260,471 from theissuance of common stock in private placements. These funds were used to fundoperations and pay-off an over-advance of $2,425,000 and $1,006,867 of notepayable to lenders. In 2006, we received $2,000,000 in the private placement of8% convertible debentures and short- and long-term warrants as well as$1,500,000 through the issuance of common stock in private placements. Thesefunds were used to repay $1,778,438 of note payable to lender and fund$3,220,001 cash used in operations.

 

**CRITICALACCOUNTING POLICIES AND MANAGEMENT JUDGEMENT**

 

Thepreparation of the financial statements in accordance with accountingprinciples generally accepted in the United States of America requires us tomake judgments, estimates, and assumptions regarding uncertainties that affectthe reported amounts of assets and liabilities, disclosure of contingent assetsand liabilities, and the reported amounts of revenues and expenses. Areas thatrequire significant judgments, estimates, and assumptions include theassignment of fair values upon acquisition of goodwill and other intangibleassets, testing for impairment of long-lived assets and valuation of the stockused to consummate our acquisitions. We use historical experience, qualifiedindependent consultants and all available information to make these judgmentsand estimates, and actual results will inevitably differ from those estimatesand assumptions that are used to prepare our financial statements at any giventime.

 

**AccountsReceivable**

 

Accountsreceivable are reduced by an allowance for doubtful accounts that provides areserve with respect to those accounts for which revenue was recognized butwith respect to which management subsequently determines that payment is notexpected to be received. We analyze the balances of accounts receivable toensure that the recorded amounts properly reflect the amounts expected to becollected. This analysis involves the application of varying percentages toeach accounts receivable category based on the age of the uncollectibleaccounts receivable. The amount ultimately recorded as the reserve isdetermined after management also analyzes the collectibility of specific largeor problematic accounts on an individual basis, as well as the overall businessclimate and other factors. Our estimate of the percentage of uncollectibleaccounts may change from time to time and any such change could have a materialimpact on our financial condition and results of operations.

 

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**PurchaseAccounting, Goodwill and Intangible Assets**

 

Allbusiness acquisitions have been accounted for using the purchase method ofaccounting and, accordingly, the statements of operations include the resultsof each acquired business since the date of acquisition. The assets acquiredand liabilities assumed are recorded at their estimated fair value asdetermined by management and supported in some cases by an independentthird-party valuation. We finalize the allocation of the purchase price to thefair value of the assets acquired and liabilities assumed when we obtaininformation sufficient to complete the allocation, but in any case, within oneyear after acquisition.

 

Goodwillarising from the acquisitions of businesses is recorded as the excess of thepurchase price over the estimated fair value of the net assets of thebusinesses acquired. Statement of Financial Accounting Standards No. 142 (“Goodwilland Other Intangible Assets”) provides that goodwill is to be tested forimpairment annually or more frequently if circumstances indicate potentialimpairment. Consistent with this standard, we will review goodwill, as well asother intangible assets and long-term assets, for impairment annually or morefrequently as warranted, and if circumstances indicate that the recorded valueof any such other asset is impaired, such asset is written down to its new,lower fair value. If any item of goodwill or such other asset is determined tobe impaired, an impairment loss would be recognized equal to the amount bywhich the recorded value exceeds the estimated fair market value.

 

**Stock-BasedCompensation**

 

Wehave used stock grants and stock options to attract and retain directors andkey executives and intend to use stock options in the future to attract, retainand reward employees for long-term service.

 

We account for these stock options under themodified prospective method of SFAS No. 123R, “Share-Based Payment”. In the modifiedprospective method, compensation cost is recognized for all share-basedpayments granted. We have used the Black-Scholes valuation model to estimatefair value of our stock-based awards which requires various judgmentalassumptions including estimating stock price volatility, forfeiture rates andexpected life. Our computation of expected volatility is based on a combinationof historical and market-based implied volatility. If any of the assumptionsused in the Black-Scholes model change significantly, stock-based compensationexpense may differ materially in the future from that recorded in the currentperiod.

 

**Item 3.****          ****Quantitative and Qualitative Disclosures About Market Risk**

 

InterestRate Risk

 

Ourexposure to interest rate risk arises principally from the variable ratesassociated with our credit facilities with Systran and Comerica Bank. OnSeptember 30, 2007, we had borrowings of approximately $5.3 million under thesefacilities that were subject to variable rates, with a rate at September 30,2007 of 12.5% and 7.25% respectively. As of September 30, 2007, an adversechange of 10% in the interest rate of all such borrowings outstanding (forexample, from 8.0% to 8.8%) would have caused us to incur an increase ininterest expense of approximately $54,975 on an annual basis.

 

Inflation

 

Wedo not believe that inflation has had a material effect on our results ofoperations in recent years and periods. There can be no assurance, however,that we will not be adversely affected by inflation in the future.

 

**Item 4.****          ****Controls and Procedures**

 

Wemaintain disclosure controls and procedures that are designed to ensure thatinformation required to be disclosed in our Exchange Act reports is recorded,processed, summarized and reported within the time periods specified in the SEC’srules and forms and that such information is accumulated and communicated

 

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toour management including our Chief Executive Officer and Chief FinancialOfficer to allow for timely decisions regarding required disclosure. Indesigning and evaluating the disclosure controls and procedures, managementrecognizes that any controls and procedures, no matter how well designed andoperated can provide only reasonable assurance of achieving the desired controlobjectives and management is required to apply its judgment in evaluating thecost-benefit relationship of possible controls and procedures.

 

Asrequired by Rule 13a-15(b) under the Exchange Act, we conducted an evaluationunder the supervision and with the participation of our management, includingour Chief Executive Officer and our Chief Financial Officer, of theeffectiveness of the design and operation of our disclosure controls andprocedures as of the end of the period covered by this report. Based upon theforegoing evaluation, our principal executive officer and our principalfinancial officer concluded that our disclosure controls and procedures wereeffective at the reasonable assurance level as of the end of the fiscal periodcovered by this report.

 

Therewere no changes in our internal controls over financial reporting during ourmost recent fiscal quarter that have materially affected, or are reasonablylikely to materially affect our internal controls over financial reporting.

 

**PART II – OTHER INFORMATION**

 

**Item 1.****          ****Legal Proceedings**

 

Fromtime to time, we may become involved in various lawsuits and legal proceedingswhich arise in the ordinary course of business. However, litigation is subjectto inherent uncertainties, and an adverse result in these or other matters mayarise from time to time that may harm our business. We are not currently awareof any such legal proceedings or claims that we believe will have, individuallyor in the aggregate, a material adverse affect on our business, financialcondition or operating results. The following is a list of claims that weresettled in the nine months ended September 30, 2007. These settlements havebeen disclosed in the financial statements and recorded as of September 30, 2007.

 

*Crdentia Corp. and CRDE Corp. v. Robert Litton and SteveWilliams*; *Cause No.3-06-CV-1182-R; Pending in the United States District Court for the NorthernDistrict of Texas-Dallas Division.*

 

OnJanuary 27, 2006, Crdentia Corp. and CRDE Corp. filed suit against RobertLitton and Steve Williams, the former owners of TravMed, asserting claims forbreach of non-competition/solicitation agreements, breach of fiduciary duty,tortious interference with existing and prospective contracts and businessrelations, and declaratory relief arising out of an Agreement and Plan ofReorganization dated as of March 28, 2005. Among other things, the Companyalleged that the defendants violated their non-competition agreements that theyexecuted in connection with the Agreement and Plan of Reorganization bydiverting business opportunities to a competing business. The Company sought anundisclosed amount of damages. The defendants filed counterclaims againstCrdentia alleging breach of the Agreement and Plan of Reorganization andconversion. The Company settled this case in September 2007. Pursuant to theterms of the Settlement Agreement, Travmed agreed: (i) to release all claims,known or unknown, related to or arising out of the Litigation, (ii) toindemnify the Company from and against all matters or obligations related tocertain creditors expressly identified in the Settlement Agreement and (iii)that the Company shall not have any responsibility to indemnify or defendTravmed from any claims, demands or causes of action arising from any acts oromissions occurring, in whole or in part, during the time period from March 28,2005 to May 8, 2006. Also, pursuant to the terms of the Settlement Agreement,the Company agreed to pay Robert Litton and Steve Williams the sum of $275,000during the quarter ended September 30, 2007.

 

*CrdentiaCorp., CRDE Corp., and Arizona Home Health Care/Private Duty, Inc. v. WilliamW. Crocker and William C. Crocker*

 

OnJanuary 31, 2006, Crdentia Corp., CRDE Corp., and Arizona Home Health Care/PrivateDuty, Inc. filed suit against William W. Crocker and William C. Crocker, theformer owners of Arizona Home Health Care/Private Duty, Inc., asserting claimsfor fraud, indemnity, and declaratory relief arising out of an

 

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Agreementand Plan of Reorganization dated August 6, 2004 and a Receivable AllocationAgreement entered into in connection therewith. Among other things, the Companyalleged that, prior to entering the Agreement and Plan of Reorganization, thedefendants failed to disclose that certain key employees had planned to leavethe company and that the defendants requested and/or instructed such employeesnot to leave prior to the closing of the merger. The Company also alleged thatthe defendants failed to disclose that their company did not possess certainstate licenses necessary to conduct a portion of its business. The Companysought an undisclosed amount of damages. This case was settled in April 2007 asdiscussed below under “*William W. Crocker v.Crdentia Corp.”*

 

*William W. Crocker, an individual, v. CrdentiaCorp., a Delaware Corporation, and Arizona Home Health Care/Private Duty, Inc.,an Arizona Corporation*

 

On February 23, 2006, William W. Crocker filed suitagainst Crdentia Corp. and Arizona Home Health Care/Private Duty, Inc.asserting claims for declaratory judgment, breach of contract, and conversionarising from a Receivable Allocation Agreement executed incident to anAgreement and Plan of Reorganization dated August 6, 2006. Mr. Crocker soughtdamages in the principal sum of $251,150, which was comprised of $114,019 forcollected accounts receivable and eighty percent (80%) of $171,414 ofuncollected accounts receivable, plus attorneys’ fees. The Company settled thiscase in April 2007. The Company issued 312,500 shares of common stock (valuedat $159,375 based on the trading value of stock on April 9, 2007) in exchangefor Crdentia retaining the proceeds from the collection of certain receivablesthat it collected on behalf of Mr. Crocker.

 

*Dawson James Securities, Inc. v. Crdentia Corp.*

 

OnMarch 22, 2006, Dawson James filed suit against Crdentia Corp. seeking fees inconnection with raising investment capital for Crdentia. Dawson James contendedthat under terms of a contract they were owed cash of $235,000 and 50,000warrants to purchase Crdentia stock. The Company settled this case in April2007. The Company agreed to issue 400,000 shares of common stock (valued at$160,000 based on the trading value of stock on April 13, 2007) in full paymentof the obligation which is an amount that is less than what was previouslyaccrued on the Company’s financial statements.

 

**Item 1A. Risk Factors**

 

*Any investment in our common stock involves a high degree of risk. Youshould consider carefully the following information about the risks describedbelow, together with the other information contained in this Form 10-Q beforeyou decide whether to buy our common stock. If any of the following risksactually occur, our business, financial condition, results of operations andcash flows could be materially and adversely affected. In those circumstances,the market price of our common stock could decline, and you may lose all orpart of the money you paid to buy our common stock.*

 

***Our independent registered public accountingfirm issued a going concern opinion on our financial statements, questioningour ability to continue as a going concern.***

*** ***

Our independent registered public accountingfirm’s opinion on our 2006 financial statements includes an explanatoryparagraph indicating substantial doubt about our ability to continue as a goingconcern. Since our inception, we have operated with limited operating capital,and we continue to face immediate and substantial cash needs. We have limitedcash resources and will need to raise additional capital through public orprivate financings or other arrangements in order to meet current commitmentsand continue development of our business. We will need to raise additionalfunds during the next twelve months to satisfy debt service requirements ofapproximately $2.5 million in January 2008 and working capital needs of between$500,000 and $1,000,000 over the next twelve months. We cannot assure you thatadditional capital will be available to us when needed, if at all, or, ifavailable, will be obtained on terms attractive to us. If we are not successfulin raising capital in the short-term we could be unable to meet payroll costs. Failureto raise additional capital when needed could cause us to cease our operations.

 

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We have financed our operations since inceptionprimarily through the private placement of equity and debt securities and loanfacilities. Although we will need to raise funds in the near future, there canbe no assurance that we will be successful in consummating any fundraisingtransaction, or if we do consummate such a transaction, that its terms andconditions will not require us to give investors warrants or other valuablerights to purchase additional interest in our company, or be otherwise unfavorableto us. Among other things, the agreements under which we issued some of ourexisting securities include, and any securities that we may issue in the futuremay also include, terms that could impede our ability to raise additionalfunding. Our projected cash needs are based on management’s current assumptionsregarding our business, including some degree of organic growth. This growthmay not materialize and our assumptions could prove to be inaccurate. We havebeen inaccurate in projecting our cash needs in the past. The issuance ofadditional securities could impose additional restrictions on how we operateand finance our business. In addition, our current debt financing arrangementsinvolve significant interest expense and restrictive covenants that limit ouroperations.

 

***We have a history of losses, and we may not achieve or maintainprofitability.***

*** ***

We have experienced operating and net losses in eachfiscal quarter since our inception, and as of September 30, 2007, we had anaccumulated deficit of $132.2 million. We incurred a net loss of $1.9 millionfor the quarter ended September 30, 2007. We will need to increase revenues andreduce operating expenses to achieve profitability, and we may not be able todo so. Even if we do achieve profitability, we may not be able to sustain orincrease profitability on a quarterly or annual basis in the future. Ourmanagement may not be able to accurately project or give any assurance withrespect to our ability to control development and operating costs and/or expensesin the future. Consequently, as we expand our commercial operations, managementmay not be able to control costs and expenses adequately, and such operationsmay generate losses. If our operating expenses exceed our expectations, ourfinancial performance will be adversely affected. Our failure to achieve andsustain profitability would negatively impact the market price of our commonstock.

 

***We may face difficulties identifying acquisitions and integrating theseacquisitions into our operations. These acquisitions may be unsuccessful,involve significant cash expenditures or expose us to unforeseen liabilities.***

*** ***

We continually evaluate opportunities to acquirehealthcare staffing companies that complement or enhance our business andfrequently have preliminary acquisition discussions with such companies. Since2003, we have acquired ten businesses. These acquisitions involve numerousrisks, including:

 

•                  potential loss of revenues following theacquisition;

 

•                  difficulties integrating acquired personneland distinct cultures into our business;

 

•                  difficulties integrating acquired companiesinto our operating, financial planning and financial reporting systems;

 

•                  diversion of management attention fromexisting operations; and

 

•                  assumption of liabilities and exposure tounforeseen liabilities of acquired companies, including liabilities for theirfailure to comply with healthcare regulations.

 

These acquisitions may also involve significant cashexpenditures, debt incurrence and integration expenses that could seriouslyharm our financial condition and results of operations. We may fail to achieveexpected efficiencies and synergies. Any acquisition may ultimately have anegative impact on our business and financial condition. We may have difficultyin successfully completing planned acquisitions, which could result insignificant cash expenditures for legal and accounting services and take upsignificant time and attention of management.

 

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***There is a limited public market for our common stock, and the tradingprice of our common stock is subject to volatility.***

*** ***

The quotation of shares of our common stock on theOTC Bulletin Board began in 2003. There can be no assurances that an activepublic market will develop or continue for our common stock. The trading priceof our common stock is subject to significant fluctuations. Factors affectingthe trading price of our common stock may include:

 

•                  variations in our financial results;

 

•                  announcements of innovations, new solutions,strategic alliances or significant agreements by us or by our competitors;

 

•                  recruitment or departure of key personnel;

 

•                  changes in estimates of our financial resultsor changes in the recommendations of any securities analysts that elect tofollow our common stock;

 

•                  market conditions in our industry, theindustries of our customers and the economy as a whole; and

 

•                  sales of substantial amounts of our commonstock, or the perception that substantial amounts of our common stock will besold, by our existing stockholders in the public market.

 

***Our need to raise additional capital in the future could have adilutive effect on your investment.***

*** ***

Based on current cash flow projections which containrevenue growth from current operations as well as new acquisitions, weanticipate needing to raise additional capital in the future in order for us tocontinue to operate our business. We will need to raise additional fundsduring the next twelve months to satisfy debt service requirements ofapproximately $2.5 million in January 2008 and working capital needs of between$500,000 and $1,000,000 over the next twelve months. Since the beginning of 2007, we have raised$4.9 million through the sale of common stock at $0.60 per share in eleven closingsof a private placement and $5.7 million through the sales of common stock at$0.30 per share in two closings of a private placement. In addition to raisingmoney through subsequent closings of the private placement, we may raiseadditional capital through the public or private sale of common stock orsecurities convertible into or exercisable for our common stock. Such salescould be consummated at a significant discount to the trading price of ourstock.

 

If we sell additional shares of our common stock,such sales will further dilute the percentage of our equity that our existingstockholders own. In addition, private placement financings could involve theissuance of securities at a price per share that represents a discount to thetrading prices listed for our common stock on the OTC Bulletin Board. Dependingupon the price per share of securities that we sell in the future, astockholder’s interest in us will be further diluted by any adjustments to thenumber of shares and the applicable exercise price required pursuant to theterms of the agreements under which we previously issued securities. Noassurance can be given that previous or future investors, finders or placementagents will not claim that they are entitled to additional anti-dilutionadjustments or dispute the calculation of any such adjustments. Any such claimor dispute could require us to incur material costs and expenses regardless ofthe resolution and, if resolved unfavorably to us, to affect dilutivesecurities issuances or adjustments to previously issued securities. Inaddition, future financings may include provisions requiring us to makeadditional payments to the investors if we fail to obtain or maintain theeffectiveness of SEC registration statements by specified dates or take otherspecified action. Our ability to meet these requirements may depend on actionsby regulators and other third parties, over which we will have no control. Theseprovisions may require us to make payments or issue additional dilutivesecurities, or could

 

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lead to costly and disruptive disputes. In addition,these provisions could require us to record additional non-cash expenses.

 

***Our credit facility and revolving note impose significant expenses onus and we could incur significant additional expenses in the event of default.***

*** ***

In January 2007, we delivered a Master RevolvingNote in the amount of $2.4 million to Comerica Bank (the “Comerica RevolvingNote”). In February 2007, we entered into a $10 million working capitalfacility with Systran Financial Services Corporation (the “Working CapitalFacility”). In connection with our entry into these credit arrangements withComerica and Systran, we terminated our existing revolving credit facility withBridge Healthcare Finance, LLC and term loan credit facility with BridgeOpportunity Finance, LLC. The new Working Capital Facility and ComericaRevolving Note involve significant interest expenses. The Working CapitalFacility has an initial term of 48 months, and we are obligated to pay Systrancertain fees upon early termination in the event the arrangement is terminatedprior to the end of the term. Upon the occurrence of certain events of default,Systran may immediately collect any obligation owing to Systran under theWorking Capital Facility. The Comerica Revolving Note provides that, upon theoccurrence of certain events of default, Comerica may, without prior notice tous, declare any or all of the indebtedness payable under the note immediatelydue and payable. Our failure to pay required interest expenses and other feesor to otherwise satisfy the terms of these credit arrangements would have amaterial adverse affect on us.

 

***The agreements governing the convertible debentures contain covenantsand restrictions that may limit our ability to operate our business.***

*** ***

The terms of our 2006 convertible debentures limitour ability to, among other things, declare or pay dividends or distributionson any equity securities, create or incur additional indebtedness, createadditional liens on our assets and repurchase common stock. These restrictionscould adversely affect our ability to borrow additional funds or raiseadditional equity to fund our future operations. In addition, if we fail tocomply with any of the covenants contained in the agreements or otherwisedefault on the convertible debentures, the holders may accelerate theindebtedness, and we may not have sufficient funds available to make therequired payments.

 

***MedCap Partners L.P. controls a significant amount of our outstandingcapital stock, and this may delay or prevent a change of control of the companyor adversely affect our stock price.***

*** ***

MedCap Partners L.P. and MedCap Master Fund L.P.(the “MedCap Funds”) control a significant portion of our outstanding capitalstock. In addition, C. Fred Toney, Chairman of our board of directors, is themanaging member of MedCap Management & Research LLC, the general partner ofthe MedCap Funds. MedCap is able to exercise influence over matters requiringstockholder approval, such as the election of directors and the approval ofsignificant corporate transactions, including transactions involving an actualor potential change of control of the company or other transactions that thenon-controlling stockholders may deem to be in their best interests and inwhich such stockholders could receive a premium for their shares.

 

***We incur significant costs as a result ofoperating as a public company, and our management is required to devotesubstantial time to comply with public company regulations.***

 

Asa public company, we incur significant legal, accounting and other expensesthat we would not otherwise incur if we were a private company. In addition,the Sarbanes-Oxley Act of 2002 and rules subsequently implemented by the SEChave imposed various requirements on public companies, including changes incorporate governance practices. The Sarbanes-Oxley Act requires us to maintaineffective disclosure controls and procedures and internal controls forfinancial reporting. In order to maintain and improve the effectiveness of ourdisclosure controls and procedures and internal controls over financialreporting, significant resources and management oversight are required. Ourmanagement and other personnel need to devote a substantial amount of time tothese requirements. We have limited internal financial and accountingresources, and these resources may not be sufficient to support our required

 

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compliancewith these rules and regulations. Moreover, these rules and regulationsincrease our legal and financial compliance costs and make some activities moretime-consuming and costly.

 

Inaddition, commencing in fiscal 2007, we must now perform system and processevaluation and testing of our internal controls over financial reporting toallow management to report on the effectiveness of our internal controls overfinancial reporting, as required by Section 404 of the Sarbanes-Oxley Act. Ourcompliance with Section 404 requires that we incur substantial expense andexpend significant management efforts. If we identify deficiencies in ourinternal controls over financial reporting that are deemed to be materialweaknesses, the market price of our stock could decline and we could be subjectto sanctions or investigations by the SEC or other regulatory authorities.

 

***Ifwe do not continue to*** attract and retain key employees our business could suffer.

*** ***

We are dependent upon the personal efforts of ourmanagement team. The loss of any of our officers or directors could have amaterial adverse effect upon our business and future prospects. In particular,we depend on our Chief Executive Officer, John Kaiser. We do not presently havekey-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 requirethe services of additional skilled personnel. There can be no assurance that wecan attract persons with the requisite skills and training to meet our futureneeds or, even if such persons are available, that they can be hired on termsfavorable to us.

 

Our success also depends on our ability to attractand retain qualified and skilled sales personnel who engage in selling andbusiness development for our services. The available pool of qualified salespersonnel candidates is limited. We commit substantial resources to therecruitment, training, development and operational support of our salespersonnel. There can be no assurance that we will be able to recruit, developand retain qualified sales personnel in sufficient numbers or that our salespersonnel will achieve productivity levels sufficient to enable growth of ourbusiness. Failure to attract and retain productive sales personnel couldadversely affect our business, financial condition and results of operations.

 

***If we are unable to attract qualified nurses and healthcareprofessionals for our healthcare staffing business, our business could benegatively impacted.***

*** ***

We rely significantly on our ability to attract andretain nurses and healthcare professionals who possess the skills, experienceand licenses necessary to meet the requirements of our hospital and healthcarefacility clients. We compete for healthcare staffing personnel with othertemporary healthcare staffing companies and with hospitals and healthcarefacilities. We must continually evaluate and expand our temporary healthcareprofessional network to keep pace with our hospital and healthcare facilityclients’ needs. Currently, there is a shortage of qualified nurses in mostareas of the United States, competition for nursing personnel is increasing,and salaries and benefits have risen. We may be unable to continue to increasethe number of temporary healthcare professionals that we recruit, decreasingthe potential for growth of our business. Our ability to attract and retaintemporary healthcare professionals depends on several factors, including ourability to provide temporary healthcare professionals with assignments thatthey 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 costof attracting temporary healthcare professionals and providing them withattractive 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 facilityclients, our losses could increase. Moreover, if we are unable to attract andretain temporary healthcare professionals, the quality of our services to ourhospital and healthcare facility clients may decline and, as a result, we couldlose clients.

 

***The temporary staffing industry is highly competitive and the successand future growth of our business depends upon our ability to remaincompetitive in obtaining and retaining temporary staffing clients.***

*** ***

The temporary staffing industry is highlycompetitive and fragmented, with limited barriers to entry. We compete innational, regional and local markets with full-service agencies and in regionaland local markets with specialized temporary staffing agencies. Some of ourcompetitors include AMN Healthcare Services, Inc., Cross Country, Inc., MedicalStaffing Network Holdings, Inc. and On Assignment, Inc. All of these companieshave significantly greater marketing and financial resources than we do. Ourability to attract 

 

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and retain clients is based on the value of theservice we deliver, which in turn depends principally on the speed with whichwe fill assignments and the appropriateness of the match based on clients’requirements and the skills and experience of our temporary employees. Ourability to attract skilled, experienced temporary professionals is based on ourability to pay competitive wages, to provide competitive benefits, to providemultiple, continuous assignments and thereby increase the retention rate ofthese employees. To the extent that competitors seek to gain or retain marketshare by reducing prices or increasing marketing expenditures, we could loserevenues and our margins could decline, which could seriously harm ouroperating results and cause the trading price of our stock to decline. As weexpand into new geographic markets, our success will depend in part on ourability to gain market share from competitors. We expect competition forclients to increase in the future, and the success and growth of our businessdepends on our ability to remain competitive.

 

***Our business depends upon our continued ability to secure and fill neworders from our hospital and healthcare facility clients, because we do nothave long-term agreements or exclusive contracts with them.***

*** ***

We generally do not have long-term agreements orexclusive guaranteed order contracts with our hospital and healthcare facilityclients. The success of our business depends upon our ability to continuallysecure new orders from hospitals and other healthcare facilities and to fillthose orders with our temporary healthcare professionals. Our hospital andhealthcare facility clients are free to place orders with our competitors andmay choose to use temporary healthcare professionals that our competitors offerthem. Therefore, we must maintain positive relationships with our hospital and healthcarefacility clients. If we fail to maintain positive relationships with ourhospital and healthcare facility clients, we may be unable to generate newtemporary healthcare professional orders and our business may be adverselyaffected.

 

***Fluctuations in patient occupancy at our clients’ hospitals andhealthcare facilities and/or nurse turnover rates may adversely affect thedemand for our services and therefore the profitability of our business.***

*** ***

Demand for our temporary healthcare staffingservices is significantly affected by the general level of patient occupancy atour hospital and healthcare clients’ facilities. When occupancy increases,hospitals and other healthcare facilities often add temporary employees beforefull-time employees are hired. As occupancy decreases, hospitals and otherhealthcare facilities typically reduce their use of temporary employees beforeundertaking layoffs of their regular employees. In addition, we may experiencemore competitive pricing pressure during periods of occupancy downturn. Occupancyat our clients’ hospitals and healthcare facilities also fluctuates due to theseasonality of some elective procedures. We are unable to predict the level ofpatient occupancy at any particular time and the effect on our revenues andearnings.

 

***We could be difficult to acquire due to anti-takeover provisions in ourcharter documents and Delaware law.***

*** ***

Provisions of our certificate of incorporation andbylaws may have the effect of making it more difficult for a third party to acquire,or of discouraging a third party from attempting to acquire control of us. Theseprovisions may make it more difficult for stockholders to take corporateactions and may have the effect of delaying or preventing a change in control. Weare subject to the anti-takeover provisions of Section 203 of the DelawareGeneral Corporation Law. Subject to specified exceptions, including theapproval of the transaction by the board of directors or the corporation’sstockholders, this section provides that a corporation may not engage in anybusiness combination with any interested stockholder during the three-yearperiod following the time that such stockholder becomes an interestedstockholder. This provision could have the effect of delaying or preventing achange of control of us. These factors could limit the price that investors oran acquirer may be willing to pay in the future for shares of our common stock.

 

***We operate in a regulated industry and changes in regulations orviolations of regulations may result in increased costs or sanctions that couldreduce our revenues and profitability.***

*** ***

The healthcare industry is subject to extensive andcomplex federal and state laws and regulations related to professionallicensure, conduct of operations, payment for services and payment forreferrals. If we fail to

 

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comply with the laws and regulations that aredirectly applicable to our business, we could suffer civil and/or criminalpenalties or be subject to injunctions or cease and desist orders.

 

Our business is generally not subject to theextensive and complex laws that apply to our hospital and healthcare facilityclients, including laws related to Medicare, Medicaid and other federal andstate healthcare programs. However, these laws and regulations could indirectlyaffect the demand or the prices paid for our services. For example, ourhospital and healthcare facility clients could suffer civil or criminalpenalties or be excluded from participating in Medicare, Medicaid and otherhealthcare programs if they fail to comply with the laws and regulationsapplicable to their businesses. In addition, our hospital and healthcarefacility clients could receive reduced reimbursements, or be excluded fromcoverage, because of a change in the rates or conditions set by federal orstate governments. In turn, violations of or changes to these laws andregulations that adversely affect our hospital and healthcare facility clientscould also adversely affect the prices that these clients are willing or ableto pay for our services.

 

In addition, improper actions by our employees andother service providers may subject us to regulatory and litigation risk.

 

***Further government regulations or healthcare reform could negatively impactour business opportunities, revenues and margins.***

*** ***

Although our operations are not currently subject toany significant government regulations, it is possible that, in the future,such regulations may be created. Although we cannot predict the likelihood orextent of such future regulations, the possibility exists that futureunforeseen changes may have an adverse impact on our ability to continue orexpand our operations as presently planned.

 

The United States government has undertaken effortsto control increasing healthcare costs through legislation, regulation andvoluntary agreements with medical care providers and drug companies. In therecent past, the United States Congress has considered several comprehensivehealthcare reform proposals. The proposals were generally intended to expandhealthcare coverage for the uninsured and reduce the growth of total healthcareexpenditures. While Congress did not adopt any comprehensive reform proposals,members of Congress may raise similar proposals in the future. If any of theseproposals are approved, hospitals and other healthcare facilities may react byspending less on healthcare staffing, including nurses. If this were to occur,we would have fewer business opportunities, which could seriously harm ourbusiness.

 

State governments have also attempted to controlincreasing healthcare costs. For example, the State of Massachusetts hasrecently implemented a regulation that limits the hourly rate payable totemporary nursing agencies for registered nurses, licensed practical nurses andcertified nurses’ aides. The State of Minnesota has also implemented a statutethat limits the amount that nursing agencies may charge nursing homes. Otherstates have also proposed legislation that would limit the amounts thattemporary staffing companies may charge. Any such current or proposed lawscould seriously harm our business, revenues and margins.

 

Furthermore, third party payers, such as healthmaintenance organizations, increasingly challenge the prices charged formedical care. Failure by hospitals and other healthcare facilities to obtainfull reimbursement from those third party payers could reduce the demand or theprice paid for our staffing services.

 

***Significant legal actions could subject us to substantial uninsuredliabilities.***

*** ***

In recent years, healthcare providers have becomesubject to an increasing number of legal actions alleging malpractice, productliability or related legal theories. Many of these actions involve large claimsand significant defense costs. In addition, we may be subject to claims relatedto torts or crimes committed by our employees or temporary healthcareprofessionals. In some instances, we are required to indemnify our clientsagainst some or all of these risks. A failure of any of our employees orhealthcare professionals to observe our policies and guidelines intended toreduce these risks, or to observe relevant client policies and guidelines orapplicable federal, state or local laws, rules and regulations, could result innegative publicity, payment of fines or other damages. Our professionalmalpractice liability insurance and general liability insurance coverage maynot cover all claims against us or continue to be available to us at areasonable

 

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cost. If we are unable to maintain adequateinsurance coverage or if our insurers deny coverage we may be exposed tosubstantial liabilities.

 

***We may be legally liable for damages resulting from our hospital andhealthcare facility clients’ mistreatment of our healthcare personnel.***

*** ***

Because we are in the business of placing ourtemporary healthcare professionals in the workplaces of other companies, we aresubject to possible claims by our temporary healthcare professionals alleging discrimination,sexual harassment, negligence and other similar activities by our hospital andhealthcare facility clients. The cost of defending such claims, even ifgroundless, could be substantial and the associated negative publicity couldadversely affect our ability to attract and retain qualified healthcareprofessionals in the future.

 

***We have a substantial amount of goodwill and other intangible assets onour balance sheet. Our level of goodwill and other intangible assets may havethe effect of decreasing our earnings or increasing our losses.***

*** ***

As of September 30, 2007, we had $12.2 million ofgoodwill and other unamortized intangible assets on our balance sheet, whichrepresents the excess of the total purchase price of our acquisitions over thefair value of the net assets acquired. At September 30, 2007, goodwill andother intangible assets represented 63% of our total assets. An impairmentcharge of goodwill to earnings would have the effect of decreasing our earningsor increasing our losses, as the case may be. If we are required to write downa substantial amount of goodwill, our stock price could be adversely affected. Asa result of the loss of customer base in some operations, the closure or saleof certain operations, our impairment analysis of goodwill required a chargefor impairment of goodwill of $10.0 million in 2006 and $3.1 million in 2007. Wealso lost certain customer relationships that were obtained with the TravMedacquisition which necessitated a write-down of $123,000 in 2006 related tointangibles assigned to these customer relationships.

 

***Demand for medical staffing services is significantly affected by thegeneral level of economic activity and unemployment in the United States.***

*** ***

Wheneconomic activity increases, temporary employees are often added beforefull-time employees are hired. However, as economic activity slows, manycompanies, including our hospital and healthcare facility clients, reduce theiruse of temporary employees before laying-off full-time employees. In addition,we may experience more competitive pricing pressure during periods of economicdownturn. Therefore, any significant economic downturn could have a materialadverse impact on our financial position and results of operations.

 

**Item 2.****          ****Unregistered Sales of EquitySecurities and Use of Proceeds**

 

None

 

**Item 3.****          ****Defaults Upon Senior Securities**

 

None

 

**Item 4.****          ****Submission of Matters to a Voteof Security Holders**

 

None

 

**Item 5.****          ****Other Information**

 

None

 

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**Item 6.****          ****Exhibits**

 
| **Exhibit  No.** | ** ** | **Description**                                                                                                                                                   |
|------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|             |       |                                                                                                                                                              |
| 3.1(2)           |       | Restated  Certificate of Incorporation.                                                                                                                           |
|             |       |                                                                                                                                                              |
| 3.2(2)           |       | Restated  Bylaws.                                                                                                                                                 |
|             |       |                                                                                                                                                              |
| 3.3(1)           |       | Certificate  of Amendment to Restated Certificate of Incorporation.                                                                                               |
|             |       |                                                                                                                                                              |
| 3.4(3)           |       | Certificate  of Amendment to Restated Certificate of Incorporation.                                                                                               |
|             |       |                                                                                                                                                              |
| 3.5(3)           |       | Certificate  of Correction of Certificate of Amendment to Restated Certificate of  Incorporation.                                                                 |
|             |       |                                                                                                                                                              |
| 3.6(3)           |       | Certificate  of Correction of Certificate of Amendment to Restated Certificate of  Incorporation.                                                                 |
|             |       |                                                                                                                                                              |
| 3.7(4)           |       | Certificate  of Amendment to Restated Certificate of Incorporation.                                                                                               |
|             |       |                                                                                                                                                              |
| 10.79(5)         |       | Securities  Purchase Agreement, dated January 25, 2007, by and among  Crdentia Corp. and the investors identified on the signature  pages thereto. |
|             |       |                                                                                                                                                              |
| 10.80(5)         |       | Registration  Rights Agreement, dated January 25, 2007, by and among Crdentia Corp and the  investors identified on the signature pages thereto.                  |
|             |       |                                                                                                                                                              |
| 10.92(6)         |       | Settlement  Agreement by and between Crdentia Corp. and iVOW, Inc., dated as of April 4,  2007.                                                                   |
|             |       |                                                                                                                                                              |
| 10.93(6)         |       | Registration  Rights Agreement by and between Crdentia Corp. and iVOW, Inc., dated as of  April 4, 2007.                                                          |
|             |       |                                                                                                                                                              |
| 10.94(7)         |       | Settlement  Agreement by and between Crdentia Corp. and Dawson James Securities, Inc.,  dated April 13, 2007.                                                     |
|             |       |                                                                                                                                                              |
| 10.95(8)         |       | Registration  Rights Agreement dated April 13, 2007 by and between Crdentia Corp. and  Dawson James Securities, Inc.                                              |
|             |       |                                                                                                                                                              |
| 10.97(9)         |       | Services  Agreement by and between Crdentia Corp. and AudioStocks, Inc., dated as of  June 25, 2007.                                                              |
|             |       |                                                                                                                                                              |
| 10.98(9)         |       | Warrant  to Purchase Common Stock of Crdentia Corp. as issued to AudioStocks, Inc.,  dated as of June 25, 2007.                                                   |
|             |       |                                                                                                                                                              |
| 10.100(10)       |       | Asset  Purchase Agreement by and between Crdentia Corp., Matthew J. Cahillane and C.  Michael Emery, dated as of June 30, 2007.                                   |
|             |       |                                                                                                                                                              |
| 10.101(11)       |       | Settlement  Agreement by and between Crdentia Corp., Travmed USA, Inc., Robert Litton and  Steve Williams.                                                        |
|             |       |                                                                                                                                                              |
| 10.102(12)       |       | Securities  Purchase Agreement, dated October 26, 2007, by and among Crdentia Corp. and  the investors identified on the signature pages thereto.                 |
|             |       |                                                                                                                                                              |
| 10.103(12)       |       | Registration  Rights Agreement, dated October 26, 2007, by and among Crdentia Corp. and the  investors identified on the signature pages thereto.                 |
|             |       |                                                                                                                                                              |
| 10.104(12)       |       | Form  of Common Stock Purchase Warrant, dated October 26, 2007.                                                                                                   |

 

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| 10.105(13) |   | Membership  Interest Purchase Agreement by and among Crdentia Corp., CRDE Corp., ATS  Universal, LLC, and the members of ATS Universal, LLC dated as of October 22,  2007.                                                     |
|------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |   |                                                                                                                                                                                                                           |
| 10.106(13) |   | Asset  Purchase Agreement by and among Crdentia Corp., CRDE Corp., MP Health Corp.,  Medical People Healthcare Services, Inc., and the shareholders of Medical  People Healthcare Services, Inc. dated as of October 22, 2007. |
|       |   |                                                                                                                                                                                                                           |
| 10.107(13) |   | Common  Stock Purchase Warrant of Crdentia Corp. issued to FatBoy Capital, LP as of  October 26, 2007.                                                                                                                         |
|       |   |                                                                                                                                                                                                                           |
| 31.1       |   | Certification  of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002.                                                                                                                          |
|       |   |                                                                                                                                                                                                                           |
| 31.2       |   | Certification  of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002.                                                                                                                          |
|       |   |                                                                                                                                                                                                                           |
| 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.                                                                                                                          |

 

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(1)           Previously filed on Form 10-QSB with theSecurities and Exchange Commission on August 12,                              2003 and incorporated herein by reference.

(2)           Previously filed on Form 8-K with theSecurities and Exchange Commission on August 22, 2002                        and incorporated herein by reference.

(3)           Previously filed on Form 8-K/A with theSecurities and Exchange Commission on June 28, 2004                          and incorporated herein by reference.

(4)           Previously filed on Form 8-K with theSecurities and Exchange Commission on January 7, 2005                             and incorporated herein by reference.

(5)           Previously filed with a Current Report onForm 8-K dated January 29, 2007 and incorporated                                          herein by reference.

(6)           Previously filed with a Current Report onForm 8-K dated April 4, 2007 and incorporated herein                           by reference.

(7)           Previously filed with a Current Report onForm 8-K dated April 12, 2007 and incorporated herein                     by reference.

(8)           Previously filed on Form 10-Q with theSecurities and Exchange Commission on May 15, 2007 and incorporated herein byreference.

(9)           Previously filed with a Current Report onForm 8-K dated June 25, 2007 and incorporated herein by reference.

(10)         Previously filed with a Current Report onForm 8-K dated June 30, 2007 and incorporated herein by reference.

(11)         Previously filed with a Current Report on Form8-K dated September 14, 2007 and incorporated herein by reference.

(12)         Previously filed with a Current Report onForm 8-K dated October 26, 2007 and incorporated herein by reference.

(13)         Previously filed with a Current Report onForm 8-K dated October 26, 2007 and incorporated herein by reference.

 

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**SIGNATURES**

 

Pursuantto the requirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the Registrant has duly caused this Report to be signed on its behalf bythe undersigned, thereunto duly authorized.

 

 
|                      | CRDENTIA CORP.                        |
|---------------------------|---------------------------------------|
|                      |                                  |
| Dated:  November 14, 2007 | By:                                   |  /s/ John Kaiser |   |
|                      | John  Kaiser                          |
|                      | Chief  Executive Officer and Director |
|                      | (Principal  Executive Officer)        |
|                      |                                  |
|                      |                                  |
| Dated:  November 14, 2007 | By:                                   |  /s/ James J. TerBeest |   |
|                      | James  J. TerBeest                    |
|                      | Chief  Financial Officer              |
|                      | (Principal  Financial and Accounting  |
|                      | Officer)                              |

 

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