**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**x****        QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934**

** **

**For the quarterly period ended March 31, 2008**

 

**o****        TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934**

 

**Commission file number: 0-31152**

 

**CRDENTIA CORP.**

(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 tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.                                                              Yes  **x**  No  **o**

 

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

 

| Large accelerated filer o                      |   | Accelerated filer o         |
|------------------------------------------------|--------|-----------------------------|
|                                           |   |                        |
| Non-accelerated filer o                        |   | Smaller reporting company x |
| (Do not check if a smaller reporting  company) |   |                        |

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-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 May 12, 2008, 50,673,796 shares of common stock, $.0001 parvalue, were outstanding.

 

 

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** **

**CRDENTIA CORP.**

 

Form 10-Q Quarterly Report

For Quarterly Period Ended March 31, 2008

 

**Table of Contents**

 
| ** **                                                                                                         | ** **                                                                                  | **Page** |
|--------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------|----------|
|                                                                                                               |                                                                                        |     |
| **PART I -  FINANCIAL INFORMATION**                                                                           | 3                                                                                           |
|                                                                                                               |                                                                                        |     |
| Item 1.                                                                                                            | Financial Statements                                                                        | 3        |
|                                                                                                               |                                                                                        |     |
| Unaudited  Condensed Consolidated Balance Sheets at March 31, 2008 and December 31, 2007                 | 3                                                                                           |
|                                                                                                               |                                                                                        |     |
| Unaudited  Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2008 and 2007 | 4                                                                                           |
|                                                                                                               |                                                                                        |     |
| Unaudited  Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2008 and 2007 | 5                                                                                           |
|                                                                                                               |                                                                                        |     |
| Notes to Unaudited Condensed Consolidated Financial  Statements                                                    | 6                                                                                           |
|                                                                                                               |                                                                                        |     |
| Item 2.                                                                                                            | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 16       |
|                                                                                                               |                                                                                        |     |
| Item 4.                                                                                                            | Controls and  Procedures                                                                    | 22       |
|                                                                                                               |                                                                                        |     |
| **PART II  - OTHER INFORMATION**                                                                              | 23                                                                                          |
|                                                                                                               |                                                                                        |     |
| Item 1.                                                                                                            | Legal Proceedings                                                                           | 23       |
|                                                                                                               |                                                                                        |     |
| Item  1A.                                                                                                          | Risk Factors                                                                                | 23       |
|                                                                                                               |                                                                                        |     |
| Item 2.                                                                                                            | Unregistered  Sales of Equity Securities and Use of Proceeds                                | 31       |
|                                                                                                               |                                                                                        |     |
| Item 3.                                                                                                            | Defaults Upon  Senior Securities                                                            | 31       |
|                                                                                                               |                                                                                        |     |
| Item 4.                                                                                                            | Submission of  Matters to a Vote of Security Holders                                        | 31       |
|                                                                                                               |                                                                                        |     |
| Item 5.                                                                                                            | Other Information                                                                           | 31       |
|                                                                                                               |                                                                                        |     |
| Item  6.                                                                                                           | Exhibits                                                                                    | 31       |
|                                                                                                               |                                                                                        |     |
| **SIGNATURES**                                                                                                     | 34                                                                                          |

 

2

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**PART I– FINANCIAL INFORMATION**

Item 1.    Financial Statements

 

Crdentia Corp.

Unaudited CondensedConsolidated Balance Sheets

 
| ** **                                                                                                                                                                                                                                                  | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                                                  | ** ** | **2008**           | ** ** | **2007**              | ** ** |
|                                                                                                                                                                                                                                                        |       |               |       |                  |       |
| Current assets:                                                                                                                                                                                                                                             |       |               |       |                  |       |
| Cash and cash equivalents                                                                                                                                                                                                                                   |       | $                  | 459,246    |                  | $          | 94,470 |   |
| Accounts receivable, net of allowance for doubtful accounts of  $995,000 and $961,160, respectively                                                                                                                                                         |       | 6,849,483          |       | 6,081,131             |       |
| Other current assets                                                                                                                                                                                                                                        |       | 1,668,977          |       | 1,748,315             |       |
| Total current assets                                                                                                                                                                                                                                        |       | 8,977,706          |       | 7,923,916             |       |
|                                                                                                                                                                                                                                                        |       |               |       |                  |       |
| Property and equipment, net                                                                                                                                                                                                                                 |       | 465,079            |       | 344,212               |       |
| Goodwill                                                                                                                                                                                                                                                    |       | 15,063,047         |       | 15,063,047            |       |
| Intangible assets, net                                                                                                                                                                                                                                      |       | 1,166,594          |       | 1,272,164             |       |
| Other assets                                                                                                                                                                                                                                                |       | 692,045            |       | 243,969               |       |
|                                                                                                                                                                                                                                                        |       |               |       |                  |       |
| Total assets                                                                                                                                                                                                                                                |       | $                  | 26,364,471 |                  | $          | 24,847,308 |   |
|                                                                                                                                                                                                                                                        |       |               |       |                  |       |
| Current liabilities:                                                                                                                                                                                                                                        |       |               |       |                  |       |
| Revolving lines of credit                                                                                                                                                                                                                                   |       | $                  | 4,849,818  |                  | $          | 4,355,338 |   |
| Accounts payable and accrued expenses                                                                                                                                                                                                                       |       | 4,078,912          |       | 3,627,305             |       |
| Accrued employee compensation and benefits                                                                                                                                                                                                                  |       | 994,479            |       | 880,718               |       |
| Current portion of notes payable including amounts due to significant  stockholders of $925,282 at March 31, 2008 and $935,425 at  December 31, 2008                                                                                              |       | 1,234,373          |       | 1,534,333             |       |
| Notes payable to lender                                                                                                                                                                                                                                     |       | —             |       | 2,075,000             |       |
| Debentures, net of discount of $115,312 at March 31, 2008                                                                                                                                                                                              |       | 409,688            |       | —                |       |
| Other current liabilities                                                                                                                                                                                                                                   |       | 948,971            |       | 725,053               |       |
| Total current liabilities                                                                                                                                                                                                                                   |       | 12,516,241         |       | 13,197,747            |       |
|                                                                                                                                                                                                                                                        |       |               |       |                  |       |
| Debentures, net of discount of $153,750 at December 31, 2007                                                                                                                                                                                           |       | —             |       | 371,250               |       |
| Long-term bonus payable, net of current portion                                                                                                                                                                                                             |       | —             |       | 495,864               |       |
| Long-term notes payable, net of discount of $973,864 at  March 31, 2008                                                                                                                                                                                |       | 4,401,803          |       | 375,667               |       |
| Other long-term liabilities                                                                                                                                                                                                                                 |       | 95,943             |       | —                |       |
|                                                                                                                                                                                                                                                        |       |               |       |                  |       |
| Total liabilities                                                                                                                                                                                                                                           |       | 17,013,987         |       | 14,440,528            |       |
|                                                                                                                                                                                                                                                        |       |               |       |                  |       |
| Commitments and contingencies                                                                                                                                                                                                                               |       |               |       |                  |       |
|                                                                                                                                                                                                                                                        |       |               |       |                  |       |
| Stockholders’ equity:                                                                                                                                                                                                                                  |       |               |       |                  |       |
| Preferred stock, 10,000,000 shares authorized no shares issued and  outstanding                                                                                                                                                                             |       | —             |       | —                |       |
| Common stock, par value $0.0001, 150,000,000 shares authorized at March 31,  2008 and December 31, 2007; 49,973,795 shares issued and outstanding at  March 31, 2008 and 49,860,327 shares issued and outstanding at  December 31, 2007 |       | 4,997              |       | 4,986                 |       |
| Additional paid-in capital                                                                                                                                                                                                                                  |       | 146,481,562        |       | 145,235,911           |       |
| Accumulated deficit                                                                                                                                                                                                                                         |       | (137,136,075       | )          | (134,834,117          | )          |
| Total stockholders’ equity                                                                                                                                                                                                                             |       | 9,350,484          |       | 10,406,780            |       |
|                                                                                                                                                                                                                                                        |       |               |       |                  |       |
| Total liabilities and stockholders’ equity                                                                                                                                                                                                             |       | $                  | 26,364,471 |                  | $          | 24,847,308 |   |

 

The accompanying notesare an integral part of these unaudited condensed consolidated financialstatements.

 

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Crdentia Corp.

UnauditedCondensed Consolidated Statements of Operations

 
| ** **                                                | ** ** | **Three Months Ended March 31,** | ** ** |
|-----------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                | ** ** | **2008**                                             | ** ** | **2007** | ** ** |
|                                                      |       |                                                 |       |   |   |
| Revenue from services                                     |       | $                                                    | 10,579,387 |   | $ | 8,097,329 |   |
| Direct operating expenses                                 |       | 8,268,533                                            |       | 6,385,179 |   |
|                                                      |       |                                                 |       |   |   |
| Gross profit                                              |       | 2,310,854                                            |       | 1,712,150 |   |
|                                                      |       |                                                 |       |   |   |
| Selling, general, and administrative expenses             |       | 3,848,356                                            |       | 6,291,043 |   |
|                                                      |       |                                                 |       |   |   |
| Loss from continuing operations before interest and taxes |       | (1,537,502                                           | )          | (4,578,893 | ) |
|                                                      |       |                                                 |       |   |   |
| Interest expense, net                                     |       | (764,456                                             | )          | (2,106,786 | ) |
|                                                      |       |                                                 |       |   |   |
| Loss from continuing operations before income taxes       |       | (2,301,958                                           | )          | (6,685,679 | ) |
|                                                      |       |                                                 |       |   |   |
| Income tax expense                                        |       | —                                               |       | — |   |
|                                                      |       |                                                 |       |   |   |
| Loss from continuing operations                           |       | (2,301,958                                           | )          | (6,685,679 | ) |
|                                                      |       |                                                 |       |   |   |
| Income from discontinued operations                       |       | —                                               |       | 96,599 |   |
|                                                      |       |                                                 |       |   |   |
| Net loss                                                  |       | $                                                    | (2,301,958 | ) | $ | (6,589,080 | ) |
|                                                      |       |                                                 |       |   |   |
| Net loss per share - basic and diluted;                   |       |                                                 |       |   |   |
| Loss from continuing operations                           |       | $                                                    | (0.05      | ) | $ | (0.39 | ) |
| Income from discontinued operations                       |       | —                                               |       | 0.01 |   |
| Basic and diluted loss per common share                   |       | $                                                    | (0.05      | ) | $ | (0.38 | ) |
|                                                      |       |                                                 |       |   |   |
| Weighted average number of common shares outstanding      |       | 47,572,548                                           |       | 17,365,298 |   |

 

The accompanying notes are an integral part of these unauditedcondensed consolidated financial statements.

 

4

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Crdentia Corp.

Unaudited CondensedConsolidated Statements of Cash Flows

 
| ** **                                                                    | ** ** | **Three Months Ended March 31,** | ** ** |
|-------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                    | ** ** | **2008**                                             | ** ** | **2007** | ** ** |
| Operating activities:                                                         |       |                                                 |       |   |   |
| Net loss                                                                      |       | $                                                    | (2,301,958 | ) | $ | (6,589,080 | ) |
| Adjustments to reconcile net loss to net cash used in operating  activities:  |       |                                                 |       |   |   |
| Non-cash interest expense                                                     |       | 143,841                                              |       | 1,232,639 |   |
| Depreciation and amortization                                                 |       | 165,321                                              |       | 249,002 |   |
| Bad debt expense                                                              |       | 34,447                                               |       | 6,306 |   |
| Non-cash stock based compensation                                             |       | 194,796                                              |       | 3,391,392 |   |
| Changes in operating assets and liabilities, net of effects of  acquisitions: |       |                                                 |       |   |   |
| Accounts receivable                                                           |       | (802,799                                             | )          | 207,815 |   |
| Other current assets and liabilities                                          |       | 354,422                                              |       | (663,873 | ) |
| Accounts payable and accrued expenses                                         |       | (51,632                                              | )          | (55,961 | ) |
| Accrued employee compensation and benefits                                    |       | 113,762                                              |       | (63,426 | ) |
| Long-term bonus payable                                                       |       | 22,068                                               |       | 22,068 |   |
| Net cash used in operating activities                                         |       | (2,127,732                                           | )          | (2,263,118 | ) |
|                                                                          |       |                                                 |       |   |   |
| Investing activities:                                                         |       |                                                 |       |   |   |
| Purchases of property and equipment                                           |       | (45,202                                              | )          | (33,340 | ) |
|                                                                          |       |                                                 |       |   |   |
| Financing activities:                                                         |       |                                                 |       |   |   |
| Proceeds from issuance of common stock, net of costs                          |       | (3,273                                               | )          | 3,152,381 |   |
| Net increase (decrease) in revolving lines of credit                          |       | 494,480                                              |       | (2,355,645 | ) |
| Proceeds from notes payable to lender                                         |       | 6,000,000                                            |       | 2,400,000 |   |
| Repayment of notes payable                                                    |       | (299,960                                             | )          | — |   |
| Repayment of note payable to lender                                           |       | (3,075,000                                           | )          | (781,867 | ) |
| Debt issuance costs                                                           |       | (578,537                                             | )          | — |   |
| Net cash provided by financing activities                                     |       | 2,537,710                                            |       | 2,414,869 |   |
|                                                                          |       |                                                 |       |   |   |
| Net increase (decrease) in cash and cash equivalents                          |       | 364,776                                              |       | 118,411 |   |
| Cash and cash equivalents at beginning of period                              |       | 94,470                                               |       | 198,068 |   |
| Cash and cash equivalents at end of period                                    |       | $                                                    | 459,246    |   | $ | 316,479 |   |

 

The accompanying notes are an integral part of these unauditedcondensed consolidated financial statements.

 

5

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** **

**Crdentia Corp.**

**Notes to Unaudited CondensedConsolidated Financial Statements**

**March 31, 2008**

 

**Note 1    Organization and Summary of Significant Accounting Policies**

 

Organization

 

Crdentia Corp (the “Company”), a Delawarecorporation, is a provider of healthcare staffing services in the UnitedStates.  Such services include travelnursing, per diem staffing, contractual clinical services, locum tenens(physician staffing), allied services (diagnostic imaging, respiratory,laboratory, therapies and administrative modalities), and private duty homehealth care.  The Company considers theseservices to be one segment.  Each ofthese services relate solely to providing healthcare staffing to customers andthe Company utilizes common systems, databases, procedures, processes andsimilar 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.  In 2003, the Company acquired Baker AndersonChristie, Inc., New Age Nurses, Inc., Nurses Network, Inc., andPSR Nurse Recruiting, Inc. and PSR Nurses Holdings Corp., which holds thelimited partner and general partner interests in PSR Nurses, Ltd. to providethe foundation for future growth.  During2004, the Company completed the acquisitions of Arizona Home Health Care/PrivateDuty, Inc. and Care Pros Staffing, Inc.  On March 29, 2005, the Company acquiredTravMed USA, Inc. and Health Industry Professionals, LLC.  On May 4, 2005, the Company acquiredPrime Staff, LP and Mint Medical Staffing Odessa.  In April 2006, the Company acquired theassets of Staff Search Ltd.  In October 2007,the Company acquired ATS Universal, LLC and in November 2007 it acquiredthe assets of Medical People Healthcare Services, Inc.

 

During 2006 the Company terminated the operations itacquired in 2003 from Baker Anderson Christie, Inc. and Nurses Network, Inc.  In addition, during 2006 the Company returnedto the sellers the shares of TravMed USA, Inc. that it had acquired fromthe sellers in March 2005 and the notes payable to the sellers werecancelled.  On June 30, 2007 theCompany sold certain assets of Health Industry Professionals, LLC back to theoriginal sellers.

 

The accompanying financial statements include theresults of the wholly-owned subsidiaries discussed above from their respectivedates of acquisition.  All intercompanytransactions have been eliminated in consolidation.

 

Basis of Presentation

 

The accompanyingunaudited financial data as of March 31, 2008 and for the three monthsended March 31, 2008 and 2007 have been prepared by the Company pursuantto the rules and regulations of the Securities and ExchangeCommission.  Certain information andfootnote disclosures normally included in financial statements prepared inaccordance with accounting principles generally accepted in the United Statesof America have been condensed or omitted pursuant to such rules andregulations.  These unaudited condensedconsolidated financial statements should be read in conjunction with theaudited financial statements and the notes thereto included in the Company’sannual report on Form 10-K for the year ended December 31, 2007.

 

In the opinion ofmanagement, all adjustments (which include normal recurring adjustments)necessary to present fairly the financial position, results of operations, andcash flows as of March 31, 2008 and for the three months ended March 31,2008 and 2007 have been made.  Theresults of operations for the three months ended March 31, 2008 are notnecessarily indicative of the expected operating results for the full year.

 

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Going Concern

 

The Company generated a net loss of $2,301,958 andused cash in operations of $2,127,732 during the three months ended March 31,2008.  Additionally, although the Companyended March 31, 2008 with a significant working capital deficit of$3,538,535, it was able to secure additional debt during the three months endedMarch 31, 2008 to finance its operations as it continued to attempt toexecute its business plan and to acquire and grow companies involved inhealthcare staffing.  The Company willneed to raise between $1,000,000 and $3,000,000 of additional funds during thenext twelve months to satisfy debt service requirements and working capitalneeds, and $750,000 of this will be needed in the second calendar quarter of2008.  There is no assurance that theCompany will be able to raise the amount of debt or equity capital required tomeet its objectives.  The Company’schallenging financial circumstances may make the terms, conditions and cost ofany available capital unfavorable.  Ifadditional debt or equity capital is not readily available, the Company will beforced to scale back its acquisition activities and its operations.  This would result in an overall slowdown ofthe Company’s development.  The Company’sshort-term need for capital may force it to consider and potentially pursueother strategic options sooner than it might otherwise have desired.  These conditions raise substantial doubtabout the Company’s ability to continue as a going concern.  The financial statements do not include anyadjustments to reflect the possible future effects on the recoverability andclassification of assets, or the amounts and classification of liabilities thatmay result from the outcome of this uncertainty.

 

Management has taken a number of steps to addressthe Company’s financial performance and to improve cash flow.  Management has refinanced a majority of theCompany’s debt with new debt that has a lower interest rate, restructured theoperating management team, and implemented programs to obtain expense savingswhich have provided the Company with access to additional working capital.  The Company’s Chief Executive Officer hasstrong operations experience and will devote continual 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.

 

Earnings Per Share

 

Basic per share data has been computed on the lossattributable to common stockholders for each quarter divided by the weightedaverage number of shares of common stock outstanding for each quarter(excluding restricted common stock issued to certain directors, officers andconsultants in 2005 and 2007).  Dilutedearnings per common share includes both the weighted average number of commonshares and any dilutive common share equivalents such as convertiblesecurities, options or warrants in the calculation.  As the Company recorded net losses for thethree months ended March 31, 2008 and 2007, common share equivalentsoutstanding would be anti-dilutive, and as such, have not been included indiluted weighted average shares outstanding. Common share equivalents that were excluded in the three months ended March 31,2008 calculations were 26,120,247 and in the calculations for the three monthsended March 31, 2007, 5,522,321 were excluded.

 

Goodwill Impairment

 

In June 2001, theFinancial Accounting Standards Board (FASB) issued SFAS No. 141, “*Business Combinations*,” and SFAS No. 142,“*Goodwill and Other Intangible Assets*.”  Under these rules, goodwill and indefinitelived intangible assets are no longer amortized and are reviewed annually forimpairment or more frequently if events or circumstances indicate such assetsmay be impaired such as reductions in demand or significant economic slowdownsin the industry.  Intangible assets thatare not deemed to have an indefinite life will continue to be amortized overtheir estimated useful lives.

 

SFAS No. 142requires the use of a two-step process to measure potential impairment.  In the first step, the fair values of theCompany’s reporting units are compared to the units’ carrying amounts.  Reporting units with similar economic andoperating characteristics may be combined into a single segment levelevaluation.  If the fair value of areporting unit exceeds its carrying cost, goodwill is not consideredimpaired.  If the carrying cost exceedsfair value, a second step is used to determine the amount of impairment.  The second step determines the implied fairvalue of goodwill for a reporting unit by applying 

 

7

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the estimated fair valueto the tangible and separately identifiable intangible assets of the reportingunit, with any remaining amount considered goodwill.

 

Management’s analysis offair value is conducted in accordance with SFAS 142 and considers variations ofall three generally accepted valuation approaches: (i) the incomeapproach, (ii) the market approach and (iii) the cost approach.  The market approach was relied upon moreheavily to estimate the fair value of the Company at December 31,2007.  The market approach analysisconsidered value indications derived from the following:

 

·                  The trading price of the Company’s common stock as reported on the OTCBulletin Board on and around the valuation date.

·                  The prices at which the Company has issued common stock historicallyand the issue dates of such stock.

·                  Valuation multiples of publicly traded guideline companies.

·                  Prices reflected in other staffing company transactions.

·                  Factors that would impact the fair value of a 100 percent ownershipinterest in the Company’s equity as of the valuation date versus the valueindications described above.

 

**Note 2    Acquisitions**

 

Medical People HealthcareServices, Inc.

 

On November 14,2007, the Company acquired the assets of Medical People Heathcare Services, Inc.,(“MPH”) a healthcare staffing firm providing services in Alabama, in exchangefor $750,000 in cash, a promissory note in the amount of $500,000 andacquisition costs of $34,169.  The notebears interest at the rate of 7.75% and requires interest only payments throughApril 30, 2008.  From May 31,2008 through the maturity date of the note on October 31, 2010, the noterequires principal and interest payments. The primary purpose of the acquisition was to enable the Company toexpand its market share in the nurse staffing market.  The following table summarizes the assetsacquired and liabilities assumed as of the closing date:

 
| Customer related intangible assets      |   | $         | 205,000   |   |
|-----------------------------------------|--------|-----------|-----------|--------|
| Goodwill (see increase described below) |   | 1,079,169 |      |
| Total assets acquired                   |   | 1,284,169 |      |
| Liabilities assumed                     |   | —    |      |
| Net assets acquired                     |   | $         | 1,284,169 |   |

 

The acquisition wasaccounted for using the purchase method of accounting.  Customer related intangible assets will beamortized over their estimated useful life of five years.  The purchase price allocated to customerrelationships was determined by management’s estimate based on a consistentmodel for all acquisitions and is periodically reviewed by a professionalvaluation group.  Goodwill represents theexcess of merger consideration over the fair value of assets acquired.  At December 31, 2007 and March 31, 2008,the Company has accrued $700,000 (with a corresponding increase to goodwill)for the estimated amount that it will be required to pay to the former ownersof MPH since results of operations for MPH for calendar 2007 exceededperformance standards established in the merger agreement.  The goodwill acquired will be amortized forfederal income tax purposes.

 

ATS Universal, LLC

 

On October 29, 2007,the Company acquired all of the outstanding equity interests in ATS Universal,LLC (“ATS”), a healthcare staffing firm providing services in Florida, NorthCarolina and Georgia, in exchange for $3,300,000 in cash and 2,079,209 sharesof Crdentia’s common stock valued at $706,931, (determined by the average of$.34 per share which approximates the trading value as quoted on the OTCBulletin Board three days before and three days after the acquisition date),and $42,132 of acquisition costs.  Theprimary purpose of the acquisition was to enable the Company to expand itsmarket share in the nurse 

 

8

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staffing market.  The following table summarizes the assetsacquired and liabilities assumed as of the closing date:

 
| Cash                                     |   | $         | 7,656     |   |
|------------------------------------------|--------|-----------|-----------|--------|
| Accounts receivable                      |   | 1,255,598 |      |
| Prepaid expenses                         |   | 71,814    |      |
| Furniture and equipment                  |   | 32,573    |      |
| Customer related intangible assets       |   | 459,000   |      |
| Goodwill (See reduction described below) |   | 2,557,893 |      |
| Total assets acquired                    |   | 4,384,534 |      |
| Liabilities assumed                      |   | 335,471   |      |
| Net assets acquired                      |   | $         | 4,049,063 |   |

 

The acquisition wasaccounted for using the purchase method of accounting.  Customer related intangible assets will beamortized over their estimated useful life of five years.  The purchase price allocated to customer relationshipswas determined by management’s estimate based on a consistent model for allacquisitions and is periodically reviewed by a professional valuationgroup.  Goodwill represents the excess ofmerger consideration over the fair value of assets acquired.  In accordance with terms of the mergeragreement, the former equity interest holders of ATS forfeited all of theCompany’s common stock that was issued in connection with the acquisition asresults of operations for ATS for calendar 2007 fell below performancestandards established in the merger agreement. Accordingly, during 2007 the Company reduced goodwill and recordedforfeiture of the stock for the $706,931 value of the stock issued inconnection with this acquisition.  Inaddition, the Company is requesting a cash settlement for shortfalls inrequired earnings and working capital levels where the forfeiture of the stockinadequately compensated for impact of the shortfalls.  A cash settlement of $62,500 was received in April 2008from the former equity interest holders of ATS for shortfalls in the workingcapital.  The goodwill acquired will beamortized for federal income tax purposes.

 

Unaudited Pro FormaSummary Information

 

The following unauditedpro forma summary approximates the consolidated results of operations as if theacquisitions disclosed above had occurred as of January 1, 2007, aftergiving effect to certain adjustments, including amortization of specificallyidentifiable intangibles and interest expense. The pro forma financial information does not purport to be indicative ofthe results of operations that would have occurred had the transactions takenplace at the beginning of the period presented or of future results ofoperations.

 
| ** **                                                                       | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                       | ** ** | **March 31, 2007**     | ** ** |
|                                                                             |       |                             |       |
| Revenue from services                                                            |       | $                                | 11,898,498 |   |
|                                                                             |       |                             |       |
| Loss from operations                                                             |       | (4,329,520                       | )          |
|                                                                             |       |                             |       |
| Net loss attributable to common stockholders                                     |       | (6,382,595                       | )          |
|                                                                             |       |                             |       |
| Basic and diluted net loss per common share attributable to common  stockholders |       | $                                | (0.37      | ) |
|                                                                             |       |                             |       |
| Weighted-average shares of common stock outstanding                              |       | 17,365,298                       |       |

 

9

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**Note 3    Disposal of Detroit Operations**

 

On June 30, 2007,the Company sold certain assets of its temporary nurse staffing business in theDetroit, Michigan metropolitan area to the original sellers (Crdentia purchasedHealth Industry Professionals, LLC on March 29, 2005).  The sale price was comprised of (1) $300,000in cash; (2) return and cancellation of 128,367 shares of the Company’scommon stock held by the original sellers with a fair value of $64,184; and (3) theassumption of certain lease obligations.

 

The Company recognized again of $126,446, which was calculated by subtracting the net book value of thefurniture and fixtures ($39,130) and the unamortized balance of the intangiblesassets associated with the customer contracts ($198,608) from the proceeds ofthe transaction.  The Company hasreported the historical results of operations from the Detroit Operations asincome from discontinued operations in the accompanying Statements ofOperations which is comprised of the following:

 
| ** **                                    | ** ** | **Three Months Ended March 31,** | ** ** |
|-----------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                    | ** ** | **2007**                                             | ** ** |
|                                          |       |                                                 |       |
| Revenue                                       |       | $                                                    | 923,108    |   |
| Direct operation expenses                     |       | 718,326                                              |       |
| Gross profit                                  |       | 204,782                                              |       |
|                                          |       |                                                 |       |
| Selling, general, and administrative expenses |       | 108,183                                              |       |
|                                          |       |                                                 |       |
| Income from discontinued operations           |       | $                                                    | 96,599     |   |

 

**Note 4    Accounts Payable and Accrued Expenses**

 

Accounts payableand accrued expenses consist of the following at:

 
| ** **                              | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                              | ** ** | **2008**           | ** ** | **2007**              | ** ** |
|                                    |       |               |       |                  |       |
| Accounts payable                        |       | $                  | 1,762,688  |                  | $          | 1,948,255 |   |
| Other accrued expenses                  |       | 602,428            |       | 483,186               |       |
| Accrued bonus                           |       | 1,013,796          |       | 495,864               |       |
| Accrued earnout for the MPH acquisition |       | 700,000            |       | 700,000               |       |
|                                    |       | $                  | 4,078,912  |                  | $          | 3,627,305 |   |

 

**Note 5    Revolving Line of Credit with Systran**

 

On February 8, 2007,the Company entered into a $10 million working capital facility with SystranFinancial Services Corporation (“Systran”), a subsidiary of Textron FinancialCorporation.  Pursuant to the agreements,Systran agreed, at its sole discretion, to purchase certain receivables fromthe Company 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 payment and performance ofCrdentia’s obligations to Systran under the agreements, Crdentia grantedSystran a security interest in all of its assets.  Crdentia also agreed to indemnify Systranagainst any liabilities arising out of claims relating to the receivablespurchased by Systran under the agreements. The agreements had an initial term of 48 months, and Crdentia isobligated 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 wereused to refinance the Loan and Term Loan with Bridge Healthcare Finance,LLC.  This line was fully repaid duringearly 2008 as discussed below.

 

10

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**Note 6    Master Revolving Note with Comerica Bank**

 

On January 19, 2007,Crdentia delivered a Master Revolving Note (the “Note”) in the amount of$2,400,000 to Comerica Bank.  Proceedsfrom the borrowing were used to refinance the over-advance amount outstandingunder the revolving line of credit with Bridge Healthcare Finance, LLC.  The Note required principal payments of$125,000 on March 31, 2007, $100,000 on June 30, 2007, September 30,2007 and December 31, 2007 and had a final maturity date of January 31,2008.  The Note bore interest at a perannum rate equal to Comerica’s base rate from time to time in effect minusone-half of one (1/2%) percent.  The Noteincluded events of default and provided that, upon the occurrence of certainevents of default, Comerica may, at its option and without prior notice toCrdentia, declare any or all of the indebtedness evidenced by the Noteimmediately due and payable.  This Notewas retired in early 2008 as discussed below.

 

**Note 7    Bridge Loan**

 

On January 15, 2008,the Company obtained a $1,000,000 loan from FatBoy Capital, LP, a Delawarelimited partnership, to fund working capital needs.  No equity securities, and no securitiesexercisable, convertible or exchangeable for equity securities, were issued inconnection with the loan.  The loan waspayable upon the earlier of (i) March 31, 2008 or (ii) the date ofthe closing of any refinancing of prior secured indebtedness by theCompany.  The loan bore interest at therate of eighteen percent (18%) per annum and interest on past-due principal andpast-due interest accrued at the rate of twenty-four percent (24%) per annumand was payable on demand.  The Companypaid FatBoy a five percent (5%) commitment fee for the extension of theloan.  MedCap Partners L.P.unconditionally guaranteed the Company’s obligations under the loan.  C. Fred Toney, the Chairman of the Company’sBoard of Directors, is the managing member of MedCap Management &Research LLC, the general partner of MedCap Partners L.P.  The loan was repaid on February 22, 2008from proceeds of the long-term debt financing with ComVest discussed below.

 

**Note 8    Credit Facility with ComVest**

 

OnFebruary 22, 2008, the Company entered into a $10.2 million debtrefinancing (the “Credit Facility”) with ComVest Capital LLC.  In connection with its entry into this debtrefinancing, the Company terminated its existing revolving credit facility withSystran Financial Services Corporation and repaid its debt obligations toComerica Bank leaving approximately $1.9 million of net working capital.  The Credit Facility contains financialcovenants with which the Company must comply. The Credit Facility is comprised of a two-year $5.2 million RevolvingCredit Note, bearing interest at the greater of the Prime Rate plus 2% or 8.5%,and two separate three-year term loans, each amounting to $2.5 million andbearing annual interest at 12.5%.  Uponthe occurrence of certain events of default, ComVest may immediately collectany obligation under the Credit Facility and may increase interest rates tomuch higher default rates.  The Companyincurred $578,537 of fees related to this debt which are being amortized asinterest expense over the term of the debt. At March 31, 2008 there was $4,849,818 outstanding under the $5.2million Revolving Credit Note and $5.0 million outstanding under the twoseparate term loans.  The Company was incompliance with all provisions of the agreements at March 31, 2008.

 

The Company issuedComVest Capital LLC warrants to purchase 8,000,000 common shares at an exerciseprice of $0.001 per share which expire in February 2014.  The Company computed the relative fair valueof the warrants at $1,018,446 and recorded this amount as a discount allocatedpro rata to the two separate three-year term loans which is being amortizedover the life of the term loans. The Company has agreed to register the sharesissuable upon the exercise of the warrant pursuant to a Registration RightsAgreement dated as of February 22, 2008 by and between the Company and ComVest.

 

**Note 9    Notes Payable**

 

As partialconsideration for the acquisition of the assets of Staff Search Ltd. in April 2006,the Company issued a promissory note in the principal amount of$1,410,000.  Subsequently, the promissorynote was purchased from the seller by MedCap Partners LP.  During 2008, 2007 and 2006, MedCapdistributed $484,718 of the promissory note to unrelated parties to settlecertain obligations of MedCap.  The 

 

11

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promissory noteaccrues interest at a rate equal to 8.00% per annum.  The principal amount of the note owed at March 31,2008 ($533,558 due to MedCap Partners L.P. and $391,724 due to MedCap MasterFund L.P.), plus all accrued interest ($141,877 at March 31, 2008), ispayable upon demand.  Related partyinterest expense of $9,694 has been included in interest expense in theaccompanying condensed consolidated statements of operations for the threemonths ended March 31, 2008 and 2007. During the first quarter of 2008, the Company repaid $299,960 ofprincipal owed to unrelated parties.  Ofthe remaining principal amount of the note owed to unrelated parties at March 31,2008 ($184,758), $174,615 plus accrued interest, is payable upon demand after January 1,2008 and $10,143 plus accrued interest, is payable upon demand after June 30,2008.

 

**Note 10  Subordinated Debentures**

 

In January 2006, theCompany completed a private placement totaling $4 million.  The first phase was completed on December 30,2005 and consisted of $2 million, or 333,333 shares of common stock and thesecond phase consisted of $2 million of 8% convertible debentures.  The convertible debentures have a term ofthree years and bear interest at a rate of 8% per year, payable semi-annuallyin cash or registered stock at the Company’s option.  At March 31, 2008, $525,000 ofdebentures before discount were outstanding.

 

Under terms of thedebenture agreements, at March 31, 2008 all debenture holders may exchangetheir debentures for shares of the Company’s common stock at $.30 per share,the price at which the Company sold its stock in the 2007 private placementoffering.

 

**Note 11  Common Stock and Stock Options**

 

During the year ended December 31,2007, the Company completed eleven closings of a private placement pursuant toa Securities Purchase Agreement and Registration Rights Agreement for 8,166,660shares of common stock at a price of $0.60 per share, with aggregate grossproceeds 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 the Registration Rights Agreement, the Companyfiled a resale registration statement covering the shares on August 31,2007.

 

During October and November 2007,the Company completed two closings on a Securities Purchase Agreement withcertain investors for the private placement of 19,166,667 shares of commonstock at a price of $0.30 per share for aggregate proceeds of $5,750,000.  The private placement also provided forwarrants to purchase up to 9,583,333 shares of common stock at $0.35.  The warrants have a life of five years.  Pursuant to the terms of the RegistrationRights Agreement, the Company filed a resale registration statement coveringthe shares on December 5, 2007.

 

MedCap Partners L.P.invested $2,600,000 in these private placements for 5,524,997 shares of commonstock, MedCap Master Fund L.P. invested $815,000 in the private placement for2,391,666 shares and C. Fred Toney, Chairman of the Board of Directors,individually invested $2,300,000 in the private placement for 4,666,667 sharesof common stock.  Mr. Toneyabstained from the Board of Directors’ vote in favor of the private placement.

 

In June 2007, theCompany entered into a services agreement with AudioStocks, Inc. wherebyAudioStocks will provide investment services, web based shareholder communicationsand public relations services for the Company in exchange for (i) $80,000,(ii) 1,247,500 restricted shares of the Company’s common stock of which975,000 were issued in June 2007 and 272,500 were issued in August 2007;and (iii) a common stock purchase warrant to purchase up to 1,000,000shares of the Company’s common stock at a purchase price of $0.60 pershare.  The term of the servicesagreement runs through June 24, 2008. The value of the consideration for the services agreement totaling$1,213,262, includes $636,225 for the 1,247,500 restricted shares (based on theclosing price of the Company’s common stock on the effective date of theagreement), $497,037 for the common stock purchase warrant (based on fair valueusing the Black-Scholes option pricing model) and the $80,000 of cash wasrecorded as a prepaid asset and is being amortized over the term of theservices agreement (1 year).

 

12

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Employee Stock Optionsand Restricted Stock Grants

 

During the three monthsended March 31, 2008, the Board of Directors granted options to purchase75,000 shares of the Company’s Common Stock to an employee.  The exercise price for this option is $0.18,the trading price of the common stock on the grant date.  There were no stock options exercised in thethree months ended March 31, 2008.

 

On March 26, 2007, Mr. Kaiser,the Company’s CEO, was granted 2,000,000 shares of restricted commonstock.  In March 2008 vestingprovisions of the grant were revised such that the shares will vest inaccordance with the following schedule: (i) eight hundred seventy-five thousand(875,000) shares shall vest on the first trading day following January 1,2009.  One-forty-eighth (1/48th)of the shares shall vest on the last trading day of January 2009 and onthe last trading day of each month thereafter, such that the shares will beone-hundred percent (100%) vested after approximately forty-eight (48) monthsof continuous service from the vesting commencement date (ii) in addition,in the event the grantee’s continuous service is terminated without cause orvoluntarily by the grantee with good reason at any time prior to the firsttrading day following January 1, 2009, 500,000 shares shall vest on thedate of such termination.  On and afterthe first trading day following January 1, 2009, vesting shall cease uponthe date of termination of the grantee’s continuous service for anyreason.  In the event of a corporatetransaction, all outstanding shares shall automatically become fully vested sixmonths following the effective date of such corporate transaction, subject tocertain conditions being met.

 

Valuation Assumptions

 

The Company calculatedthe fair value of each option award on the date of grant using theBlack-Scholes option pricing model.  Thefollowing assumptions were used for the three months ended March 31, 2008.

 
| ** **              | ** ** | **March 31,** | ** ** |
|-------------------------|------------|--------------------|------------|
| ** **              | ** ** | **2008**           | ** ** |
|                    |       |               |       |
| Risk-free interest rate |       | 3.00%              |       |
| Expected lives          |       | 4  years           |       |
| Dividend yield          |       | 0                  |       |
| Expected volatility     |       | 192%               |       |

 

13

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Stock option activity is summarized as follows:

 
| ** **                                                                     | ** ** | **March 31,** | ** ** |
|--------------------------------------------------------------------------------|------------|--------------------|------------|
| ** **                                                                     | ** ** | **2008**           | ** ** |
|                                                                           |       |               |       |
| Outstanding, January 1                                                    |       | 2,197,204          |       |
| Granted                                                                        |       | 75,000             |       |
| Exercised                                                                      |       | —             |       |
| Forfeited                                                                      |       | (75,870            | )          |
| Outstanding, March 31                                                     |       | 2,196,334          |       |
| Exercisable, March 31                                                     |       | 1,560,656          |       |
| Non-exercisable, March 31                                                 |       | 635,678            |       |
|                                                                           |       |               |       |
| Average exercise price per share:                                              |       |               |       |
| Outstanding, January 1                                                    |       | $                  | 2.49       |   |
| Granted                                                                        |       | 0.18               |       |
| Exercised                                                                      |       | —             |       |
| Forfeited                                                                      |       | 1.92               |       |
| Outstanding, March 31                                                     |       | 2.44               |       |
| Exercisable                                                                    |       | 2.90               |       |
| Non-vested, January 1                                                     |       | 1.59               |       |
| Non-vested, March 31                                                      |       | 1.30               |       |
|                                                                           |       |               |       |
| Weighted-average remaining contractual term of outstanding options  (in years) |       | 8.37               |       |
| Weighted-average remaining contractual term of exercisable options  (in years) |       | 8.17               |       |
|                                                                           |       |               |       |
| Weighted-average grant date fair value per share of options granted            |       | $                  | 0.17       |   |
| Total estimated future expense related to unvested options                     |       | 898,860            |       |
| Weighted-average remaining contractual term of unvested options (in  years)    |       | 8.84               |       |

 

**Note 12  Supplemental Disclosure to the Statements of Cash Flows**

 
| ** **                                                                  | ** ** | **Three Months ended** | ** ** |
|-----------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                  | ** ** | **March 31,**               | ** ** |
| ** **                                                                  | ** ** | **2008**                         | ** ** | **2007** | ** ** |
|                                                                        |       |                             |       |   |   |
| Supplemental cash flow disclosures:                                         |       |                             |       |   |   |
| Cash paid for interest                                                      |       | $                                | 505,512    |   | $ | 902,079 |   |
| Cash paid for income taxes                                                  |       | —                           |       | — |   |
|                                                                        |       |                             |       |   |   |
| Non-cash investing and financing activities:                                |       |                             |       |   |   |
| Conversion of debentures into common stock                                  |       | —                           |       | 899,000 |   |
| Debenture interest paid in common stock                                     |       | 21,000                           |       | 14,948 |   |
| Property and equipment acquired with capital lease                          |       | 135,417                          |       | — |   |
| Relative fair value of warrants issued in connection with notes  payable    |       | 1,018,446                        |       | — |   |
| Directors fees paid with the issuance of restricted stock and stock options |       | 14,693                           |       | — |   |
|                                                                             |            |                                  |            |  |  |  |  |

 

14

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**Note 13  Litigation**

 

The following claim wassettled during the three months ended March 31, 2008:

 

***CauseNo. 2006-40525; PrimeCaid Management, Inc. d/b/a Mint MedicalPhysician Staffing, L.P., d/b/a Prime Staff v. Mavis Dedman and Crdentia Corp.;Pending in the 157th Judicial District Court of Harris County, Texas***

 

On June 28, 2006,PrimeCaid filed suit against Crdentia and its former employee Mavis Dedman,asserting claims for breach of contract, fraud, and misappropriation of tradesecrets arising out of Crdentia’s hiring of Dedman.  Among other things, Plaintiff alleges Dedmanviolated her non-competition agreement and utilized PrimeCaid’s confidentialinformation and trade secrets for the benefit of Crdentia.  On April 4, 2007, the Court entered atemporary injunction prohibiting Dedman and Crdentia from using or disclosingPrimeCaid’s confidential information and trade secrets.

 

The Company has reachedan agreement to settle this action, pursuant to which it will, among otherthings, pay $90,000 ($30,000 was paid on March 17, 2008 and the remainderwill be paid over a 24-month period in equal installments commencing April 1,2008).  At March 31, 2008 theCompany had the remaining $60,000 recorded as a liability in the financialstatements.

 

**Note 15  Subsequent Events**

 

Short-Term Loan

 

OnMay 1, 2008, the Company obtained a $400,000 loan (the “Loan”) from C. FredToney, Chairman of the Board of Crdentia Corp., to fund working capitalneeds.  No equity securities, and nosecurities exercisable, convertible or exchangeable for equity securities, wereissued in connection with the Loan.  TheLoan is payable upon the earlier of (i) July 15, 2008 or (ii) thedate of the closing of any term loan or other financing by the Company.  The Loan bears interest at the rate ofeighteen percent (18%) per annum and interest on past-due principal andpast-due interest accrues at the rate of twenty-four percent (24%) perannum.  The Company paid C. Fred Toney afive percent (5%) commitment fee for the granting of the Loan.

 

Directorand Officer Restricted Stock Grants and Option Grants

 

On April 4, 2008,the Board of Directors approved the following:

 

·                  The grant of an option to purchase 100,000 shares ofthe Company’s common stock to each of Thomas Herman and David Jenkins, each aDirector of the Company.  The optionshave an exercise price of $0.23 per share, the last sale price of the Company’scommon stock as reported on the OTC Bulletin Board on April 4, 2008.  The options vest and become exercisable overtwo years, with 50% of the shares subject to the options vesting on the firstanniversary of the date of grant and the remaining 50% of the shares subject tothe options vesting on the second anniversary of the date of grant.

 

·                  The grant of 100,000 restricted shares of the Company’scommon stock to each of Robert Kenneth, William Nydam and Jay Dunn, each aDirector of the Company.  The shares ofrestricted stock vest over a two-year period. Assuming continued association with the Company, the first 50% of theshares shall vest on the first anniversary of the date of grant and theremaining 50% of the shares shall vest on the second anniversary of the date ofgrant.  The shares are valued at the fairmarket value of $0.23 per share, the last sale price of the Company’s commonstock as reported on the OTC Bulletin Board on April 4, 2008.

 

·                  The grant of 300,000 restricted shares of the Company’scommon stock to John Kaiser, the Company’s Chief Executive Officer andDirector.  Twenty-five percent (25%) ofthe restricted shares shall vest twelve (12) months after the date ofgrant.  One-thirty-sixth (1/36th) of the 

 

15

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remaining unvestedshares shall vest at the end of the 13th month and each month thereafter, suchthat the shares will be one hundred percent (100%) vested after forty-eight(48) months of continuous services from date of grant.  The shares are valued at the fair marketvalue of $0.23 per share, the last sale price of the Company’s common stock asreported on the OTC Bulletin Board on April 4, 2008.

 

·                  The grant of 100,000 restricted shares of the Company’scommon stock to James J. TerBeest, the Company’s Chief Financial Officer.  The restricted shares vest at the earlier ofa change in control of the Company, or four years from the date of grant basedon continued service to the Company.  Theshares are valued at the fair market value of $0.23 per share, the last saleprice of the Company’s common stock as reported on the OTC Bulletin Board on April 4,2008.

 

**Item 2.    Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

 

*This**report**contains forward-lookingstatements**.  These statementsrelate to future events or our future financial performance. In some cases, youcan 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 comparable terminology.  These statements are only predictions.  Actual events or results**may differ materially**.*

 

*Althoughwe believe that the expectations reflected in the forward-looking statementsare reasonable, we cannot guarantee future results, levels of activity,performance or achievements.  Moreover,neither we, nor any other person, assume responsibility for the accuracy andcompleteness of the forward-looking statements. 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.*

 

*Thefollowing discussion of our financial condition and results of operationsshould be read in conjunction with our consolidated financial statements andthe related notes and other financial information appearing elsewhere in thisQuarterly Report.  Readers are also urgedto carefully review and consider the various disclosures made by us whichattempt to advise interested parties of the factors which affect our business,including without limitation the disclosures made in Item 1A of Part II ofthis Quarterly 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-Kfor the year ended December 31, 2007, previously filed with the U.S.Securities and Exchange Commission (SEC).*

 

*Risk factors that could causeactual results to differ from those contained in the forward-looking statementsincluding but are not limited to: our ability to continue as a going concern;we have a history of losses; we face difficulties identifying and integratingacquisitions; our need to raise additional capital in the future; our creditfacility and revolving note impose significant expenses on us; our convertibledebentures contain covenants and restrictions; MedCap controls a significantamount of our outstanding capital stock; we need to continue to attract andretain key employees; we need to attract qualified nurses; the temporary nursestaffing industry is highly competitive; our need to secure and fill new ordersfrom hospitals and healthcare facilities; fluctuations in patient occupancy; wehave anti-takeover provisions in our charter and bylaws; we operate in aregulated industry; government regulation and regulatory reform couldnegatively impact our business; and legal actions could subject us to uninsuredliabilities.*

 

Introduction

 

Management’s discussionand analysis of financial condition and results of operations is provided as asupplement to our consolidated financial statements and accompanying notes tohelp provide an understanding of our financial condition, changes in financialcondition and results of operations.

 

16

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Overview

 

We are a provider ofhealthcare staffing services, focusing on the areas of travel nursing, per diemstaffing, contractual clinical services, locum tenens, allied services andprivate duty home care.  Our travelnurses are recruited domestically as well as internationally, and placed ontemporary assignments at healthcare facilities across the United States, with aparticular focus on the Sun Belt region of the United States.  Our per diem nurses are local nurses placed athealthcare facilities on short-term assignments.  Our contractual clinical services groupprovides complete clinical management and staffing for healthcarefacilities.  Under our locum tenensprogram, physicians contract with us to perform medical services for healthcareorganizations for a specified length of time. Our allied services primarily consist of diagnostic imaging,respiratory, laboratory, therapies and administrative modalities and ourprivate duty home care group provides nursing case management and staffing forskilled and non-skilled care in the home. We consider the different services described above to be one segment aseach of these services relate solely to providing healthcare staffing tocustomers that are healthcare providers and utilize similar distributionmethods, common systems, databases, procedures, processes and similar methodsof identifying and serving these customers.

 

We didnot have any revenue in 2003 until we completed our first acquisition in August 2003.  During 2003 we began operating four newlyacquired companies, combining the various back offices and support staff into acentral location and began streamlining the operations.  We have continued to pursue our operationalplan of acquiring companies in the healthcare staffing field and purchased twocompanies in 2004, three companies in 2005, one company in 2006, and twocompanies in 2007.

 

On September 20,2006, we entered into an Agreement and Plan of Merger with iVOW, Inc., aprovider of services to employers, payors and unions to facilitate weight loss programson a per patient direct basis.  In 2007we entered into a Settlement Agreement with iVOW pursuant to which the mergeragreement was terminated.

 

During2006 we terminated the operations we had acquired in 2003 from Baker AndersonChristie, Inc. and Nurses Network, Inc.  In addition, in May 2006 we returned tothe sellers the shares of TravMed USA, Inc. that we had acquired from thesellers in March 2005 in connection with our acquisition of that company,and our notes payable to the sellers were cancelled.  We were permitted to retain receivables netof payables existing as of the date the TravMed shares were returned.  In June 2007, we sold certain assets ofHealth Industry Professionals, LLC (purchased in March 2005) to theoriginal sellers.

 

Some key factors we arefocusing on to improve performance are as follows:

 

·                  We continue to identify innovative ways to attract andretain nurses.

 

·                  We are vigorously 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 and administrativecosts at our field office locations to limit these expenses to no more than 10%of the revenue at each location.

 

·                  We are aggressively expanding our locum tenensbusiness, our allied services and our home health business in an effort toimprove gross margins through a better mix of the services provided.

 

·                  We are devoting continual 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.

 

17

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·                  We are seeking to raise $1,000,000 to $3,000,000 ofadditional funds during the next twelve months to satisfy working capital anddebt service needs, and $750,000 of this will be needed in the second calendarquarter of 2008.

 

**RESULTS OF OPERATIONS**

 
| ** **                                                | ** ** | **Three Months Ended March 31,** | ** ** |
|-----------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                | ** ** | **2008**                                             | ** ** | **2007** | ** ** |
|                                                      |       |                                                 |       |   |   |
| Revenue from services                                     |       | $                                                    | 10,579,387 |   | $ | 8,097,329 |   |
| Direct operating expenses                                 |       | 8,268,533                                            |       | 6,385,179 |   |
| Gross profit                                              |       | 2,310,854                                            |       | 1,712,150 |   |
|                                                      |       |                                                 |       |   |   |
| Selling, general, and administrative expenses             |       | 3,848,356                                            |       | 6,291,043 |   |
|                                                      |       |                                                 |       |   |   |
| Loss from continuing operations before interest and taxes |       | (1,537,502                                           | )          | (4,578,893 | ) |
|                                                      |       |                                                 |       |   |   |
| Interest expense, net                                     |       | (764,456                                             | )          | (2,106,786 | ) |
|                                                      |       |                                                 |       |   |   |
| Loss from continuing operations before income taxes       |       | (2,301,958                                           | )          | (6,685,679 | ) |
|                                                      |       |                                                 |       |   |   |
| Income tax expense                                        |       | —                                               |       | — |   |
|                                                      |       |                                                 |       |   |   |
| Loss from continuing operations                           |       | (2,301,958                                           | )          | (6,685,679 | ) |
|                                                      |       |                                                 |       |   |   |
| Income from discontinued operations                       |       | —                                               |       | 96,599 |   |
|                                                      |       |                                                 |       |   |   |
| Net loss                                                  |       | $                                                    | (2,301,958 | ) | $ | (6,589,080 | ) |
|                                                      |       |                                                 |       |   |   |
| Net loss per share - basic and diluted;                   |       |                                                 |       |   |   |
| Loss from continuing operations                           |       | $                                                    | (0.05      | ) | $ | (0.39 | ) |
| Income from discontinued operations                       |       | —                                               |       | 0.01 |   |
| Basic and diluted loss per common share                   |       | $                                                    | (0.05      | ) | $ | (0.38 | ) |
|                                                      |       |                                                 |       |   |   |
| Weighted average number of common shares outstanding      |       | 47,572,548                                           |       | 17,365,298 |   |

 

***Threemonths ended March 31, 2008 compared to the three months ended March 31,2007***

 

Revenues in the threemonths ended March 31, 2008 were $10,579,387 compared to revenues of$8,097,329 in the three months ended March 31, 2007.  Revenues have increased in 2008 compared to2007 due principally to our acquisitions of ATS Universal, LLC and MedicalPeople Healthcare Services, Inc. in the fourth quarter of 2007.  In 2008 approximately 9.1% (17.5% in 2007) ofour revenue was derived from the placement 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 diemnurses to satisfy the very short-term needs of healthcare facilities.  Per diem services provided 64.8% of ourrevenue in 2008 (68.4% in 2007).  Theremaining amount of our revenue in 2008 and 2007 came from providing staffingto healthcare facilities, private duty homecare, locum tenens revenue andallied services.  During 2008 and 2007,most of our customers were acute care hospitals located throughout thecontinental United States.

 

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Our overall gross profitin the three months ended March 31, 2008 was $2,310,854 or 21.8% ofrevenues compared to $1,712,150 or 21.1% of revenues in the three months ended March 31,2007.  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.  Margin percentages are improving in 2008because of higher margins generated by the businesses purchased in the fourthquarter of 2007.

 

Our selling, general andadministrative costs were $3,848,356 or 36.4% of revenues in the three monthsended March 31, 2008 compared to $6,291,043 or 77.7%******ofrevenues in the three months ended March 31, 2007.  Selling, general and administrative expensesare comprised primarily of certain personnel costs, legal and accounting feesrelated to being a public company and various other office and administrativeexpenses as well as non-cash stock compensation costs.  In 2007, we accrued $503,333 of expensesrelated to a severance agreement with our former Chief Executive Officer.  Also, non-cash stock based compensation costswere $498,112 in the three months ended March 31, 2008 compared to $3,391,392in the three months ended March 31, 2007. The volume of trading in the Company’s stock triggered acceleratedvesting of some of the outstanding 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 severance agreement for our former Chief ExecutiveOfficer included the granting of an option to purchase 1,000,000 shares of theCompany’s stock vesting immediately and accelerated vesting of restrictedgrants.  Non-cash stock basedcompensation cost of $3,024,177 associated with the accelerated vesting of therestricted stock and the severance agreement was recorded during the three monthsended March 31, 2007.

 

Interest costs were$764,456 in the three months ended March 31, 2008 compared to $2,106,786in the three months ended March 31, 2007. The higher interest costs in the first quarter of 2007 are due to aprepayment penalty and the write-off of deferred financing costs associatedwith the refinancing of our term note and revolving credit facility with BridgeFinance and costs associated with the conversion of a portion of our debenturesfor a total of $1,391,538 of additional interest costs.  We also had lower interest costs in the firstquarter of 2008 due to lower interest rates offsetting the impact of aprepayment penalty of $200,000 paid in the first quarter of 2008 to refinanceour revolving credit facility with Systran and move it to ComVest.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

Since inception, we haveincurred losses from operations and have reported negative cash flows.  As of March 31, 2008, we had anaccumulated deficit of $137,136,075 and cash and cash equivalents of$459,246.  We have financed ouroperations primarily through private placements of equity and debt securitiesand through our revolving credit facility with Systran Financial ServicesCorporation (“Systran”) and our loan with Comerica Bank and most recently withthe Comvest Facility.

 

On January 19, 2007,we delivered a Master Revolving Note in the amount of $2.4 million to ComericaBank.  Proceeds from the borrowing wereused to refinance the over-advance amount outstanding under the revolving lineof credit with Bridge Healthcare.  TheMaster Revolving Note had a maturity date of January 31, 2008 and requiredinterest at a per annum rate equal to Comerica’s base rate from time to time ineffect minus one-half of one (0.5%) percent. The Master Revolving Note was secured by all items deposited in our accountwith Comerica.  The Note included eventsof default and provided that, upon the occurrence of certain events of default,Comerica could, at its option and without prior notice to us, declare any orall of the indebtedness evidenced by the Master Revolving Note immediately dueand payable.  In connection with therefinancing of our debt on February 22, 2008 with ComVest Capital LLC, werepaid all remaining obligations to Comerica.

 

On February 8, 2007we entered into a $10 million working capital facility with Systran FinancialServices Corporation, a subsidiary of Textron Financial Corporation (“Systran”). Pursuant to the agreements, Systran agreed, at its sole discretion, to purchasecertain receivables from us on a recourse basis.  The 

 

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agreements anticipate aminimum volume of purchases and also contemplate the payment of certain servicefees, including a minimum fee.  To secure the payment and performance ofour obligations to Systran under the agreements, we granted Systran a securityinterest in all of our assets.  Theagreements had an initial term of 48 months, and we were obligated to paySystran an early termination premium in the event the agreements wereterminated under certain circumstances prior to the end of the term.  The agreements included events of default(with grace periods, as applicable) and provided that, upon the occurrence ofcertain events of default, Systran could immediately collect any obligationowing to Systran under the agreements. In connection with a debt refinancingclosed on February 22, 2008 with ComVest Capital LLC, we repaid allremaining obligations to Systran as well as an early termination fee of$200,000.

 

On January 15, 2008,we obtained a $1,000,000 loan from FatBoy Capital, LP, a Delaware limitedpartnership, to fund working capital needs. No equity securities, and no securities exercisable, convertible orexchangeable for equity securities, were issued in connection with theloan.  The loan was payable upon theearlier of (i) March 31, 2008 or (ii) the date of the closing ofany refinancing of prior secured indebtedness by us.  The loan bore interest at the rate ofeighteen percent (18%) per annum and interest on past-due principal andpast-due interest accrued at the rate of twenty-four percent (24%) per annumand was payable on demand.  We paidFatBoy a five percent (5%) commitment fee for the extension of the loan.  MedCap Partners L.P. unconditionallyguaranteed our obligations under the loan. C. Fred Toney, the Chairman of the Company’s Board of Directors, is themanaging member of MedCap Management & Research LLC, the generalpartner of MedCap Partners L.P.  The loanwas repaid on February 22, 2008 from proceeds of the debt refinancing withComVest discussed below.

 

OnFebruary 22, 2008, we entered into a $10.2 million debt refinancing withComVest Capital LLC (the “Credit Facility”). In connection with our entry into this debt refinancing, we terminatedour existing revolving credit facility with Systran Financial ServicesCorporation and repaid our debt obligations to Comerica Bank leavingapproximately $1.9 million of net working capital.  The new credit facility contains financialcovenants with which we must comply.  Thecredit facility is comprised of a two-year $5.2 million Revolving Credit Note,bearing interest at the greater of the Prime Rate plus 2% or 8.5%, and twoseparate three-year term loans, each amounting to $2.5 million and bearingannual interest at 12.5%.  Upon theoccurrence of certain events of default, ComVest may immediately collect anyobligation owing to ComVest under the credit facility and may increase interestrates to much higher default rates.

 

We do not expect to reachcash flow positive operations in the near future, and we expect to continue togenerate losses from operations for the foreseeable future.  We will need to raise between $1,000,000 and$3,000,000 during the next twelve months to satisfy our debt servicerequirements and working capital needs, and $750,000 of this will be needed inthe second calendar quarter of 2008.  Ifwe are not able to raise these funds we may be unable to meet our payrollcosts.  In addition, we will need to raiseadditional funds in the future in order to finance our future capital needs.  There is no assurance that we will be able toraise the amount of debt or equity capital required to meet ourobjectives.  Our challenging financialcircumstances may make the terms, conditions and cost of any available capitalrelatively unfavorable.  If additionaldebt or equity capital is not readily available, we may not be able to operateour business, and we will be forced to scale back our acquisition activitiesand our operations.  Our short-term needfor capital may force us to consider and potentially pursue other strategicoptions sooner than we might otherwise have desired.  These conditions raise substantial doubtabout our ability to continue as a going concern.

 

OnMay 1, 2008, we obtained a $400,000 loan (the “Loan”) from C. Fred Toney, Chairmanof the Board of Crdentia Corp., to fund working capital needs.  No equity securities, and no securitiesexercisable, convertible or exchangeable for equity securities, were issued inconnection with the Loan.  The Loan ispayable upon the earlier of (i) July 15, 2008 or (ii) the dateof the closing of any term loan or other financing by the Company.  The Loan bears interest at the rate ofeighteen percent (18%) per annum and interest on past-due principal andpast-due interest accrues at the rate of twenty-four percent (24%) perannum.  The Company paid C. Fred Toney afive percent (5%) commitment fee for the extension of the Loan.

 

Management has taken anumber of steps to address our financial performance and improve cashflow.  We have refinanced all of ourdebt, restructured the operating management team and implemented programs to 

 

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obtain expensesavings.  During 2007 we raised$10,650,000 of equity for working capital and for making two acquisitions.  Management is devoting continual attentiontoward achieving growth both organically and through acquisitions so that wecan spread our corporate overhead over a larger base of business and achieveeconomies of scale.  However, there canbe no assurance that these programs will be successful.  If unsuccessful, we could be unable to fundpayroll costs and could ultimately fail.

 

Cash Flows

 

For the three monthsended March 31, 2008, we used cash in operations of $2,127,732 compared to$2,263,118 for the three months ended March 31, 2007.  Although we ended March 31, 2008 with asignificant working capital deficit of $3,538,535 we were able to secureadditional funding during this period to finance our operations.

 

Net cash used ininvesting activities was $45,202 for the three months ended March 31, 2008and $33,340 for the three months ended March 31, 2007.  The amounts for both periods relate topurchases of property and equipment.

 

During the three monthsended March 31, 2008 and 2007, we financed our working capitalrequirements primarily through the sale of common stock and through loans andcredit facilities.  Net cash provided byfinancing activities was $2,537,710 for the three months ended March 31,2008 and $2,414,869 for the three months ended March 31, 2007.  In 2008, we received net proceeds from notespayable of $2,925,000 primarily to fund operations.  In 2007, we received $2,400,000 from a notepayable to lender and $3,152,381 from the issuance of common stock in privateplacements.  These funds were used tofund operations and pay-off the over-advance and note payable to lender.

 

**CRITICAL ACCOUNTING POLICIES ANDMANAGEMENT JUDGEMENT**

 

The preparation of thefinancial statements in accordance with accounting principles generallyaccepted in the United States of America requires us to make judgments,estimates, and assumptions regarding uncertainties that affect the reportedamounts of assets and liabilities, disclosure of contingent assets andliabilities, and the reported amounts of revenues and expenses.  Areas that require significant judgments,estimates, and assumptions include the assignment of fair values uponacquisition of goodwill and other intangible assets, testing for impairment oflong-lived assets and valuation of the stock used to consummate ouracquisitions.  We use historicalexperience, qualified independent consultants and all available information tomake these judgments and estimates, and actual results will inevitably differfrom those estimates and assumptions that are used to prepare the company’sfinancial statements at any given time.

 

**Accounts Receivable**

 

Accounts receivable arereduced by an allowance for doubtful accounts that provides a reserve withrespect to those accounts for which revenue was recognized but with respect towhich management subsequently determines that payment is not expected to bereceived.  We analyze the balances ofaccounts receivable to ensure that the recorded amounts properly reflect theamounts expected to be collected.  Thisanalysis involves the application of varying percentages to each accountsreceivable category based on the age of the uncollectible accountsreceivable.  The amount ultimatelyrecorded as the reserve is determined after management also analyzes thecollectibility of specific large or problematic accounts on an individualbasis, as well as the overall business climate and other factors.  Our estimate of the percentage ofuncollectible accounts may change from time to time and any such change couldhave a material impact on our financial condition and results of operations.

 

**Purchase Accounting, Goodwill andIntangible Assets**

 

All business acquisitionshave been accounted for using the purchase method of accounting and,accordingly, the statements of operations include the results of each acquiredbusiness since the date of acquisition. The assets acquired and liabilities assumed are recorded at theirestimated fair value as determined by management and supported in some cases byan independent third-party valuation.  We

 

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finalize the allocationof the purchase price to the fair value of the assets acquired and liabilitiesassumed when we obtain information sufficient to complete the allocation, butin any case, within one year after acquisition.

 

Goodwill arising from theacquisitions of businesses is recorded as the excess of the purchase price overthe estimated fair value of the net assets of the businesses acquired.  Statement of Financial Accounting Standards No. 142(“Goodwill and Other Intangible Assets”) provides that goodwill is to be testedfor impairment annually or more frequently if circumstances indicate potentialimpairment.  Consistent with thisstandard, we will review goodwill, as well as other intangible assets andlong-term assets, for impairment annually or more frequently as warranted, andif circumstances indicate that the recorded value of any such other asset isimpaired, such asset is written down to its new, lower fair value.  If any item of goodwill or such other assetis determined to be impaired, an impairment loss would be recognized equal tothe amount by which the recorded value exceeds the estimated fair market value.

 

**Stock-BasedCompensation**

 

We have used stock grantsand stock options to attract and retain directors and key executives and intendto use stock options in the future to attract, retain and reward employees forlong-term service.

 

Weaccount for these stock options under the modified 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 theBlack-Scholes valuation model to estimate fair value of our stock-based awardswhich requires various judgmental assumptions including estimating stock pricevolatility, forfeiture rates and expected life. Our computation of expected volatility is based on a combination ofhistorical and market-based implied volatility. If any of the assumptions usedin the Black-Scholes model change significantly, stock-based compensationexpense may differ materially in the future from that recorded in the currentperiod.

 

**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 communicatedto our 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 anevaluation under the supervision and with the participation of our management,including our 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 uponthe foregoing 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.

 

**Report of Management on InternalControl over Financial Reporting**

 

**Changes in our Controls**

 

Therewere no changes in our internal control over financial reporting during ourmost recent quarter that have materially affected, or are reasonably likely tomaterially affect our internal controls over financial reporting.

 

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**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 subject to inherent uncertainties, and an adverseresult in these or other matters may arise from time to time that may harm ourbusiness.  We are not currently aware ofany such legal proceedings or claims that we believe will have, individually orin the aggregate, a material adverse affect on our business, financialcondition or operating results.  Asdescribed below, we have agreed to settle the following claim.  Any loss related to this settlement has beendisclosed in the financial statements and recorded as of March 31, 2008.

 

***Cause No. 2006-40525; PrimeCaid Management, Inc. d/b/a MintMedical Physician Staffing, L.P., d/b/a Prime Staff v. Mavis Dedman andCrdentia Corp.; Pending in the 157th Judicial District Court ofHarris County, Texas***

 

OnJune 28, 2006, PrimeCaid filed suit against Crdentia and its formeremployee Mavis Dedman, asserting claims for breach of contract, fraud, andmisappropriation of trade secrets arising out of Crdentia’s hiring ofDedman.  Among other things, Plaintiffalleges Dedman violated her non-competition agreement and utilized PrimeCaid’sconfidential information and trade secrets for the benefit of Crdentia.  On April 4, 2007, the Court entered atemporary injunction prohibiting Dedman and Crdentia from using or disclosingPrimeCaid’s confidential information and trade secrets.

 

Wehave reached an agreement to settle this action, pursuant to which we will,among other things, pay $90,000 ($30,000 was paid on March 17, 2008 andthe remainder will be paid over a 24-month period in equal installmentscommencing April 1, 2008).  Theremaining $60,000 was accrued in the financial statements as of March 31,2008.

 

**Item 1A. Risk Factors**

 

*Any investment in our common stock involves a high degree of risk.  You should consider carefully the followinginformation about the risks described below, together with the otherinformation contained in this Form 10-Q before you decide whether to buyour common stock.  If any of thefollowing risks actually occur, our business, financial condition, results ofoperations and cash flows could be materially and adversely affected.  In those circumstances, the market price ofour common stock could decline, and you may lose all or part of the money youpaid to buy our common stock.*

 

**Our independent registered publicaccounting firm issued a going concern opinion on our financial statements,questioning our ability to continue as a going concern.**

 

Our independent registered public accountingfirm’s opinion on our 2007 financial statements includes an explanatoryparagraph indicating substantial doubt about our ability to continue as a goingconcern.  Since our inception, we haveoperated with limited operating capital, and we continue to face immediate andsubstantial 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 between $1,000,000 and $3,000,000 of additional fundsduring the next twelve months to satisfy working capital and debt serviceneeds, and $750,000 of this will be needed in the second calendar quarter of2008.  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 successful in raising capitalin the short-term we could be unable to meet payroll costs.  Failure to raise additional capital whenneeded could cause us to cease our operations.

 

We have financed our operations since inceptionprimarily through the private placement of equity and debt securities and loanfacilities.  Although we will need toraise funds in the near future, there can be no assurance that we will besuccessful in consummating any fundraising transaction, or if we do consummatesuch a transaction, that its terms and conditions will not require us to giveinvestors warrants or other 

 

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valuable rights to purchase additional interestin our company, or be otherwise unfavorable to us.  Among other things, the agreements underwhich we issued some of our existing securities include, and any securitiesthat we may issue in the future may also include, terms that could impede ourability to raise additional funding.  Ourprojected cash needs are based on management’s current assumptions regardingour business, including some degree of organic growth.  This growth may not materialize and ourassumptions could prove to be inaccurate. We have been inaccurate in projecting our growth and related cash needsin the past.  The issuance of additionalsecurities could impose additional restrictions on how we operate and financeour business.  In addition, our currentdebt financing arrangements involve significant interest expense andrestrictive covenants that limit our operations.

 

**We have a history of losses, andwe may not achieve or maintain profitability.**

 

We have experienced operating and net losses ineach fiscal quarter since our inception, and as of March 31, 2008, we hadan accumulated deficit of $137.1 million. We incurred net losses of $2.3 million for the quarter ended March 31,2008 and $6.6 million for the quarter ended March 31, 2007.  We will need to increase revenues and reduceoperating expenses to achieve profitability, and we may not be able to doso.  Even if we do achieve profitability,we may not be able to sustain or increase profitability on a quarterly orannual 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/orexpenses in the future.  Consequently, aswe expand our commercial operations, management may not be able to controlcosts and expenses adequately, and such operations may generate losses.  If our operating expenses exceed ourexpectations, our financial performance will be adversely affected.  Our failure to achieve and sustain profitabilitywould negatively impact the market price of our common stock.

 

**We may face difficultiesidentifying acquisitions and integrating these acquisitions into ouroperations.  These acquisitions may beunsuccessful, involve significant cash expenditures or expose us to unforeseenliabilities.**

 

We continually evaluate opportunities to acquirehealthcare staffing companies that complement or enhance our business andfrequently have preliminary acquisition discussions with such companies.  Since 2003, we have acquired twelvebusinesses.  These acquisitions involvenumerous risks, including:

 

·                  potentialloss of revenues following the acquisition;

 

·                  difficultiesintegrating acquired personnel and distinct cultures into our business;

 

·                  difficultiesintegrating acquired companies into our operating, financial planning andfinancial reporting systems;

 

·                  diversionof management attention from existing operations;

 

·                  lossof required personnel to competitive businesses and a corresponding loss ofclients; and

 

·                  assumptionof liabilities and exposure to unforeseen liabilities of acquired companies,including liabilities for their failure to comply with healthcare regulations.

 

These acquisitions may also involve significantcash expenditures, debt incurrence and integration expenses that couldseriously harm our financial condition and results of operations.  We may fail to achieve expected efficienciesand synergies.  Any acquisition mayultimately have a negative impact on our business and financial condition.  We may have difficulty in successfullycompleting planned acquisitions, which could result in significant cashexpenditures for legal and accounting services and take up significant time andattention of management.

 

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**There is a limited public marketfor our common stock, and the trading price of our common stock is subject tovolatility.**

 

The quotation of shares of our common stock onthe OTC Bulletin Board began in 2003. There can be no assurances that an active public market will develop orcontinue for our common stock.  Thetrading price of our common stock is subject to significant fluctuations.  Factors affecting the trading price of ourcommon stock may include:

 

·                  variationsin our financial results;

 

·                  announcementsof innovations, new solutions, strategic alliances or significant agreements byus or by our competitors;

 

·                  recruitmentor departure of key personnel;

 

·                  changesin estimates of our financial results or changes in the recommendations of anysecurities analysts that elect to follow our common stock;

 

·                  marketconditions in our industry, the industries of our customers and the economy asa whole; and

 

·                  salesof substantial amounts of our common stock, or the perception that substantialamounts of our common stock will be sold, by our existing stockholders in thepublic market.

 

**Our need to raise additionalcapital in the future could have a dilutive effect on your investment.**

 

Based on current cash flow projections whichcontain revenue growth from current operations, we anticipate needing to raiseadditional capital in the future in order for us to continue to operate ourbusiness.  We will need to raise between$1,000,000 and $3,000,000 of additional funds during the next twelve months tosatisfy working capital and debt service needs, and $750,000 of this will beneeded during the second calendar quarter of 2008.  Since the beginning of 2007, we have raised$4.9 million through the sale of common stock at $0.60 per share in elevenclosings of a private placement and $5.7 million through the sales of commonstock at $0.30 per share in two closings of the private placement.  We may raise additional capital through thepublic or private sale of common stock or securities convertible into orexercisable for our common stock.  Suchsales could be consummated at a significant discount to the trading price ofour stock.

 

If we sell additional shares of our commonstock, such sales will further dilute the percentage of our equity that ourexisting stockholders own.  In addition,private placement financings could involve the issuance of securities at aprice per share that represents a discount to the trading prices listed for ourcommon stock on the OTC Bulletin Board. Further, debt and equity financings may involve the issuance of dilutivewarrants.  Depending upon the price per shareof securities that we sell in the future, a stockholder’s interest in us willbe further diluted by any adjustments to the number of shares and theapplicable exercise price required pursuant to the terms of the agreementsunder which we previously issued securities. No assurance can be given that previous or future investors, finders orplacement agents will not claim that they are entitled to additionalanti-dilution adjustments or dispute the calculation of any suchadjustments.  Any such claim or disputecould require us to incur material costs and expenses regardless of theresolution and, if resolved unfavorably to us, to effect dilutive securitiesissuances or adjustments to previously issued securities.  In addition, future financings may includeprovisions requiring us to make additional payments to the investors if we failto obtain or maintain the effectiveness of SEC registration statements byspecified dates or take other specified action. Our ability to meet these requirements may depend on actions byregulators and other third parties, over which we will have no control.  These provisions may require us to makepayments or issue additional dilutive securities, or could lead to costly anddisruptive disputes.  In addition, theseprovisions could require us to record additional non-cash expenses.

 

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**Our credit facility imposessignificant expenses on us and we could incur significant additional expensesin the event of default.**

 

In February 2008, we entered into a $10.2million refinancing with ComVest Capital, LLC (the “Credit Facility”).  In connection with our entry into this debtrefinancing with ComVest, we terminated our existing revolving credit facilitywith Systran Financial Services Corporation and repaid our outstanding debtobligations to Comerica Bank.  The CreditFacility involves significant interest expense and contains financial covenantswith which we must comply.  The CreditFacility is comprised of a two-year $5.2 million Revolving Credit Note, bearinginterest at an annual rate equal to the greater of the Prime Rate plus 2% or8.5%, and two separate three-year term loans, each amounting to $2.5 millionand bearing interest at the annual rate of 12.5%.  Upon the occurrence of certain events ofdefault, ComVest may immediately collect any obligation under the CreditFacility and may increase interest rates to much higher default rates.  Our failure to pay required interest expensesand other fees or to otherwise satisfy the terms of this Credit Facility wouldhave a material adverse affect on us.

 

**The agreements governing theconvertible debentures contain covenants and restrictions that may limit ourability to operate our business.**

 

Like the Credit Facility, the terms of our 2006convertible debentures limit our ability to, among other things, declare or paydividends or distributions on any equity securities, create or incur additionalindebtedness, create additional liens on our assets and repurchase commonstock.  These restrictions couldadversely affect our ability to borrow additional funds or raise additionalequity to fund our future operations.  Inaddition, if we fail to comply with any of the covenants contained in theagreements or otherwise default on the convertible debentures, the holders mayaccelerate the indebtedness, and we may not have sufficient funds available tomake the required payments.

 

**MedCap Partners L.P. controls asignificant amount of our outstanding capital stock, and this may delay orprevent a change of control of the company or 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 the managing member of MedCap Management &Research LLC, the general partner of the MedCap Funds.  MedCap is able to exercise influence overmatters requiring stockholder approval, such as the election of directors andthe approval of significant corporate transactions, including transactionsinvolving an actual or potential change of control of the company or othertransactions that the non-controlling stockholders may deem to be in their bestinterests and in which such stockholders could receive a premium for theirshares.

 

**We incur significant costs as aresult of operating as a public company, and our management is required todevote substantial time to comply with public company regulations.**

 

As a public company, we incur significant legal,accounting and other expenses that we would not otherwise incur if we were aprivate company.  In addition, theSarbanes-Oxley Act of 2002 and rules subsequently implemented by theSecurities and Exchange Commission (“SEC”) have imposed various requirements onpublic companies, including changes in corporate governance practices.  The Sarbanes-Oxley Act requires us tomaintain effective disclosure controls and procedures and internal controls forfinancial reporting.  In order tomaintain and improve the effectiveness of our disclosure controls andprocedures and internal controls over financial reporting, significantresources and management oversight are required.  Our management and other personnel need todevote a substantial amount of time to these requirements.  We have limited internal financial andaccounting resources, and these resources may not be sufficient to support ourrequired compliance with these rules and regulations.  Moreover, these rules and regulationsincrease our legal and financial compliance costs and make some activities moretime-consuming and costly.

 

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In addition, we must now perform system andprocess evaluation and testing of our internal controls over financialreporting to allow management to report on the effectiveness of our internalcontrols over financial reporting, as required by Section 404 of theSarbanes-Oxley Act.  Our compliance with Section 404requires that we incur substantial expense and expend significant managementefforts.  If we identify deficiencies inour internal 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.

 

**If we do not continue to attractand retain key employees, our business could suffer.**

 

We are dependent upon the personal efforts ofour management team.  The loss of any ofour officers or directors could have a material adverse effect upon ourbusiness and future prospects.  Inparticular, we depend on our Chief Executive Officer, John Kaiser.  We do not presently have key-person lifeinsurance upon the life of any of our officers or directors.  Additionally, as we continue our plannedexpansion of commercial operations, we will require the services of additionalskilled personnel.  There can be noassurance that we can attract persons with the requisite skills and training tomeet our future needs or, even if such persons are available, that they can behired on terms favorable to us.

 

Our success also depends on our ability toattract and retain qualified and skilled sales personnel who engage in sellingand business development for our services. The available pool of qualified sales personnel candidates islimited.  We commit substantial resourcesto the recruitment, training, development and operational support of our salespersonnel.  There can be no assurancethat we will be able to recruit, develop and retain qualified sales personnelin sufficient numbers or that our sales personnel will achieve productivitylevels sufficient to enable growth of our business.  Failure to attract and retain productivesales personnel could adversely affect our business, financial condition andresults of operations.

 

**If we are unable to attractqualified nurses and healthcare professionals for our healthcare staffingbusiness, our business could be negatively impacted.**

 

We rely significantly on our ability to attractand retain nurses and healthcare professionals who possess the skills,experience and licenses necessary to meet the requirements of our hospital andhealthcare facility clients.  We competefor healthcare staffing personnel with other temporary healthcare staffingcompanies and with hospitals and healthcare facilities.  We must continually evaluate and expand ourtemporary healthcare professional network to keep pace with our hospital andhealthcare facility clients’ needs. Currently, there is a shortage of qualified nurses in most areas of theUnited States, competition for nursing personnel is increasing, and salariesand benefits have risen.  We may beunable to continue to increase the number of temporary healthcare professionalsthat we recruit, decreasing the potential for growth of our business.  Our ability to attract and retain temporaryhealthcare professionals depends on several factors, including our ability toprovide temporary healthcare professionals with assignments that they view asattractive and to provide them with competitive benefits and wages.  We cannot assure you that we will besuccessful in any of these areas.  Thecost of 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 financial performance could be adversely affected.  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 industryis highly competitive and the success and future growth of our business dependsupon our ability to remain competitive in obtaining and retaining temporarystaffing clients.**

 

The temporary staffing industry is highlycompetitive and fragmented, with limited barriers to entry.  We compete in national, regional and localmarkets with full-service agencies and in regional and local markets withspecialized temporary staffing agencies. Some of our competitors include AMN Healthcare Services, Inc.,Cross Country, Inc., Medical Staffing Network Holdings, Inc. and OnAssignment, Inc.  All of thesecompanies have significantly greater marketing and financial resources than wedo.  Our ability to attract 

 

27

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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.  Our ability to attract skilled, experiencedtemporary professionals is based on our ability to pay competitive wages, toprovide competitive benefits, and to provide multiple, continuous assignments,and thereby increase the retention rate of these employees.  To the extent that competitors seek to gainor retain market share by reducing prices or increasing marketing expenditures,we could lose revenues and our margins could decline, which could seriouslyharm our operating results and cause the trading price of our stock todecline.  As we expand into new geographicmarkets, our success will depend in part on our ability to gain market sharefrom competitors.  We expect competitionfor clients to increase in the future, and the success and growth of ourbusiness depends on our ability to remain competitive.

 

**Our business depends upon ourcontinued ability to secure and fill new orders from our hospital andhealthcare facility clients, because we do not have long-term agreements orexclusive 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 businessdepends upon our ability to continually secure new orders from hospitals andother healthcare facilities and to fill those orders with our temporaryhealthcare professionals.  Our hospitaland healthcare facility clients are free to place orders with our competitorsand may choose to use temporary healthcare professionals offered by ourcompetitors.  Therefore, we must maintainpositive relationships with our hospital and healthcare facility clients.  If we fail to maintain positive relationshipswith our hospital and healthcare facility clients, we may be unable to generatenew temporary healthcare professional orders and our business may be adverselyaffected.

 

Depressed economic conditions, such asincreasing unemployment rates and low job growth, could also negativelyinfluence our ability to secure new orders and contracts from clients.  In times of economic downturn, permanenthealthcare facility staff may be more inclined to work overtime and less likelyto leave their positions, resulting in fewer available vacancies and lessdemand for our services.  Fewer placementopportunities for our temporary healthcare professionals impairs our ability torecruit and place temporary healthcare professionals and our revenues maydecline as a result of this constricted demand and supply.

 

**Fluctuations in patient occupancyat our clients’ hospitals and healthcare facilities and/or nurse turnover ratesmay adversely affect the demand for our services and therefore theprofitability 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 otherhealthcare facilities often add temporary employees before full-time employeesare hired.  As occupancy decreases,hospitals and other healthcare facilities typically reduce their use of temporaryemployees before undertaking layoffs of their regular employees.  In addition, we may experience morecompetitive pricing pressure during periods of occupancy downturn.  Occupancy at our clients’ hospitals andhealthcare facilities also fluctuates due to the seasonality of some electiveprocedures.  We are unable to predict thelevel of patient occupancy at any particular time and the effect on ourrevenues and earnings.

 

**We could be difficult to acquiredue to anti-takeover provisions in our charter documents and Delaware law.**

 

Provisions of our certificate of incorporationand bylaws may have the effect of making it more difficult for a third party toacquire us, or of discouraging a third party from attempting to acquire controlof us.  These provisions may make it moredifficult for stockholders to take corporate actions and may have the effect ofdelaying or preventing a change in control. We are subject to the anti-takeover provisions of Section 203 ofthe Delaware General Corporation Law. Subject to specified exceptions, including the approval of thetransaction by the corporation’s board of directors or stockholders, thissection provides that a corporation may not engage in any business combinationwith any interested stockholder during the three-year period 

 

28

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following the time that such stockholder becomesan interested stockholder.  Thisprovision could have the effect of delaying or preventing a change of controlof us.  These factors could limit theprice that investors or an acquirer may be willing to pay in the future forshares of our common stock.

 

**We operate in a regulatedindustry and changes in regulations or violations of regulations may result inincreased costs or sanctions that could reduce our revenues and adversely affectour financial performance.**

 

The healthcare industry is subject to extensiveand complex federal and state laws and regulations related to professionallicensure, conduct of operations, payment for services and payment forreferrals.  If we fail to comply with thelaws and regulations that are applicable to our business, we could suffer civiland/or criminal penalties or be subject to injunctions or cease and desistorders.

 

Except as noted below, our business is generallynot subject to the extensive and complex laws that apply to our hospital andhealthcare facility clients, including laws related to Medicare, Medicaid andother federal and state healthcare programs. However, these laws and regulations could indirectly affect the demandor the prices paid for our services.  Forexample, our hospital and healthcare facility clients could suffer civil orcriminal penalties or be excluded from participating in Medicare, Medicaid andother healthcare programs if they fail to comply with the laws and regulationsapplicable to their businesses.  Inaddition, our hospital and healthcare facility clients could receive reducedreimbursements, or be excluded from coverage, because of a change in the ratesor conditions set by federal or state governments.  In turn, violations of or changes to theselaws and regulations that adversely affect our hospital and healthcare facilityclients could also adversely affect the prices that these clients are willingor able to pay for our services.

 

As a result of our acquisition of ATS Universalin October 2007, we are reimbursed under Medicaid programs for a portionof the services we provide, and are subject to the complex and extensive lawsrelating to those programs.  Adversechanges in Medicaid reimbursement rates may harm our business. Further, wecould suffer civil and/or criminal penalties and/or be excluded fromparticipating in Medicaid and other healthcare programs if we fail to complywith the applicable laws and regulations.

 

We are also subject to certain laws andregulations applicable to healthcare staffing agencies and general temporarystaffing services.  Like all employers,we must also comply with various laws and regulations relating to paypractices, workers compensation and immigration.

 

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

 

**Further government regulations orhealthcare reform could negatively impact our business opportunities, revenuesand margins.**

 

Although our operations are not currentlysubject to any significant government regulations, it is possible that, in thefuture, such regulations may be created. Although we cannot predict the likelihood or extent of any such future regulations,the possibility exists that future unforeseen changes may have an adverseimpact on our ability to continue or expand our operations as presentlyplanned.

 

The United States government has undertakenefforts to control increasing healthcare costs through legislation, regulationand voluntary agreements with medical care providers and drug companies.  In the recent past, the United StatesCongress has considered several comprehensive healthcare reform proposals.  The proposals were generally intended toexpand healthcare coverage for the uninsured and reduce the growth of totalhealthcare expenditures.  While Congressdid not adopt any comprehensive reform proposals, members of Congress may raisesimilar proposals in the future.  If anyof these proposals are approved, hospitals and other healthcare facilities mayreact by spending less on healthcare staffing, including nurses.  If this were to occur, we would have fewerbusiness 

opportunities, which could seriously harm ourbusiness.

 

29

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State governments have also attempted to controlincreasing healthcare costs.  Forexample, the State of Massachusetts has recently implemented a regulation thatlimits the hourly rate payable to temporary nursing agencies for registerednurses, licensed practical nurses and certified nurses’ aides.  The State of Minnesota has also implemented astatute that limits the amount that nursing agencies may charge nursinghomes.  Other states have also proposedlegislation that would limit the amounts that temporary staffing companies maycharge.  Any such current or proposedlaws could seriously harm our business, revenues and margins.

 

Furthermore, third party payers, such as healthmaintenance organizations, increasingly challenge the prices charged for medicalcare.  Failure by hospitals and otherhealthcare facilities to obtain full reimbursement from those third partypayers could reduce the demand or the price paid for our staffing services.

 

**Significant legal actions couldsubject us to substantial uninsured liabilities.**

 

In recent years, healthcare providers havebecome subject to an increasing number of legal actions alleging malpractice,product liability or related legal theories. Many of these actions involve large claims and significant defense costs.  In addition, we may be subject to claimsrelated to torts or crimes committed by our employees or temporary healthcareprofessionals.  In some instances, we arerequired to indemnify our clients against 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, couldresult in negative publicity, payment of fines or other damages.  Our professional malpractice liabilityinsurance and general liability insurance coverage may not cover all claimsagainst us or continue to be available to us at a reasonable 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 fordamages resulting from our hospital and healthcare 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 allegingdiscrimination, sexual harassment, negligence and other similar activities byour hospital and healthcare facility clients. The cost of defending such claims, even if groundless, could besubstantial and the associated negative publicity could adversely affect ourability to attract and retain qualified healthcare professionals in the future.

 

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

 

As of March 31, 2008, we had $16.2 millionof goodwill 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 March 31, 2008, goodwill and other intangible assets represented62% 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 down a substantial amount of goodwill, ourstock price could be adversely affected. As a result of the loss of customer base in some operations, and theclosure or sale of certain operations, our impairment analysis of goodwillrequired a charge for impairment of goodwill of $10.0 million in 2006 and $3.1million in 2007.  We also lost certaincustomer relationships that were obtained with the TravMed acquisition whichnecessitated a write-down of $123,000 in 2006 related to intangibles assignedto these customer relationships.

 

**Demand for medical staffingservices is significantly affected by the general level of economic activityand unemployment in the United States.**

 

When economic activity increases, temporaryemployees are often added before full-time employees are hired.  However, as economic activity slows, manycompanies, including our hospital and healthcare 

 

30

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facility clients, reduce their use of temporaryemployees before laying off full-time employees.  In addition, we may experience morecompetitive pricing pressure during periods of economic downturn.  Therefore, any significant economic downturncould have a material adverse impact on our financial position and results ofoperations.

 

**Item 2.    Unregistered Sales ofEquity Securities and Use of Proceeds**

 

Inconjunction with the new Credit Facility with ComVest Capital LLC (“ComVest”),the Company issued ComVest warrants to purchase 8,000,000 common shares at anexercise price of $0.001 per share and which expire in February 2014.  The Company computed the relative fair valueof the warrants at $1,018,446 and recorded this amount as a discount associatedwith the two separate three-year term loans which is being amortized over thelife of the term loans.

 

**Item 3.    Defaults Upon SeniorSecurities**

 

None

 

**Item 4.    Submission of Mattersto a Vote of Security Holders**

 

None

 

**Item 5.    Other Information**

 

None.

 

**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.        |
|                   |       |                                                                                                                                                              |
| 10.81(6)#              |       | Severance  Agreement and Mutual Release of Claims dated March 6, 2007, by and  between Crdentia Corp. and James D. Durham.                                   |
|                   |       |                                                                                                                                                              |
| 10.82(7)#              |       | Letter  Agreement dated March 8, 2007, by and between Crdentia Corp. and John Kaiser.                                                                        |

 

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| 10.83(8)#  |   | Executive  Employment Agreement dated March 26, 2007, by and between Crdentia Corp.  and John Kaiser.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.84(8)#  |   | Restricted  Stock Bonus Award Agreement, dated March 26, 2007, by and between  Crdentia Corp. and John Kaiser.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.85*(12) |   | SYSTRAN  Financial Services Corporation Factoring Agreement, dated February 8,  2007, by and between SYSTRAN Financial Services Corporation and Arizona Home  Health Care/Private Duty, Inc., Care Pros Staffing, Inc., Baker  Anderson Christie, Inc., New Age Staffing, Inc., PSR Nurses, Ltd.,  and Nurses Network, Inc.                                                                                                                                                                                                                                                 |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.86*(12) |   | SYSTRAN  Financial Services Corporation Factoring Agreement, dated February 8,  2007, by and between SYSTRAN Financial Services Corporation and Crdentia  Corp., Health Industry Professions, L.L.C., Mint Medical Staffing Odessa, LP,  Prime Staff LP and Staff Search Acquisition Corp.                                                                                                                                                                                                                                                                                                           |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.87(12)  |   | Collateralized  Guaranty Agreement dated February 8, 2007, by AHHC Acquisition  Corporation, Arizona Home Health Care/Private Duty, Inc., Baker Anderson  Christie, Inc., BAC Acquisition Corporation, Care Pros  Staffing, Inc., CPS Acquisition Corp., CRDE Corp., GHS Acquisition  Corporation, HIP Acquisition Corporation, HIP Holding Inc., iVOW Acquisition  Corporation, NAS Acquisition Corporation, New Age Staffing, Inc., NNI  Acquisition Corporation, Nurses Network, Inc., PSR Nurses, Ltd., PSR  Nurse Recruiting, Inc., and PSR Nurses Holdings Corp. |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.88(12)  |   | Collateralized  Guaranty Agreement dated February 8, 2007, by Crdentia Corp., Health  Industry Professionals, L.L.C., Mint Medical Staffing Odessa, LP, Prime  Staff, LP, and Staff Search Acquisition Corp.                                                                                                                                                                                                                                                                                                                                                                                         |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.89(12)  |   | Bills,  Accounts, and Accounts Receivable Validity Guaranty dated February 8, 2007  by James D. Durham in favor of Systran Financial Services Corporation.                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.90(12)  |   | Bills,  Accounts, and Accounts Receivable Validity Guaranty dated February 8,  2007 by James J. TerBeest in favor of Systran Financial Services Corporation.                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.91(12)  |   | Master  Revolving Note dated January 19, 2007 between Crdentia Corp. and  Comerica Bank.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.92(9)   |   | Settlement  Agreement by and between Crdentia Corp. and iVOW, Inc., dated as of  April 4, 2007                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.93(9)   |   | Registration  Rights Agreement by and between Crdentia Corp. and iVOW, Inc., dated as  of April 4, 2007.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.94(10)  |   | Settlement  Agreement by and between Crdentia Corp. and Dawson James  Securities, Inc., dated April 13, 2007.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.95(12)  |   | Registration  Rights Agreement dated April 13, 2007 by and between Crdentia Corp. and  Dawson James Securities, Inc.                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.96(12)  |   | Compromise,  Settlement and Release Agreement dated effective March 29, 2007 by and  between Crdentia Corp. and William W. Crocker and William C. Crocker.                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.97(11)  |   | Revolving  Credit and Term Loan Agreement dated February 22, 2008 by and between  Crdentia Corp. and ComVest Capital, LLC.                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |

 

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| 10.98(11)  |   | Revolving  Credit Note dated February 22, 2008 by Crdentia Corp. in favor of ComVest  Capital, LLC.             |
|------------|--------|----------------------------------------------------------------------------------------------------------------------|
|       |   |                                                                                                                 |
| 10.99(11)  |   | Term  Note (Tranche A) dated February 22, 2008 by Crdentia Corp. in favor of  ComVest Capital, LLC.             |
|       |   |                                                                                                                 |
| 10.100(11) |   | Term  Note (Tranche B) dated February 22, 2008 by Crdentia Corp. in favor of  ComVest Capital, LLC.             |
|       |   |                                                                                                                 |
| 10.101(11) |   | Common  Stock Purchase Warrant of Crdentia Corp. issued to ComVest Capital, LLC as of  February 22, 2008.       |
|       |   |                                                                                                                 |
| 10.102(11) |   | Registration  Rights Agreement dated February 22, 2008 by and between Crdentia Corp.  and ComVest Capital, LLC. |
|       |   |                                                                                                                 |
| 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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#Indicates management contract or compensatory plan.

*Applicationhas been made to the Securities and Exchange Commission to seek confidentialtreatment of certain provisions.  Omittedmaterial for which confidential treatment has been requested has been filedseparately with the Securities and Exchange Commission.

(1)Previously filed on Form 10-QSB with the Securities and ExchangeCommission on August 12, 2003 and incorporated herein by reference.

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

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

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

(5)           Previously filedwith a Current Report on Form 8-K dated January 29, 2007 andincorporated herein by reference.

(6)           Previously filedwith a Current Report on Form 8-K dated February 28, 2007 andincorporated herein by reference.

(7)           Previously filedwith a Current Report on Form 8-K dated March 8, 2007 andincorporated herein by reference.

(8)           Previously filedwith a Current Report on Form 8-K dated March 26, 2007 andincorporated herein by reference.

(9)           Previously filedwith a Current Report on Form 8-K dated April 4, 2007 andincorporated herein by reference.

(10)         Previously filed witha Current Report on Form 8-K dated April 12, 2007 and incorporatedherein by reference.

(11)         Previously filed witha Current Report on Form 8-K dated February 22, 2008 and incorporatedherein by reference.

(12)         Previouslyfiled with a Quarterly Report on Form 10-Q for the quarterly period ended March31, 2007 and incorporated herein by reference.

33

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**SIGNATURES**

 

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the Registrant has duly caused this Report to be signed on itsbehalf by the undersigned, thereunto duly authorized.

 

 
|                            | CRDENTIA CORP. |
|---------------------------------|----------------|
|                            |           |
| Dated:   May 15, 2008 | By:            | /s/  John Kaiser |
|                            |           |   | John  Kaiser |
|                            |           |   | Chief  Executive Officer and Director |
|                            |           |   | (Principal  Executive Officer) |
|                            |           |
|                            |           |
| Dated:   May 15, 2008 | By:            | /s/  James J. TerBeest |
|                            |           |   | James  J. TerBeest |
|                            |           |   | Chief  Financial Officer |
|                            |           |   | (Principal  Financial and Accounting |
|                            |           |   | Officer) |

 

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