**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

**FORM 10-Q**
| **x**      | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|------------|------------|-----------------------------------------------------------------------------------------------|
|       |       |                                                                                          |
| ** ** |       | **For the  quarterly period ended March 31, 2007**                                            |
| ** ** |       | ** **                                                                                    |
| **o**      | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**Commissionfile number: 0-31152**

**CRDENTIA CORP.**

(Exact name ofregistrant 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 ofprincipal executive offices)

**(972) 850-0780**

(Registrant’stelephone number, including area code)

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.              Yes  **x**         No**o**

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer,or a non-accelerated filer.  Seedefinition of “accelerated filer and large accelerated filer” in Rule 12b-2 ofthe Exchange Act.  (Check one):

Large acceleratedfiler **o                                                **Acceleratedfiler **o                                                **Non-acceleratedfiler **x**

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).    Yes     **o**     No **x**

Indicate thenumber of shares outstanding of each of the issuer’s classes of common equity,as of the latest practicable date.  AtMay 10, 2007, 25,889,983 shares of common stock, $.0001 par value, wereoutstanding.

 

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**CRDENTIACORP.**

Form 10-Q QuarterlyReport

For QuarterlyPeriod Ended March 31, 2007

**Table ofContents**
|                                                                                                                | ** **           | **Page**                                                                                    |
|----------------------------------------------------------------------------------------------------------------|----------------------|---------------------------------------------------------------------------------------------|
| ** **                                                                                                     |                 |                                                                                        |
| **PART I - FINANCIAL  INFORMATION**                                                                            |                 | 3                                                                                           |
| ** **                                                                                                     |                 |                                                                                        |
| Item 1.                                                                                                        | Financial Statements |                                                                                        | 3 |
|                                                                                                           |                 |                                                                                        |   |
| Unaudited Condensed Consolidated Balance Sheets at  March 31, 2007 and December 31, 2006                       |                 | 3                                                                                           |
|                                                                                                           |                 |                                                                                        |
| Unaudited  Condensed Consolidated Statements of Operations for the Three Months Ended  March 31, 2007 and 2006 |                 | 4                                                                                           |
|                                                                                                           |                 |                                                                                        |
| Unaudited  Condensed Consolidated Statements of Cash Flows for the Three Months Ended  March 31, 2007 and 2006 |                 | 5                                                                                           |
|                                                                                                           |                 |                                                                                        |
| Notes to  Unaudited Condensed Consolidated Financial Statements                                                |                 | 6                                                                                           |
|                                                                                                           |                 |                                                                                        |
| Item 2.                                                                                                        |                 | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |   | 16 |
|                                                                                                           |                 |                                                                                        |   |   |
| Item 3.                                                                                                        |                 | Quantitative  and Qualitative Disclosures About Market Risk                                 |   | 22 |
|                                                                                                           |                 |                                                                                        |   |   |
| Item 4.                                                                                                        |                 | Controls and  Procedures                                                                    |   | 22 |
|                                                                                                           |                 |                                                                                        |   |   |
| **PART II - OTHER  INFORMATION**                                                                               |                 | 23                                                                                          |
| ** **                                                                                                     |                 |                                                                                        |
| Item 1.                                                                                                        |                 | Legal Proceedings                                                                           |   | 23 |
|                                                                                                           |                 |                                                                                        |   |   |
| Item  1A.                                                                                                      |                 | Risk  Factors                                                                               |   | 24 |
|                                                                                                           |                 |                                                                                        |   |   |
| Item 2.                                                                                                        |                 | Unregistered  Sales of Equity Securities and Use of Proceeds                                |   | 30 |
|                                                                                                           |                 |                                                                                        |   |   |
| Item 3.                                                                                                        |                 | Defaults Upon  Senior Securities                                                            |   | 30 |
|                                                                                                           |                 |                                                                                        |   |   |
| 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,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                                                 | ** ** | **2007**           | ** ** | **2006**              | ** ** |
|                                                                                                                                                                                                                                                       |       |               |       |                  |       |
| Current assets:                                                                                                                                                                                                                                            |       |               |       |                  |       |
| Cash and cash  equivalents                                                                                                                                                                                                                                 |       | $                  | 316,479    |                  | $          | 198,068 |   |
| Accounts receivable,  net of allowance for doubtful accounts of $330,000 at March 31, 2007 and  $450,000 at December 31, 2006                                                                                                                              |       | 5,562,352          |       | 5,776,473             |       |
| Other current assets                                                                                                                                                                                                                                       |       | 1,236,814          |       | 700,524               |       |
| Total current assets                                                                                                                                                                                                                                       |       | 7,115,645          |       | 6,675,065             |       |
|                                                                                                                                                                                                                                                       |       |               |       |                  |       |
| Property and equipment,  net                                                                                                                                                                                                                               |       | 453,173            |       | 469,396               |       |
| Goodwill                                                                                                                                                                                                                                                   |       | 14,532,917         |       | 14,532,917            |       |
| Intangible assets, net                                                                                                                                                                                                                                     |       | 1,382,515          |       | 1,581,954             |       |
| Other assets                                                                                                                                                                                                                                               |       | 394,420            |       | 628,764               |       |
|                                                                                                                                                                                                                                                       |       |               |       |                  |       |
| Total assets                                                                                                                                                                                                                                               |       | $                  | 23,878,670 |                  | $          | 23,888,096 |   |
|                                                                                                                                                                                                                                                       |       |               |       |                  |       |
| Current liabilities:                                                                                                                                                                                                                                       |       |               |       |                  |       |
| Revolving lines of  credit                                                                                                                                                                                                                                 |       | $                  | 4,056,383  |                  | $          | 6,412,029 |   |
| Accounts payable and  accrued expenses                                                                                                                                                                                                                     |       | 3,440,033          |       | 3,807,253             |       |
| Due to iVOW                                                                                                                                                                                                                                                |       | 700,693            |       | 791,943               |       |
| Accrued employee  compensation and benefits                                                                                                                                                                                                                |       | 832,835            |       | 896,260               |       |
| Current portion of  notes payable (Including amounts due to significant shareholder of $1,251,597  at March 31, 2007 and $1,234,078 at December 31, 2006)                                                                                                  |       | 1,410,000          |       | 1,234,078             |       |
| Notes payable to lender                                                                                                                                                                                                                                    |       | 2,400,000          |       | 701,717               |       |
| Debentures, net of  discount of $1,109,313 at December 31, 2006                                                                                                                                                                                            |       | —             |       | 554,687               |       |
| Other current liabilities                                                                                                                                                                                                                                  |       | 733,203            |       | 345,643               |       |
| Total current  liabilities                                                                                                                                                                                                                                 |       | 13,573,147         |       | 14,743,610            |       |
|                                                                                                                                                                                                                                                       |       |               |       |                  |       |
| Debentures, net of  discount of $318,750 at March 31, 2007                                                                                                                                                                                                 |       | 446,250            |       | —                |       |
| Long term bonus payable                                                                                                                                                                                                                                    |       | 925,523            |       | 903,455               |       |
| Other long-term  liabilities                                                                                                                                                                                                                               |       | 582,032            |       | 757,954               |       |
|                                                                                                                                                                                                                                                       |       |               |       |                  |       |
| Total liabilities                                                                                                                                                                                                                                          |       | 15,526,952         |       | 16,405,019            |       |
|                                                                                                                                                                                                                                                       |       |               |       |                  |       |
| Commitments and  contingencies                                                                                                                                                                                                                             |       |               |       |                  |       |
|                                                                                                                                                                                                                                                       |       |               |       |                  |       |
| Stockholders’ equity:                                                                                                                                                                                                                                 |       |               |       |                  |       |
| Common stock, par value  $0.0001, 150,000,000 shares authorized at March 31, 2007 and December 31,  2006; 23,306,651 shares issued and outstanding at March 31, 2007 and  14,538,313 shares issued and 14,430,672 shares outstanding at December 31,  2006 |       | 2,331              |       | 1,454                 |       |
| Additional paid-in  capital                                                                                                                                                                                                                                |       | 134,224,855        |       | 126,768,011           |       |
| Treasury stock, no  shares at March 31, 2007 and 107,641 shares at cost at December 31, 2006                                                                                                                                                               |       | —             |       | —                |       |
| Accumulated deficit                                                                                                                                                                                                                                        |       | (125,875,468       | )          | (119,286,388          | )          |
| Total stockholders’  equity                                                                                                                                                                                                                           |       | 8,351,718          |       | 7,483,077             |       |
|                                                                                                                                                                                                                                                       |       |               |       |                  |       |
| Total liabilities and stockholders’ equity                                                                                                                                                                                                            |       | $                  | 23,878,670 |                  | $          | 23,888,096 |   |

 

The accompanying notes are an integral part of theseunaudited condensed consolidated financial statements.

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Crdentia Corp.

Unaudited CondensedConsolidated Statements of Operations

 
| ** **                                                                   | ** ** | **Three Months Ended March 31,** | ** ** |
|------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                   | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
|                                                                         |       |                                                 |       |   |   |
| Revenue from  services                                                       |       | $                                                    | 9,020,437  |   | $ | 8,984,823 |   |
| Direct operating  expenses                                                   |       | 7,103,505                                            |       | 7,235,519 |   |
| Gross profit                                                                 |       | 1,916,932                                            |       | 1,749,304 |   |
|                                                                         |       |                                                 |       |   |   |
| Operating  expenses:                                                         |       |                                                 |       |   |   |
| Selling, general, and administrative expenses                                |       | 3,007,834                                            |       | 2,600,785 |   |
| Gain from settlement of acquisition claim                                    |       | —                                               |       | (1,064,693 | ) |
| Non-cash stock based compensation                                            |       | 3,391,392                                            |       | 378,260 |   |
| Total operating  expenses                                                    |       | 6,399,226                                            |       | 1,914,352 |   |
|                                                                         |       |                                                 |       |   |   |
| Loss from  operations                                                        |       | (4,482,294                                           | )          | (165,048 | ) |
|                                                                         |       |                                                 |       |   |   |
| Interest  expense, net                                                       |       | (2,106,786                                           | )          | (1,193,539 | ) |
|                                                                         |       |                                                 |       |   |   |
| Loss before  income taxes                                                    |       | (6,589,080                                           | )          | (1,358,587 | ) |
|                                                                         |       |                                                 |       |   |   |
| Income tax  expense                                                          |       | —                                               |       | — |   |
|                                                                         |       |                                                 |       |   |   |
| Net loss  attributable to common stockholders                                |       | $                                                    | (6,589,080 | ) | $ | (1,358,587 | ) |
|                                                                         |       |                                                 |       |   |   |
| Basic and  diluted loss per common share attributable to common stockholders |       | $                                                    | (0.38      | ) | $ | (0.42 | ) |
|                                                                         |       |                                                 |       |   |   |
| Weighted average number  of common shares outstanding                        |       | 17,365,298                                           |       | 3,214,729 |   |

 

The accompanying notes are an integral part of theseunaudited condensed consolidated financial statements.

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Crdentia Corp.

Unaudited CondensedConsolidated Statements of Cash Flows

 
| ** **                                                                    | ** ** | **Three Months Ended March 31,** | ** ** |
|-------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                    | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
|                                                                          |       |                                                 |       |   |   |
| Operating  activities:                                                        |       |                                                 |       |   |   |
| Net loss                                                                      |       | $                                                    | (6,589,080 | ) | $ | (1,358,587 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities:  |       |                                                 |       |   |   |
| Non-cash  interest expense                                                    |       | 1,232,639                                            |       | 831,813 |   |
| Depreciation and  amortization                                                |       | 249,002                                              |       | 219,177 |   |
| Gain on disposal  of fixed assets                                             |       | —                                               |       | (500 | ) |
| Gain on  settlement of acquisition claim                                      |       | —                                               |       | (1,064,693 | ) |
| Bad debt expense                                                              |       | 6,306                                                |       | 6,548 |   |
| Non-cash stock  based compensation                                            |       | 3,391,392                                            |       | 378,260 |   |
| Changes in  operating assets and liabilities, net of effects of acquisitions: |       |                                                 |       |   |   |
| Accounts  receivable                                                          |       | 207,815                                              |       | 139,634 |   |
| Other current  assets and liabilities                                         |       | (663,873                                             | )          | (135,952 | ) |
| Accounts payable  and accrued expenses                                        |       | (55,961                                              | )          | (312,041 | ) |
| Accrued employee  compensation and benefits                                   |       | (63,426                                              | )          | 34,674 |   |
| Long-term bonus  payable                                                      |       | 22,068                                               |       | 24,645 |   |
| Net cash used in  operating activities:                                       |       | (2,263,118                                           | )          | (1,237,022 | ) |
|                                                                          |       |                                                 |       |   |   |
| Investing  activities:                                                        |       |                                                 |       |   |   |
| Purchases of  property and equipment                                          |       | (33,340                                              | )          | (13,952 | ) |
| Proceeds from  disposals of property and equipment                            |       | —                                               |       | 500 |   |
| Net cash used in  investing activities                                        |       | (33,340                                              | )          | (13,452 | ) |
|                                                                          |       |                                                 |       |   |   |
| Financing  activities:                                                        |       |                                                 |       |   |   |
| Proceeds from  issuance of common stock, net of costs                         |       | 3,152,381                                            |       | 1,150,000 |   |
| Net decrease in  revolving lines of credit                                    |       | (2,355,645                                           | )          | (823,269 | ) |
| Proceeds from  notes payable to lender                                        |       | 2,400,000                                            |       | — |   |
| Proceeds from  debentures                                                     |       | —                                               |       | 2,000,000 |   |
| Repayment of  subordinated convertible notes                                  |       | —                                               |       | (12,500 | ) |
| Repayment of  note payable to lender                                          |       | (781,867                                             | )          | (1,350,000 | ) |
| Net cash  provided by financing activities                                    |       | 2,414,869                                            |       | 964,231 |   |
|                                                                          |       |                                                 |       |   |   |
| Net increase  (decrease) in cash and cash equivalents                         |       | 118,411                                              |       | (286,243 | ) |
| Cash and cash  equivalents at beginning of period                             |       | 198,068                                              |       | 434,921 |   |
| Cash and cash  equivalents at end of period                                   |       | $                                                    | 316,479    |   | $ | 148,678 |   |

 

The accompanying notes are an integral part of theseunaudited condensed consolidated financial statements.

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**Crdentia Corp.**

**Notes toUnaudited Condensed Consolidated Financial Statements**

**March 31,2007**

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

Organization

Crdentia Corp (the“Company”), a Delaware corporation, is a provider of healthcare staffingservices in the United States.  Suchservices include travel nursing, per diem staffing, contractual clinicalservices, locum tenens (physician staffing), allied services (diagnosticimaging, respiratory, laboratory, therapies and administrative modalities), andprivate duty home health care.  TheCompany considers these services to be one segment.  Each of these services relate solely toproviding healthcare staffing to customers and the Company utilizes commonsystems, databases, procedures, processes and similar methods of identifyingand serving these customers.

At the beginningof 2003, the Company was a development stage company with no commercialoperations. During that year, the Company pursued its operational plan ofacquiring companies in the healthcare staffing field and completed theacquisition of four operating companies. In 2003, the Company acquired Baker Anderson Christie, Inc., New AgeNurses, Inc., Nurses Network, Inc., and PSR Nurse Recruiting, Inc. and PSRNurses Holdings Corp., which holds the limited partner and general partnerinterests in PSR Nurses, Ltd. to provide the foundation for future growth.  During 2004, the Company completed theacquisitions of Arizona Home Health Care/Private Duty, Inc. and Care ProsStaffing, Inc.  On March 29, 2005, theCompany acquired TravMed USA, Inc. and Health Industry Professionals, LLC.  On May 4, 2005, the Company acquired PrimeStaff, LP and Mint Medical Staffing Odessa. In April 2006, the Company acquired the assets of Staff Search Ltd.

During 2006 theCompany terminated the operations it acquired in 2003 from Baker AndersonChristie, Inc. and Nurses Network, Inc. In addition, the Company returned to the sellers the shares of TravMedUSA, Inc. that it had acquired from the sellers in March 2005 and the notepayable to the sellers was cancelled.

The accompanyingfinancial statements include the results of the wholly-owned subsidiariesdiscussed above from their respective dates of acquisition.  All intercompany transactions have been eliminatedin consolidation.

Basis ofPresentation

The accompanyingunaudited financial data as of March 31, 2007 and for the three months endedMarch 31, 2007 and 2006 have been prepared by the Company pursuant to the rulesand regulations of the Securities and Exchange Commission.  Certain information and footnote disclosuresnormally included in financial statements prepared in accordance withaccounting principles generally accepted in the United States of America havebeen condensed or omitted pursuant to such rules and regulations.  These unaudited condensed consolidatedfinancial statements should be read in conjunction with the audited financialstatements and the notes thereto included in the Company’s annual report onForm 10-K for the year ended December 31, 2006.

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, 2007 and for the three months ended March 31, 2007and 2006 have been made.  The results ofoperations for the three months ended March 31, 2007 are not necessarilyindicative of the expected operating results for the full year.

Certain reclassificationshave been made to conform prior year data to the current year presentation.

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Going Concern

The Companygenerated a net loss of $6,589,080 and used cash in operations of $2,263,118during the three months ended March 31, 2007. Additionally, although the Company ended March 31, 2007 with asignificant working capital deficit of $6,457,502, it was able to secureadditional funding during the three months ended March 31, 2007 to finance itsoperations as it continued to attempt to execute its business plan and toacquire and grow companies involved in healthcare staffing.  The Company will need to raise additionalfunds during the next twelve months to satisfy debt service requirements andworking capital needs.  There is no assurancethat the Company will be able to raise the amount of debt or equity capitalrequired to meet its objectives.  TheCompany’s challenging financial circumstances may make the terms, conditionsand cost of any available capital unfavorable. If additional debt or equity capital is not readily available, theCompany will be forced to scale back its acquisition activities and itsoperations.  This would result in anoverall slowdown of the Company’s development. The Company’s short-term need for capital may force it to consider andpotentially pursue other strategic options sooner than it might otherwise havedesired.  These conditions raisesubstantial doubt about the Company’s ability to continue as a goingconcern.  The financial statements do notinclude any adjustments to reflect the possible future effects on therecoverability and classification of assets, or the amounts and classificationof liabilities that may result from the outcome of this uncertainty.

Management hastaken a number of steps to address the Company’s financial performance and toimprove cash flow.  Management hasrefinanced a majority of the Company’s debt with new debt that has a lowerinterest rate, restructured the operating management team, and implementedprograms to obtain expense savings which have provided the Company with accessto additional working capital.  TheCompany’s new Chief Executive Officer has strong operations experience and willdevote constant attention toward expense reduction and achieving growth bothorganically and through acquisitions so that the Company can spread itscorporate overhead over a larger base of business and achieve economies ofscale.  However, there can be noassurances that these programs will be successful.

Earnings Per Share

Basic per sharedata has been computed on the loss attributable to common stockholders for eachquarter divided by the weighted average number of shares of common stockoutstanding for each quarter (excluding the restricted common stock issued tocertain officers in 2005 and 2007). Diluted earnings per common share includes both the weighted averagenumber of common shares and any dilutive common share equivalents such asconvertible securities, options or warrants in the calculation.  As the Company recorded net losses for thethree months ended March 31, 2007 and 2006, 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 March 31, 2007calculation totaled 5,522,321 shares (5,332,563 were excluded in the March 31,2006 calculation).

Income Taxes

In January 2007, the Company adopted theFinancial Accounting Standards Board Interpretation No. 48, “Accounting forUncertainty in Income Taxes — An Interpretation of FASB Statement No. 109” (FIN48). This Interpretation clarifies the accounting for uncertainty in incometaxes recognized in a company’s financial statements.  FIN 48 requires companies to determine whetherit is “more likely than not” that a tax position will be sustained uponexamination by the appropriate taxing authorities before any part of thebenefit can be recorded in the financial statements.  It also provides guidance on the recognition,measurement and classification of income tax uncertainties, along with anyrelated interest and penalties.  TheCompany did not recognize any adjustments to its financial statements as aresult of its implementation of FIN 48.

**Note 2    Acquisitions**

Staff Search Ltd.

On April 18, 2006the Company acquired the assets of Staff Search Ltd. for $2,386,174, includingacquisition costs.  The Company issued apromissory note in the principal amount of $1,410,000 and issued 229,128 sharesof its common stock valued at $976,174 (determined by the average of $4.26 pershare which approximates the average trading value as quoted on the OTCBulletin Board for the three days before and three days after the acquisitiondate).  Subsequently, the promissory notewas purchased from the seller by the Company’s significant stockholder.  During 2006 and 2007, the significant stockholderdistributed $158,403 of the promissory note to unrelated parties to settlecertain obligations of the significant stockholder.  The promissory note accrues interest at arate equal to 8.00% per annum.  Theprincipal amount of the note owed at March 31, 2007 ($546,597 owed to MedCapPartners, L.P. and $705,000 owed to MedCap Master Fund L.P.), plus all accruedinterest ($100,128 at March 31, 2007), is payable upon demand.  The principal amount of the note owed tounrelated parties at March 31, 2007 ($158,403), plus all accrued interest, ispayable upon demand after January 1, 2008. The notes include

7

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events of default(with grace periods, as applicable) and provides that, upon the occurrence ofcertain events of default, payment of all amounts due under the notes shallbecome immediately payable.  The primarypurpose of the acquisition was to enable the Company to expand its market sharein the nurse staffing industry.  Thefollowing table summarizes the assets acquired and liabilities assumed as of theclosing date:
| Tangible assets acquired            |   | $         | 345,075   |   |
|-------------------------------------|--------|-----------|-----------|--------|
| Customer related  intangible assets |   | 486,000   |      |
| Goodwill                            |   | 1,555,099 |      |
| Total assets acquired               |   | 2,386,174 |      |
| Liabilities  assumed                |   | —    |      |
| Net assets  acquired                |   | $         | 2,386,174 |   |

 

The acquisitionwas accounted 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 was initially developed by a professionalvaluation group.  Goodwill represents theexcess of merger consideration over the fair value of assets acquired.  The Company will be required to pay additionalcash and issue additional shares of its common stock to the former stockholderof Staff Search Ltd. should its results of operations exceed performancestandards established in the merger agreement. If results of operations for Staff Search Ltd. fall below performancestandards established in the merger agreement, the former stockholder of StaffSearch Ltd. is required to return certain amounts of the Company’s common stockthat were issued in connection with the acquisition.  The goodwill acquired will be amortized forfederal income tax purposes.

Unaudited ProForma Summary Information

The followingunaudited pro forma summary approximates the consolidated results of operationsas if the acquisition disclosed above had occurred as of January 1, 2006, 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.
| ** **                                                                       | ** ** | **March 31,** | ** ** |
|----------------------------------------------------------------------------------|------------|--------------------|------------|
| ** **                                                                       | ** ** | **2006**           | ** ** |
|                                                                             |       |               |       |
| Revenue from  services                                                           |       | $                  | 12,036,008 |   |
| Income from  operations                                                          |       | 48,315             |       |
| Net loss  attributable to common stockholders                                    |       | (1,167,225         | )          |
| Basic and  diluted net loss per common share attributable to common stockholders |       | $                  | (0.34      | ) |
|                                                                             |       |               |       |
| Weighted-average shares  of common stock outstanding                             |       | 3,443,857          |       |

 

**Note 3    iVOW, Inc.**

On September 20, 2006,the Company entered into an Agreement and Plan of Merger (“Merger Agreement”)with iVOW, Inc. (“iVOW”), a provider of services to employers, payors andunions to facilitate weight loss programs on a per patient direct basis.  In connection with Crdentia’s entry into theMerger Agreement, the Company also entered into an Interim Management Agreement(“IMA”), pursuant to which the Company had the sole and exclusiveresponsibility, authority and discretion to (a) conduct, manage, direct andcontrol all aspects of the business and operations of iVOW and (b) utilize iVOW’scash and working capital to defray Crdentia’s expenses and the expenses ofiVOW, prior to the closing of the merger. Pursuant to the original Merger Agreement, the termination date of theMerger Agreement and IMA was December 31, 2006. Crdentia and iVOW executed an amendment to the Merger Agreement onDecember 29, 2006, which extended the termination date for the merger and IMAto March 31, 2007.  In

8

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April 2007, the Companynegotiated a Settlement Agreement with iVOW pursuant to which Crdentia and iVOWagreed to terminate the Merger Agreement and release the other party from anyand all claims arising under the Merger Agreement and related agreements,including the IMA.  The Company issued iVOW1,500,000 shares of the Company’s common stock in April 2007.  All negotiations with respect to a possiblemerger between Crdentia and iVOW have been terminated.  At March 31, 2007 the Company has recorded$700,693 as due to iVOW which represents amounts advanced by iVOW to Crdentia.  The $700,693 due to iVOW, and other valueattributed to the Settlement Agreement approximates the fair market value ofthe 1,500,000 shares issued in April 2007.

**Note4    Settlement ofAcquisition Claim**

In 2005, theCompany asserted a claim against a seller of one of the Company’s 2003acquisitions.  In January 2006, theCompany and the seller settled with the seller returning 59,150 shares of theCompany’s common stock that had been issued in connection with theacquisition.  The Company reported a gainon settlement of acquisition claim of $1,064,693 representing the fair value ofthe stock returned on the date of the settlement.  The offset to the gain recorded was areduction in common stock and additional paid-in capital.  The returned shares were retired immediately.

**Note 5    Accounts Payable and Accrued Expenses**

Accounts payable and accrued expenses consist of the following:
| ** **                       | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|----------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                       | ** ** | **2007**           | ** ** | **2006**              | ** ** |
|                             |       |               |       |                  |       |
| Accounts payable                 |       | $                  | 1,460,076  |                  | $          | 1,968,731 |   |
| Accrued fee for  placement agent |       | 864,589            |       | 864,589               |       |
| Other accrued  expenses          |       | 1,115,368          |       | 973,933               |       |
|                             |       |               |       |                  |       |
|                             |       | $                  | 3,440,033  |                  | $          | 3,807,253 |   |

 

**Note 6    Revolving Line of Credit**

OnJune 16, 2004, the Company entered into a Loan and Security Agreement withBridge Healthcare Finance, LLC (“Bridge Healthcare”), pursuant to which theCompany obtained a revolving credit facility of up to $15,000,000 (the “Loan”).  During the first quarter of 2005, the Loanwas reduced to $10,000,000 permitting the Company to lower its effectiveinterest rate through lower unused line fees. The Loan had an original term of three years and bore interest at a rateequal to the greater of three percent (3.0%) per annum over the prime rate ornine and one-half percent (9.5%) per annum. In December 2006, Bridge Healthcare increased the rate charged to theCompany by 4% over the rate specified in the agreement to 15.25%.  Interest was payable monthly.  Accounts receivable served as security forthe Loan and the Loan was subject to certain financial and reportingcovenants.  Customer payments were usedto repay the advances on the Loan after deducting charges for interest expense,unused line and account management fees. Except in certain limited circumstances, the Loan could not be prepaidin full without incurring a significant prepayment penalty.  The financial covenants were for themaintenance of minimum tangible net worth, minimum debt service coverageratios, minimum EBITDA, maximum capital expenditure limits and maximumoperating lease obligations.

During2006, Bridge Healthcare made $2,425,000 available to the Company in the form ofover-advances on the Loan.  Theover-advances were used for working capital purposes.  The $2,425,000 of over-advances werepartially secured by a guaranty from MedCap Partners L.P. (“MedCap”), Crdentia’ssignificant stockholder, partially secured by a personal guarantee from C. FredToney, Crdentia’s current Chairman of the board of directors, and the managingmember of MedCap Management & Research LLC, the general partner of MedCap,and partially secured by a personal guarantee from James D. Durham, the Company’sformer Chief Executive Officer and former Chairman of the Board.  Bridge Healthcare charged the Company monthlyfees in excess of normal Loan interest charges for all over-advances. Asdiscussed in Note 9, over-advances of $2,400,000 were refinanced with bank debtin early 2007 and the remaining $25,000 was repaid in early 2007.

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The Loan includedevents of default (with grace periods as applicable) and provided that, uponthe occurrence of certain events of default, payment of all amounts payableunder the Loan, including the principal amount of, and accrued interest on, theLoan could be accelerated.  There werealso cross default provisions between the Loan and the Term Loan discussedbelow.  Financial covenants were violatedin a number of instances including at December 31, 2006 which had no continuingsignificance since all debt with this lender has been refinanced with eitherbank debt as discussed in the preceding paragraph or a working capital facilityas discussed in Note 8.

**Note 7    Notes Payable to Lender**

Pursuant to a loanagreement dated August 31, 2004, the Company obtained a term loan creditfacility (“Term Loan”) in the amount up to $10,000,000 from Bridge OpportunityFinance, LLC, an affiliate of Bridge Healthcare.  The Company obtained certain loans under theagreement to fund permitted acquisitions. Any loans obtained under the Term Loan were due and payable in full onAugust 31, 2007 and required interest at the rate of fifteen and one-quarterpercent (15.25%) per annum.  Interest waspayable monthly.  The Term Loan wassecured by all of the Company’s assets. On August 31, 2004, the Company received proceeds from the Term Loan of$2,697,802 for the acquisitions of Arizona Home Health Care/Private Duty, Inc.and Care Pros Staffing, Inc.

The Term Loanrequired that the Company issue warrants to purchase shares of common stock tothe lender up to 12% of the Company’s overall capitalization on the date ofborrowing.  On August 31, 2004, theCompany issued warrants to purchase 90,578 shares of common stock at a price of$31.50 per share in connection with the first borrowing under the creditfacility.  As a result, the Term Loan hasbeen recorded net of a discount of $810,000 which represents the estimated fairmarket value related to the warrants at the date of issuance.  The discount was amortized to interestexpense over the life of the Term Loan.  Duringthe first quarter of 2006, the Company used proceeds from a private offering asdiscussed in Note 11 to repay $1,350,000 of the Term Loan.  As a result of this repayment, the Companyrecorded $200,168 of additional interest relating to the proportionate amountof unamortized discount associated with the repayment.  During the second quarter of 2006, BridgeHealthcare demanded further repayments of the Term Loan amounting to $300,000and future monthly principal payments of $45,742 until the Term Loan was paidin full.  The Term Loan was paid off infull in early 2007 as discussed in Note 8.

The Term Loancontained certain financial covenants, including the maintenance of minimumtangible net worth, minimum debt service coverage ratios, minimum EBITDA,maximum capital expenditure limits and maximum operating lease obligations.  Financial covenants were violated in a numberof instances including at December 31, 2006 which have no continuingsignificance since all debt with this lender has been refinanced.  The Term Loan was classified as a currentliability on the accompanying balance sheet as of December 31, 2006 because ofthe covenant violations.  The Company wascharged fees by Bridge for the various compliance violations and relatedwaivers granted during 2005, 2006 and 2007. The Term Loan included events of default (with grace periods asapplicable) and provided that, upon the occurrence of certain events ofdefault, payment of all amounts payable under the Term Loan, including theprincipal amount of, and accrued interest on, the Term Loan could beaccelerated.  There were also crossdefault provisions between the Term Loan and the Loan.

**Note 8    Working Capital Facility**

On February 8,2007, the Second Amended and Restated Loan and Security Agreement - RevolvingLoans, dated May 16, 2005, as amended by and among Crdentia, its Subsidiariesand Bridge Healthcare Finance, LLC, and the Amended and Restated Loan andSecurity Agreement - Term Loan, dated May 16, 2005, as amended, by and amongCrdentia, its Subsidiaries and Bridge Opportunity Finance, LLC, wereterminated, along with all related loan documents (including, withoutlimitation, promissory notes and pledge agreements).  In connection with this termination, Crdentiaand its subsidiaries paid to Bridge Healthcare Finance, LLC and BridgeOpportunity Finance, LLC all principal outstanding under the Bridge LoanAgreements (approximately $3.9 million), all accrued and unpaid interest underthe Bridge Loan Agreements (approximately $14,000) and certain fees (includinga Make-Whole Fee of $490,000).  In

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addition to theMake-Whole fee of $490,000, the Company also wrote-off $84,012 of deferredfinancing fees and $60,150 of debt discount associated with warrants issued toBridge Healthcare Finance.  Crdentia andits Subsidiaries released Bridge Healthcare Finance, LLC and Bridge OpportunityFinance, LLC from any claims relating to any matter, including the Bridge LoanAgreements.

On February 8,2007, the Company entered into a $10 million working capital facility withSystran Financial Services Corporation (“Systran”), a subsidiary of TextronFinancial Corporation.  Pursuant to theagreements, Systran agreed, at its sole discretion, to purchase certainreceivables from the Company on a recourse basis.  The agreements anticipate a minimum volume ofpurchases and also contemplate the payment of certain service fees, including aminimum fee.  To secure the payment andperformance of Crdentia’s obligations to Systran under the agreements, Crdentiagranted Systran 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 have 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 revolving line of credit and note payable with BridgeHealthcare Finance, LLC.  The balance dueunder this facility at March 31, 2007 was $4,056,383.

The agreementsinclude events of default (with grace periods, as applicable) and provide that,upon the occurrence of certain events of default, Systran may immediatelycollect any obligation owing to Systran under the agreements.  The Company is currently in compliance withall provisions of the agreements.

**Note 9    Master Revolving Note**

On January 19,2007, Crdentia delivered a Master Revolving Note (the “Note”) in the amount of$2.4 million 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 requires principal payments of$125,000 on March 31, 2007, $100,000 on June 30, 2007, September 30, 2007 andDecember 31, 2007 and has a final maturity date of January 31, 2008.  The Note bears interest at a per annum rateequal to Comerica’s base rate from time to time in effect minus one-half of one(1/2%) percent (8% at March 31, 2007). The Note is secured by, and Comerica was granted a security interest in,all items deposited in Crdentia’s account with Comerica.  The Note includes events of default andprovides that, upon the occurrence of certain events of default, Comerica may,at its option and without prior notice to Crdentia, declare any or all of theindebtedness evidenced by the Note immediately due and payable.  The Company is currently is compliance withall provisions of the agreement.  Thebalance due under this facility at March 31, 2007 was $2,400,000.

As security forCrdentia’s prompt and complete payment of its obligations under the Note, (i)James D. Durham, Crdentia’s former Chairman and Chief Executive Officer,pledged and granted to Comerica a security interest in all of his right, titleand interest in and to a $600,000 certificate of deposit with Comerica, (ii)MedCap Partners LP (“MedCap”) pledged and granted to Comerica a securityinterest in all of its right, title and interest in and to a $250,000certificate of deposit with Comerica, and (iii) C. Fred Toney, Crdentia’sChairman of the Board of Directors and the managing member of MedCap Managementand Research LLC, the general partner of MedCap, pledged and granted toComerica a security interest in all of his right, title and interest in and toa $1,125,000 certificate of deposit with Comerica.  In addition, MedCap delivered a Guaranty toComerica pursuant to which it agreed to unconditionally and absolutelyguarantee to Comerica payment when due of all existing and future indebtednessof Crdentia to Comerica.

**Note 10  Notes Payable**

As discussed in Note 2, the Company has demand notes totaling $546,597at March 31, 2007 due to MedCap Partners L.P. and $705,000 at March 31, 2007due to MedCap Master Fund L.P.  Relatedparty interest expense of $100,128 has been included in interest expense in theaccompanying consolidated statement of operations for the three months endedMarch 31, 2007.  The remaining principalamount totaling $158,403 at March 31, 2007 is due to unrelated parties.

11

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**Note 11  Subordinated Debentures**

In January 2006,the Company 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. $765,000 of debentures areoutstanding at March 31, 2007.

The debentures wereinitially convertible into common stock at a price of $6.00 per share(currently $0.60 as discussed below). The sale of convertible debentures included common stock warrantcoverage allowing debenture holders to exercise warrants to purchase 500,000common shares.  Warrants to purchase166,667 common shares have a five year term and an exercise price of $7.50 pershare.  Warrants to purchase 333,333common shares at an exercise price of $6.00 per share expired on June 14, 2006with none being exercised.  The Companycomputed the relative fair value of the warrants at $1,443,265 and thebeneficial conversion feature related to the debentures at $556,735, and recordedthese amounts as a discount to the debentures which is being amortized over theterm of the debentures.

Terms of anagreement with the placement agent representing the Company required placementfees upon a private placement of at least $5 million.  Although the minimum was not achieved, feeshave been accrued and warrants recorded based on the lower amount offunding.  Per the terms of the agreement,$589,722 was recorded as deferred financing costs associated with thedebentures and $294,867 was recorded as an offset to proceeds from the equityportion of the funding.  The $589,722 isbeing amortized over the three year term of the debentures.  A portion of the placement fees were warrantsto purchase 50,000 shares of common stock at $6.00 per share.  The warrants have a five year life and werevalued at $629,589 ($419,722 recorded as deferred financing costs and $209,867recorded as an offset to proceeds from the equity offering).  The warrants have been valued on the date ofthe closing; however, the Company has not yet issued these warrants andtherefore has recorded a liability of $629,589 at March 31, 2007.  The remaining portion of the fee totaling$255,000 is to be paid in cash ($235,000 accrued and $20,000 paid as of March31, 2007).

On February 16,2006, a holder of the debentures converted $260,000 of the debentures into43,333 shares of the Company’s common stock. On October 6, 2006, a holder of the debentures converted $76,000 of thedebentures into 12,666 shares of the Company’s common stock.  In March 2007, three of the five debentureholders exchanged $899,000 of their debentures for 1,498,333 shares of theCompany’s common stock.  The Companyissued 44,311 shares of its common stock as payment of $14,948 of accruedinterest due to the debenture holders through the date of the exchange.  The Company recognized expense in the amountof $161,654 relating to the deferred financing fees associated with theconverted and exchanged debentures and expense in the amount of $595,720related to the proportionate share of the unamortized discount on the convertedand exchanged debentures.  Under terms ofthe debenture agreements, all debenture holders are now permitted to exchangetheir debentures for shares of the Company’s common stock at $.60 per share,the price at which the Company sold its stock in the private placement offeringmentioned below.  At December 31, 2006,due to cross default provisions in the debenture agreement and the violation ofcovenants with the Bridge Revolving Line of Credit and Term Loan (as discussedin Notes 6 and 7), the Company classified the debentures as a currentliability.  At March 31, 2007, with therefinancing of all Bridge facilities with the Working Capital Facility fromSystran and the Master Revolving Note from Comerica (as discussed in Notes 8and 9) and the Company’s compliance with all provision of these agreements, theCompany has classified the debentures as a long-term liability.

The Company wasobligated to register the shares (including the shares issuable upon conversionof the debentures and exercise of the warrants) for resale on a registrationstatement.

**Note 12  Common Stock and Stock Options**

During the firstquarter of 2007, the Company completed four closings of a private placementpursuant to a Securities Purchase Agreement and Registration Rights Agreementfor 5,333,333 common shares at a price of $0.60 per share, with aggregate grossproceeds of $3,200,000.  The Board ofDirectors of the Company has

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authorized thesale of up to $5,000,000 in common stock in all closings of the private placementwhich will have a final close in May 2007. Pursuant to the terms of the Registration Rights Agreement, the Companyhas agreed to cause a resale registration statement covering the shares to befiled within 30 days of the May 2007 final close.

MedCap PartnersL.P. invested $975,000 in the private placement for 1,625,000 shares of commonstock, MedCap Master Fund L.P. invested $25,000 in the private placement for41,667 shares and C. Fred Toney, Chairman of the board of directors,individually invested $1,550,000 in the private placement for 2,583,333 sharesof common stock.  Mr. Toney abstainedfrom the board of directors’ vote in favor of the private placement.

Employee StockOptions and Restricted Stock Grants

During the threemonths ended March 31, 2007, the Board granted options to purchase 193,500shares of the Company’s Common Stock to employees under the 2004 Plan.  The exercise price for these options is$0.42, the stock’s trading price on the date granted. There were no stockoptions exercised in the three months ended March 31, 2007.

See Note 13 belowfor a discussion of the Stock Options and Restricted Stock Grants associatedwith the severance agreement with the Company’s former Chairman of the Boardand Chief Executive Officer as well as Restricted Stock Grant awarded to theCompany’s new Director and Chief Executive Officer.

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 ended March 31, 2007.

 
|                          | ** ** | **Three Months Ended** | ** ** |
|--------------------------|------------|----------------------------------|------------|
| ** **               | ** ** | **March 31, 2007**     | ** ** |
|                     |       |                             |       |
| Risk-free  interest rate |       | 5.25                             | %          |
| Expected lives           |       | 4 years                          |       |
| Dividend Yield           |       | 0.00                             | %          |
| Expected volatility      |       | 201% - 204                       | %          |

 

Stock option activity issummarized as follows:

 
|                                                         | ** ** | **Three Months Ended** | ** ** |   |
|---------------------------------------------------------|------------|----------------------------------|------------|--------|
| ** **                                              | ** ** | **March 31, 2007**     | ** ** |   |
|                                                    |       |                             |       |
| Outstanding,  January 1                                 |       | 809,894                          |       |
| Granted                                                 |       | 1,193,500                        |       |
| Exercised                                               |       | —                           |       |
| Forfeited                                               |       | 143,318                          |       |
| Outstanding,  March 31                                  |       | 1,860,076                        |       |
|                                                    |       |                             |       |
| Exercisable at March 31                            |       | 1,446,354                        |       |
| Non-vested, March 31                               |       | 413,722                          |       |
|                                                    |       |                             |       |
| Average exercise price per  share:                      |       |                             |       |
| Outstanding, January  1                                 |       | $                                | 6.99       |   |
| Granted                                                 |       | 0.57                             |       |
| Exercised                                               |       | —                           |       |
| Forfeited                                               |       | 5.36                             |       |
| Outstanding,  March 31                                  |       | 3.00                             |       |
| Exercisable                                             |       | 2.63                             |       |
| Non-vested,  January 1                                  |       | 4.81                             |       |
| Non-vested,  March 31                                   |       | 1.22                             |       |
|                                                    |       |                             |       |
| Weighted-average  remaining term of outstanding options |       | 9.11 years                       |       |
| Weighted-average  remaining term of exercisable options |       | 9.06 years                       |       |
|                                                    |       |                             |       |
| Weighted-average  grant date fair value                 |       | $                                | 0.43       |   |
| Total estimated future  cost of unvested options        |       | $                                | 680,582    |   |
| Weighted-average period  of unvested options            |       | 9.31 years                       |       |
|                                                         |            |                                  |            |        |  |  |  |

 

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**Note 13  Retirement of Chairman of the Board ofDirector and Chief Executive Officer**

On March 6, 2007, JamesD. Durham, the Company’s Chief Executive Officer, announced his retirement, andthe Company accepted his resignation and retirement, effective March 1, 2007.  Mr. Durham also stepped down as Chairman ofthe Board and as a member of the Company’s Board of Directors, effective March1, 2007.  Mr. Durham will serve as aconsultant to the Company through October 2007. In connection withMr. Durham’s resignation, Mr. Durham and the Company executed a SeveranceAgreement and Mutual Release of Claims, effective March 14, 2007.  The Severance Agreement provides for, amongother things: (a) payment of an additional $60,161 within three days of theeffective date of the Severance Agreement; (b) payment of $31,667 per monthduring the eight month consulting period; (c) payment of a lump sum severanceamount of $250,000 within seven business days of November 1, 2007; (d) anadditional grant of an option to purchase 1,000,000 shares of the Company’scommon stock at an exercise price of $0.60 per share; (e) continuation ofhealth insurance coverage for a 24 month period following the effective date;and (f) vesting in the****restricted stock awards granted to Mr. Durham on March 24, 2006 and May31, 2005 will continue during the period Mr. Durham provides consultingservices and shall cease as of October 31, 2007.  At March 31, 2007 the Company has accrued liabilitiesof $503,333 related to the future cash payments associated with the SeveranceAgreement and has recorded compensation expense of $1,715,177 associated withthe option and vesting of the restricted stock.

The Company andMr. Durham had previously entered into an employment agreement effective August1, 2002, as amended by the Amendment to Employment Agreement effective August1, 2004 and the Second Amendment to Employment Agreement effective as ofNovember 8, 2005.  Mr. Durham’semployment agreement, as amended, has been terminated in connection with hisresignation and entry into the Severance Agreement.

The Severance Agreement did not affect the two cash bonuses in theamount of $540,000 each that were granted to Mr. Durham in 2003 and are due onDecember 31, 2008 and January 4, 2009. The carrying amount of this liability is $925,523 at March 31, 2007.

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

**Note 14  Supplemental Disclosure to the Statementsof Cash Flows**
| ** **                                                                                          | ** ** | **March 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|--------------------|------------|
| ** **                                                                                          | ** ** | **2007**           | ** ** | **2006** | ** ** |
|                                                                                                |       |               |       |   |   |
| Supplemental  cash flow disclosures:                                                                |       |               |       |   |   |
| Cash paid for interest                                                                              |       | $                  | 902,079    |   | $ | 171,233 |   |
| Cash paid for income taxes                                                                          |       | —             |       | — |   |
|                                                                                                |       |               |       |   |   |
| Non-cash  investing and financing activities:                                                       |       |               |       |   |   |
| Conversion of debentures into common stock                                                          |       | 899,000            |       | 260,000 |   |
| Debenture interest paid in common stock                                                             |       | 14,948             |       | — |   |
| Common stock issued as payment of preferred stock  dividends                                        |       | —             |       | 800,748 |   |
| Placement fees payable related to sale of common  stock                                             |       | —             |       | 65,000 |   |
| Value of debentures allocated to attached common  stock warrants and beneficial conversion features |       | —             |       | 2,000,000 |   |
| Fair value of  warrants accrued as placement fee related to debentures                              |       | —             |       | 419,722 |   |
|                                                                                                     |            |                    |            |  |  |  |  |

 

**Note 15  Litigation**

The following is alist of claims that are in settlement discussions or were settled subsequent toMarch 31, 2007.

*CrdentiaCorp. and CRDE Corp. v. Robert Litton and Steve Williams*; *CauseNo. 3-06-CV-1182-R; Pending in the United States District Court for theNorthern District of Texas-Dallas Division.*

On January 27,2006, Crdentia Corp. and CRDE Corp. filed suit against Robert Litton and SteveWilliams, the former owners of TravMed, asserting claims for breach ofnon-competition/solicitation agreements,

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breach of fiduciary duty, tortious interference with existing andprospective contracts and business relations, and declaratory relief arisingout of an Agreement and Plan of Reorganization dated as of March 28, 2005.  Among other things, the Company alleged thatthe defendants violated their non-competition agreements that they executed inconnection with the Agreement and Plan of Reorganization by diverting businessopportunities to a competing business. The Company sought an undisclosed amount of damages.  The defendants filed counterclaims againstCrdentia alleging breach of the Agreement and Plan of Reorganization andconversion.  The Company begannegotiating a settlement in March 2007 and anticipates it will pay $575,000 inthe form of a thirty-six month note in exchange for the defendants agreeing topay certain payables on Crdentia’s behalf. The Company anticipates that the note will bear interest at 10% for thefirst eighteen months and 5% for the second eighteen months.  Monthly interest payments will be requiredfor the first eighteen months and principal and interest payments in the secondeighteen months will be required which will fully amortize the obligation.  This liability is included in other long-termliabilities at March 31, 2007.

*CrdentiaCorp., CRDE Corp., and Arizona Home Health Care/Private Duty, Inc. v. WilliamW. Crocker and William C. Crocker;  Cause No. 06-01050-L;  Pending in the 193**rd JudicialDistrict Court, Dallas County, Texas.*

On January 31,2006, Crdentia Corp., CRDE Corp., and Arizona Home Health Care/Private Duty,Inc. filed suit against William W. Crocker and William C. Crocker, the formerowners of Arizona Home Health Care/Private Duty, Inc., asserting claims forfraud, indemnity, and declaratory relief arising out of an Agreement and Planof Reorganization dated August 6, 2004 and a Receivable Allocation Agreemententered into in connection therewith. Among other things, the Company alleged that, prior to entering theAgreement and Plan of Reorganization, the defendants failed to disclose thatcertain key employees had planned to leave the company and that the defendantsrequested and/or instructed such employees not to leave prior to the closing ofthe merger.  The Company also allegedthat the defendants failed to disclose that their company did not possesscertain state licenses necessary to conduct a portion of its business.  The Company sought an undisclosed amount ofdamages.  This case was settled in April2007 as discussed below under “*William W. Crocker v.Crdentia Corp.”*

*William W. Crocker, an individual, v. Crdentia Corp., a DelawareCorporation, and Arizona Home Health Care/Private Duty, Inc., an ArizonaCorporation, CauseNo. 06C-02-226, pending in the Superior Court of the State of Delaware in andfor Castle County.*

On February 23, 2006, William W. Crocker filed suit against CrdentiaCorp. and Arizona Home Health Care/Private Duty, Inc. asserting claims fordeclaratory judgment, breach of contract, and conversion arising from aReceivable Allocation Agreement executed incident to an Agreement and Plan ofReorganization dated August 6, 2006.  MrCrocker sought damages in the principal sum of $251,150, which was comprised of$114,019 for collected accounts receivable and eighty percent (80%) of $171,414of uncollected accounts receivable, plus attorneys’ fees.  The Company settled this case in April2007.  The Company agreed to issue312,500 shares of common stock (valued at $159,375 based on the trading valueof stock on April 9, 2007) in exchange for Crdentia retaining the proceeds fromthe collection of certain receivables that it collected on behalf of Mr.Crocker.  The Company has recorded thisliability in accounts payable and accrued expenses at March 31, 2007.

*Dawson James Securities, Inc. v. Crdentia Corp., Case No. 50 2006CA002708XXXXMB, pending inthe Circuit Court of the 15**th Judicial District, Palm BeachCounty, Florida.*

On March 22, 2006,Dawson James filed suit against Crdentia Corp. seeking fees in connection withraising investment capital for Crdentia. Dawson James contended that under terms of a contract they were owedcash of $235,000 and 50,000 warrants to purchase Crdentia stock.  The Company settled this case in April 2007.  The Company agreed to issue 400,000 shares ofcommon stock (valued at $160,000 based on the trading value of stock on April13, 2007) in full payment of the obligation. At March 31, 2007, the Company has recorded an accrual of $864,589 forthe fair value of warrants to be issued plus an expected cash payment.  This accrual will be reduced in April 2007 toreflect the above settlement in stock.

**Note 16  Subsequent Events**

Private Placement

Subsequent toMarch 31, 2007, the Company completed three closings of a private placementpursuant to a Securities Purchase Agreement and Registration Rights Agreementfor 1,083,333 shares at a price of $0.60 per share, with aggregate proceeds of$650,000.  The Board of Directors of theCompany has authorized the sale of up to $5,000,000 in common stock in allclosings of the private placement which will have a final close in May,2007.  Pursuant to the terms of theRegistration Rights Agreement, the Company agreed to cause a resaleregistration statement covering the shares to be filed within 30 days of thefinal May 2007 closing.

Stock Options andRestricted Stock Grants

On May 4, 2007, theCompany issued 400,000 shares of restricted common stock to two members of theBoard of Directors and granted an option to purchase 200,000 shares of commonstock at an exercise price of $0.49 per share to one member of the Board ofDirectors.  The restricted shares vest50% on May 4, 2008 and 50% on May 4, 2009; the option is exercisable with respectto 50% of the shares subject to such option on May 4, 2008 and 50% of theshares subject to such option on May 4, 2009. The issuance of the restricted common stock or option is compensation tothese board members for future services.

 

Also on May 4,2007, the Company granted certain employees options to purchase 218,031 sharesof common stock at a per share exercise price of $0.49.  The vesting period and dates of vesting ofthe shares of common stock subject to the options is identical to vestingperiods and dates of vesting provided for in all options granted to thesecertain employees in the past.

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

*This report contains forward-lookingstatements.  These statements relate to future events orour future financial performance. In some cases, you can identifyforward-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 differmaterially.*

*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 of thisQuarterly Report under the  Caption “RiskFactors” and under the captions “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations,” and “Risk Factors”  and in our audited consolidated financialstatements and related notes included in our Annual Report on Form 10-K for theyear ended December 31, 2006, previously filed with the U.S. Securities andExchange Commission (SEC).*

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

Introduction

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

Overview

We are a providerof healthcare staffing services, focusing on the areas of travel nursing, perdiem staffing, contractual clinical services, locum tenens (physicianstaffing), allied services and private duty home care.  Our travel nurses are recruited domesticallyas well as internationally, and placed on temporary assignments at healthcarefacilities across the United States.  Ourper diem nurses are local nurses placed at healthcare facilities on short-termassignments.  Our contractual clinicalservices group provides complete clinical management and staffing forhealthcare facilities.  Under our locumtenens program, physicians contract with us to perform medical services forhealthcare organizations for a specified length of time.  Our allied services primarily consist ofdiagnostic imaging, respiratory, laboratory, therapies and administrativemodalities and our private duty home care group provides nursing casemanagement and staffing for skilled and non-skilled care in the home.  We consider the different services describedabove to be one segment as each of these services relate solely to providinghealthcare staffing to customers that are

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healthcareproviders and utilize similar distribution methods, common systems, databases,procedures, processes and similar methods of identifying and serving thesecustomers.

We did not haveany revenue in 2003 until we completed our first acquisition in August2003.  During 2003 we began operatingfour newly acquired companies, combining the various back offices and supportstaff into a central location and began streamlining the operations.  We have continued to pursue our operationalplan of acquiring companies in the healthcare staffing field and purchased twocompanies in 2004, three companies in 2005 and one company in 2006.

During 2006 weterminated the operations we had acquired in 2003 from Baker Anderson Christie,Inc. and Nurses Network, Inc.  Inaddition, in May 2006 we returned to the sellers the shares of TravMed USA,Inc. that we had acquired from the sellers in March 2005 in connection with ouracquisition of that company, and our notes payable to the sellers werecancelled.

Some key factors weare focusing on to improve performance are as follows:

·                  Wecontinue to identify innovative ways to attract and retain nurses.

·                  Weare vigorously managing the amounts billed to healthcare facilities in relationto the payroll cost of our nurses in an effort to improve gross margins.

·                  Weare managing selling, general and administrative costs at our field officelocations to limit these expenses to no more than 10% of the revenue at eachlocation.

·                  Weare aggressively expanding our locum tenens business, our allied services andour home health business in an effort to improve gross margins through a bettermix of the services provided.

·                  Weare devoting constant attention toward achieving growth both organically andthrough acquisitions so that we can spread our corporate overhead over a largerbase of business and achieve economies of scale.

·                  We are seeking to raise equitycapital to provide for working capital needs and to continue to pursueacquisitions.

·                  Weare seeking to list our common stock on the Nasdaq Market or another nationalexchange (our common stock is currently quoted on the OTC Bulletin Board).

During the three monthsended March 31, 2007, we recorded several costs which are of a non-recurringnature, including the following:

 
    - Future cash severance costs associated with our     former Chief Executive Officer in the amount of $503,333 recorded as     selling, general and administrative costs.
    - Stock compensation costs associated with our     former Chief Executive Officer’s severance and the accelerated vesting of     restricted stock in the amount of $3,024,177.
    - Prepayment penalty and the write-off of deferred     financing costs associated with refinancing our term note and revolving     credit facility and costs associated with the conversion and exchange of a     portion of our debentures for a total of $1,391,538 recorded as interest     costs.

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**RESULTSOF OPERATIONS**
| ** **                                                                   | ** ** | **Three Months Ended March 31,** | ** ** |
|------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                   | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
|                                                                         |       |                                                 |       |   |   |
| Revenue from  services                                                       |       | $                                                    | 9,020,437  |   | $ | 8,984,823 |   |
| Direct operating  expenses                                                   |       | 7,103,505                                            |       | 7,235,519 |   |
| Gross profit                                                                 |       | 1,916,932                                            |       | 1,749,304 |   |
|                                                                         |       |                                                 |       |   |   |
| Operating  expenses:                                                         |       |                                                 |       |   |   |
| Selling, general, and administrative expenses                                |       | 3,007,834                                            |       | 2,600,785 |   |
| Gain from settlement of acquisition claim                                    |       | —                                               |       | (1,064,693 | ) |
| Non-cash stock based compensation                                            |       | 3,391,392                                            |       | 378,260 |   |
| Total operating  expenses                                                    |       | 6,399,226                                            |       | 1,914,352 |   |
|                                                                         |       |                                                 |       |   |   |
| Loss from  operations                                                        |       | (4,482,294                                           | )          | (165,048 | ) |
|                                                                         |       |                                                 |       |   |   |
| Interest  expense, net                                                       |       | (2,106,786                                           | )          | (1,193,539 | ) |
|                                                                         |       |                                                 |       |   |   |
| Loss before  income taxes                                                    |       | (6,589,080                                           | )          | (1,358,587 | ) |
|                                                                         |       |                                                 |       |   |   |
| Income tax  expense                                                          |       | —                                               |       | — |   |
|                                                                         |       |                                                 |       |   |   |
| Net loss  attributable to common stockholders                                |       | $                                                    | (6,589,080 | ) | $ | (1,358,587 | ) |
|                                                                         |       |                                                 |       |   |   |
| Basic and  diluted loss per common share attributable to common stockholders |       | $                                                    | (0.38      | ) | $ | (0.42 | ) |
|                                                                         |       |                                                 |       |   |   |
| Weighted average number  of common shares outstanding                        |       | 17,365,298                                           |       | 3,214,729 |   |

 

***Threemonths ended March 31, 2007 compared to the three months ended March 31, 2006***

Revenues in thethree months ended March 31, 2007 were $9,020,437 compared to revenues of$8,984,823 in the three months ended March 31, 2006.  Revenues have increased in 2007 compared to2006 due principally to our acquisition of Staff Search Ltd. in April2006.  However, the increase in revenuedue to our acquisition was offset in part by decreases in revenue related toclosing portions of our operations in California and to the loss of customersrelated to litigation surrounding the TravMed acquisition.  In 2007 approximately 15.9% (36.1% in 2006)of our 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 71.5% of ourrevenue in 2007 (56.2% in 2006).  Theremaining amount of our revenue in 2007 came from providing staffing tohealthcare facilities, private duty homecare, locum tenens revenue and alliedservices.  In 2006 the remaining revenuecame from providing clinical management and staffing to healthcare facilitiesand private duty homecare.  During 2007and 2006, most of our customers were acute care hospitals located throughoutthe continental United States.

Our overall grossprofit in the three months ended March 31, 2007 was $1,916,932 or 21.3% ofrevenues compared to $1,749,304 or 19.5% of revenues in the three months endedMarch 31, 2006.  Our gross profit is thedifference between the revenue we realize when we bill our customers for theservices of our healthcare professionals and our direct operating costs, whichinclude the cost of the healthcare

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professionals andthe related housing and travel costs, certain employment related taxes,professional liability insurance, health insurance for professionals andworkers compensation insurance coverage.

Our selling,general and administrative costs were $3,007,834 or 33.3% of revenues in thethree months ended March 31, 2007 compared to $2,600,785 or 28.9%******of revenues in the three monthsended March 31, 2006.  Selling, generaland administrative expenses are comprised primarily of certain personnel costs,legal and accounting fees related to being a public company and various otheroffice and administrative expenses.  In2007, we accrued $503,333 of expenses related to a severance agreement with ourformer Chief Executive Officer.

Non-cash stockbased compensation costs were $3,391,392 in the three months ended March 31, 2007compared to $378,260 in the three months ended March 31, 2006.  In 2006, the volume of trading in the Company’sstock triggered accelerated vesting of some of the restricted shares and causedthe Company to begin amortizing the cost of the restricted grants over ashorter period of time beginning in the fourth quarter of 2006.  In addition, the severance agreement for ourformer Chief Executive Officer included the granting of an option to purchase1,000,000 shares of the Company’s stock vesting immediately and acceleratedvesting of restricted grants.  Expense of$3,024,177 associated with the accelerated vesting of the restricted stock andthe severance agreement was recorded in the three months ended March 31, 2007.

Interest costswere $2,106,786 in the three months ended March 31, 2007 compared to $1,193,539in the three months ended March 31, 2006. This increase in interest cost is due to a prepayment penalty and thewrite-off of deferred financing costs associated with the refinancing of ourterm note and revolving credit facility with Bridge Finance and costsassociated with the conversion of a portion of our debentures for a total of$1,391,538.

**LIQUIDITYAND CAPITAL RESOURCES**

Since inception,we have incurred losses from operations and have reported negative cashflows.  As of March 31, 2007, we had anaccumulated deficit of $125,875,468 and cash and cash equivalents of$316,479.  We have financed ouroperations primarily through private placements of equity and debt securitiesand through credit facilities, including our current facility with SystranFinancial Services Corporation, a subsidiary of Textron Financial Corporationand a term loan with Comerica Bank.

During the firstquarter of 2007, the Company completed four closings of a private placementpursuant to a Securities Purchase Agreement and Registration Rights Agreementfor 5,333,333 shares at a price of $0.60 per share, with aggregate proceeds of$3,200,000.  During the months of Apriland May 2007 the Company completed three additional closings for 1,083,332shares at a price of $0.60 per share, with aggregate proceeds of $650,000.  The Board of Directors of the Company hasauthorized the sale of up to $5,000,000 in common stock in all closings of theprivate placement which will have a final close in May 2007.  Pursuant to the terms of the RegistrationRights Agreement, the Company has agreed to cause a resale registrationstatement covering the shares to be filed within 30 days of the May 2007 finalclose.

On February 8,2007, the Company entered into a $10 million working capital facility withSystran Financial Services Corporation, a subsidiary of Textron FinancialCorporation.  Pursuant to the agreements,Systran agreed, at its sole discretion, to purchase certain receivables from theCompany 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 have 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.

The agreementsinclude events of default (with grace periods, as applicable) and provide that,upon the occurrence of certain events of default, Systran may immediatelycollect any obligation owing to Systran under the agreements.  The Company is currently in compliance withall provisions of the agreements.

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On January 19,2007, Crdentia delivered a Master Revolving Note in the amount of $2.4 millionto Comerica Bank.  Proceeds from theborrowing were used to refinance the over-advance amount outstanding under therevolving line of credit with Bridge Healthcare Finance, LLC.  The Note has principle payments of $125,000on March 31, 2007, $100,000 on June 30, 2007, September 30, 2007 and December31, 2007 and has a final maturity date of January 31, 2008 and bears interestat a per annum rate equal to Comerica’s base rate from time to time in effectminus one-half of one (1/2%) percent (8% at March 31, 2007).  The Note is secured by, and Comerica wasgranted a security interest in, all items deposited in Crdentia’s account withComerica.  The Note includes events ofdefault and provides that, upon the occurrence of certain events of default,Comerica may, at its option and without prior notice to Crdentia, declare anyor all of the indebtedness evidenced by the Note immediately due and payable.  The Company is currently in compliance withall provisions of the agreement.

As security forCrdentia’s prompt and complete payment of its obligations under the MasterRevolving Note, (i) James D. Durham, Crdentia’s then Chairman and ChiefExecutive Officer, pledged and granted to Comerica a security interest in allof his right, title and interest in and to a $600,000 certificate of depositwith Comerica, (ii) MedCap Partners LP (“MedCap”) pledged and granted toComerica a security interest in all of its right, title and interest in and toa $250,000 certificate of deposit with Comerica, and (iii) C. Fred Toney,Crdentia’s Chairman of the Board of Directors and the managing member of MedCapManagement and Research LLC, the general partner of MedCap, pledged and grantedto Comerica a security interest in all of his right, title and interest in andto a $1,125,000 certificate of deposit with Comerica.  In addition, MedCap delivered a Guaranty toComerica pursuant to which it agreed to unconditionally and absolutely guaranteeto Comerica payment when due of all existing and future indebtedness ofCrdentia to Comerica.

We do not expectto reach cash flow positive operations in 2007, and we expect to continue togenerate losses from operations for the foreseeable future.  We will need to raise at least $2,000,000 byMarch 31, 2008 (of which a significant amount will need to be raised by June30, 2007) in order to satisfy our working capital needs.  If we are not able to raise these funds wemay be unable to meet our payroll costs. In addition, we will need to raise additional funds in the future inorder to finance our future capital needs. There is no assurance that we will be able to raise the amount of debtor equity capital required to meet our objectives.  Our challenging financial circumstances maymake the terms, conditions and cost of any available capital relativelyunfavorable.  If additional debt orequity capital is not readily available, we may not be able to operate our business,and we will be forced to scale back our acquisition activities and ouroperations.  Our short-term need forcapital may force us to consider and potentially pursue other strategic optionssooner than we might otherwise have desired. These conditions raise substantial doubt about our ability to continueas a going concern.

Management hastaken a number of steps to address our financial performance and improve cashflow.  In the first quarter of 2007, weraised an additional $3,200,000 in equity through four closings of a privateplacement and refinanced the Loan, the Term Loan and the over-advances on theLoan.  Proceeds of the equity raisedearly in 2007 were used for working capital purposes and costs related to debtrefinancing.  Management is devotingconstant attention toward achieving growth both organically and throughacquisitions so that we can spread our corporate overhead over a larger base ofbusiness and achieve economies of scale. However, there can be no assurance that these programs will besuccessful.  If unsuccessful, we could beunable to fund payroll costs and could ultimately fail.

Cash Flows

For the threemonths ended March 31, 2007, we used cash in operations of $2,263,118, comparedto $1,237,022 for the three months ended March 31, 2006.  Although we ended March 31, 2007 with asignificant working capital deficit of $6,457,502 we were able to secureadditional funding during this period to finance our operations.  The increased amount of cash used inoperations in 2007 compared to 2006 is directly attributable to the increasednet loss recorded in the three months ended March 31, 2007.

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Net cash used ininvesting activities was $33,340 for the three months ended March 31, 2007 and$13, 452 for the three months ended March 31, 2006.  The amounts for both periods relate predominatelyto purchases of property and equipment.

During the threemonths ended March 31, 2007 and 2006, we financed our working capitalrequirements primarily through the sale of common stock, convertible debenturesand through loans and credit facilities. Net cash provided by financing activities was $2,414,869 for the threemonths ended March 31, 2007 and $964,231 for the three months ended March 31,2006.  In 2007, we received $2,400,000from a note payable to lender and $3,152,381 from the issuance of common stockin private placements.  These funds wereused to fund operations and pay-off the over-advance and note payable tolender.  In 2006, we received $2,000,000in the private placement of 8% convertible debentures and short- and long-termwarrants as well as $1,150,000 through the issuance of common stock in privateplacements.  These funds were used torepay $1,350,000 of note payable to lender, repay $12,500 of subordinatedconvertible notes and decrease our revolving line of credit by $823,269.

**CRITICALACCOUNTING POLICIES AND MANAGEMENT JUDGEMENT**

The preparation ofthe financial 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 historical experience,qualified independent consultants and all available information to make thesejudgments and estimates, and actual results will inevitably differ from thoseestimates and assumptions that are used to prepare the company’s financialstatements at any given time.

**AccountsReceivable**

Accountsreceivable are reduced by an allowance for doubtful accounts that provides areserve with respect to those accounts for which revenue was recognized butwith respect to which management subsequently determines that payment is notexpected to be received.  We analyze thebalances of accounts receivable to ensure that the recorded amounts properlyreflect the amounts expected to be collected. This analysis involves the application of varying percentages to eachaccounts receivable 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.

**PurchaseAccounting, Goodwill and Intangible Assets**

All businessacquisitions have been accounted for using the purchase method of accountingand, accordingly, the statements of operations include the results of eachacquired business since the date of acquisition.  The assets acquired and liabilities assumedare recorded at their estimated fair value as determined by management andsupported in some cases by an independent third-party valuation.  We finalize the allocation of the purchaseprice to the fair value of the assets acquired and liabilities assumed when weobtain information sufficient to complete the allocation, but in any case,within one year after acquisition.

Goodwill arisingfrom the acquisitions of businesses is recorded as the excess of the purchaseprice over the estimated fair value of the net assets of the businessesacquired.  Statement of FinancialAccounting Standards No. 142 (“Goodwill and Other Intangible Assets”) providesthat goodwill is to be tested for impairment annually or more frequently ifcircumstances indicate potential impairment. Consistent with this standard, we will review goodwill, as well as otherintangible assets and long-term assets, for impairment annually or morefrequently as warranted, and if circumstances indicate that the recorded value

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of any such otherasset is impaired, such asset is written down to its new, lower fairvalue.  If any item of goodwill or suchother asset is determined to be impaired, an impairment loss would berecognized equal to the amount by which the recorded value exceeds theestimated fair market value.

**Stock-Based Compensation**

We have used stockgrants and stock options to attract and retain directors and key executives andintend to use stock options in the future to attract, retain and rewardemployees for long-term service.

We accountfor 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 expectedvolatility is based on a combination of historical and market-based impliedvolatility. If any of the assumptions used in the Black-Scholes model changesignificantly, stock-based compensation expense may differ materially in thefuture from that recorded in the current period.

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

Interest Rate Risk

Our exposure tointerest rate risk arises principally from the variable rates associated withour credit facilities with Systran and Comerica Bank.  On March 31, 2007, we had borrowings ofapproximately $6.5 million under these facilities that were subject to variablerates, with a rate at March 31, 2007 of 13.0% and 8.0% respectively.  As of March 31, 2007, an adverse change of10% in the interest rate of all such borrowings outstanding (for example, from8.0% to 8.8%) would have caused us to incur an increase in interest expense ofapproximately $71,934 on an annual basis.

Inflation

We do not believethat inflation has had a material effect on our results of operations in recentyears and periods.  There can be noassurance, however, that we will not be adversely affected by inflation in thefuture.

**Item 4.                    Controls and Procedures**

We maintaindisclosure controls and procedures that are designed to ensure that informationrequired to be disclosed in our Exchange Act reports is recorded, processed,summarized and reported within the time periods specified in the SEC’s rulesand forms and that such information is accumulated and communicated to ourmanagement including our Chief Executive Officer and Chief Financial Officer toallow for timely decisions regarding required disclosure.  In designing and evaluating the disclosurecontrols and procedures, management recognizes that any controls andprocedures, no matter how well designed and operated can provide onlyreasonable assurance of achieving the desired control objectives and managementis required to apply its judgment in evaluating the cost-benefit relationshipof possible controls and procedures.

As required byRule 13a-15(b) under the Exchange Act, we conducted an evaluation under thesupervision and with the participation of our management, including our ChiefExecutive Officer and our Chief Financial Officer, of the effectiveness of thedesign and operation of our disclosure controls and procedures as of the end ofthe period covered by this report.  Basedupon the foregoing evaluation, our principal executive officer and ourprincipal financial officer concluded that our disclosure controls andprocedures were effective at the reasonable assurance level as of the end ofthe fiscal period covered by this report.

There were nochanges in our internal controls over financial reporting during our mostrecent fiscal quarter that have materially affected, or are reasonably likelyto materially affect our internal controls over financial reporting.

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**PART II –OTHER INFORMATION**

**Item 1.                    Legal Proceedings**

From time to time,we may become involved in various lawsuits and legal proceedings which arise inthe 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.  Thefollowing is a list of claims that are in settlement discussions or weresettled subsequent to March 31, 2007. Any losses related to these anticipated settlements or actualsettlements have been disclosed in the financial statements and recorded as ofMarch 31, 2007.

*CrdentiaCorp. and CRDE Corp. v. Robert Litton and Steve Williams*; *CauseNo. 3-06-CV-1182-R; Pending in the United States District Court for theNorthern District of Texas-Dallas Division.*

On January 27,2006, Crdentia Corp. and CRDE Corp. filed suit against Robert Litton and SteveWilliams, the former owners of TravMed, asserting claims for breach ofnon-competition/solicitation agreements, breach of fiduciary duty, tortiousinterference with existing and prospective contracts and business relations,and declaratory relief arising out of an Agreement and Plan of Reorganizationdated as of March 28, 2005.  Among otherthings, the Company alleged that the defendants violated their non-competitionagreements that they executed in connection with the Agreement and Plan ofReorganization by diverting business opportunities to a competingbusiness.  The Company sought anundisclosed amount of damages.  Thedefendants filed counterclaims against Crdentia alleging breach of theAgreement and Plan of Reorganization and conversion.  The Company began negotiating a settlement inMarch 2007 and anticipates it will pay $575,000 in the form of a thirty-sixmonth note in exchange for the defendants agreeing to pay certain payables onCrdentia’s behalf.  The note will bearinterest at 10% for the first eighteen months and 5% for the second eighteenmonths.  Monthly interest payments willbe required for the first eighteen months and principal and interest paymentsin the second eighteen months will be required which will fully amortize theobligation.  This liability is includedin other long-term liabilities at March 31, 2007.

*CrdentiaCorp., CRDE Corp., and Arizona Home Health Care/Private Duty, Inc. v. WilliamW. Crocker and William C. Crocker;  Cause No. 06-01050-L;  Pending in the 193**rd JudicialDistrict Court, Dallas County, Texas.*

On January 31,2006, Crdentia Corp., CRDE Corp., and Arizona Home Health Care/Private Duty,Inc. filed suit against William W. Crocker and William C. Crocker, the formerowners of Arizona Home Health Care/Private Duty, Inc., asserting claims forfraud, indemnity, and declaratory relief arising out of an Agreement and Planof Reorganization dated August 6, 2004 and a Receivable Allocation Agreemententered into in connection therewith. Among other things, the Company alleged that, prior to entering theAgreement and Plan of Reorganization, the defendants failed to disclose thatcertain key employees had planned to leave the company and that the defendantsrequested and/or instructed such employees not to leave prior to the closing ofthe merger.  The Company also allegedthat the defendants failed to disclose that their company did not possesscertain state licenses necessary to conduct a portion of its business.  The Company sought an undisclosed amount ofdamages.  This case was settled in April2007 as discussed below under “*William W. Crocker v.Crdentia Corp.”*

*William W. Crocker, an individual, v. Crdentia Corp., a Delaware Corporation,and Arizona Home Health Care/Private Duty, Inc., an Arizona Corporation, Cause No. 06C-02-226, pending in theSuperior Court of the State of Delaware in and for Castle County.*

On February 23, 2006, William W. Crocker filed suit against CrdentiaCorp. and Arizona Home Health Care/Private Duty, Inc. asserting claims fordeclaratory judgment, breach of contract, and conversion arising from aReceivable Allocation Agreement executed incident to an Agreement and Plan ofReorganization dated August 6, 2006.  MrCrocker sought damages in the principal sum of $251,150,

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which was comprised of $114,019 for collected accounts receivable andeighty percent (80%) of $171,414 of uncollected accounts receivable, plusattorneys’ fees.  The Company settledthis case in April 2007.  The Companyagreed to issue 312,500 shares of common stock (valued at $159,375 based on thetrading value of stock on April 9, 2007) in exchange for Crdentia retaining theproceeds from the collection of certain receivables that it collected on behalfof Mr. Crocker.  The Company has recordedthis liability in accounts payable and accrued expenses at March 31, 2007.

*Dawson James Securities, Inc. v. Crdentia Corp., Case No. 50 2006CA002708XXXXMB, pending inthe Circuit Court of the 15**th Judicial District, Palm BeachCounty, Florida.*

On March 22, 2006,Dawson James filed suit against Crdentia Corp. seeking fees in connection withraising investment capital for Crdentia. Dawson James contended that under terms of a contract they were owedcash of $235,000 and 50,000 warrants to purchase Crdentia stock.  The Company settled this case in April2007.  The Company agreed to issue400,000 shares of common stock (valued at $160,000 based on the trading valueof stock on April 13, 2007) in full payment of the obligation.  At March 31, 2007, the Company has recordedan accrual of $864,589 for the fair value of warrants to be issued plus anexpected cash payment.  This accrual willbe reduced in April 2007 to reflect the above settlement in stock.

**Item 1A.                 RiskFactors**

*Anyinvestment 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 buy ourcommon stock.  If any of the followingrisks actually occur, our business, financial condition, results of operationsand 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 independentregistered public accounting firm issued a going concern opinion on ourfinancial statements, questioning our ability to continue as a going concern.***

Our independentregistered public accounting firm’s opinion on our 2006 financial statementsincludes an explanatory paragraph indicating substantial doubt about ourability to continue as a going concern. Since our inception, we have operated with limited operating capital,and we continue to face immediate and substantial cash needs.  We have limited cash resources and will needto raise additional capital through public or private financings or other arrangementsin order to meet current commitments and continue development of ourbusiness.  In particular, we will need toraise at least $2,000,000 by March 31, 2008 (of which a significant amount willneed to be raised by June 30, 2007) in order to continue to operate ourbusiness.  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 financedour operations since inception primarily through the private placement ofequity and debt securities and loan facilities. Although we will need to raise funds in the near future, there can be noassurance that we will be successful in consummating any fundraisingtransaction, or if we do consummate such a transaction, that its terms andconditions will not require us to give investors warrants or other valuablerights to purchase additional interest in our company, or be otherwiseunfavorable to us.  Among other things,the agreements under which we issued some of our existing securities include,and any securities that we may issue in the future may also include, terms thatcould impede our ability to raise additional funding.  The issuance of additional securities couldimpose additional restrictions on how we operate and finance our business.  In addition, our current debt financingarrangements involve significant interest expense and restrictive covenantsthat limit our operations.

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***We have a historyof losses, and we may not achieve or maintain profitability.***

We haveexperienced operating and net losses in each fiscal quarter since ourinception, and as of March 31, 2007, we had an accumulated deficit of $125.9million.  We incurred net losses of $6.6million for the quarter ended March 31, 2007 and $1.4 million for the quarterended March 31, 2006.  We will need toincrease revenues and reduce operating expenses to achieve profitability, andwe may not be able to do so.  Even if wedo achieve profitability, we may not be able to sustain or increaseprofitability on a quarterly or annual basis in the future.  Our management may not be able to accuratelyproject or give any assurance with respect to our ability to controldevelopment and operating costs and/or expenses in the future.  Consequently, as we expand our commercialoperations, management may not be able to control costs and expensesadequately, 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 facedifficulties identifying acquisitions and integrating these acquisitions intoour operations.  These acquisitions maybe unsuccessful, involve significant cash expenditures or expose us tounforeseen liabilities.***

We continuallyevaluate opportunities to acquire healthcare staffing companies that complementor enhance our business and frequently have preliminary acquisition discussionswith such companies.  Since 2003, we haveacquired ten businesses.  Theseacquisitions involve numerous risks, including:

·                  potential lossof revenues following the acquisition;

·                  difficultiesintegrating acquired personnel and distinct cultures into our business;

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

·                  diversion ofmanagement attention from existing operations; and

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

These acquisitionsmay also involve significant cash expenditures, debt incurrence and integrationexpenses that could seriously harm our financial condition and results ofoperations.  We may fail to achieveexpected efficiencies and synergies.  Anyacquisition may ultimately have a negative impact on our business and financialcondition.   We may have difficulty insuccessfully completing planned acquisitions, which could result in significantcash expenditures for legal and accounting services and take up significanttime and attention of management.

***There is a limitedpublic market for our common stock, and the trading price of our common stockis subject to volatility.***

The quotation ofshares of our common stock on the OTC Bulletin Board began in 2003.  There can be no assurances that an activepublic market will develop or continue for our common stock.  The trading price of our common stock issubject to significant fluctuations.  Factorsaffecting the trading price of our common stock may include:

·                  variations inour financial results;

·                  announcements ofinnovations, new solutions, strategic alliances or significant agreements by usor by our competitors;

·                  recruitment ordeparture of key personnel;

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·                  changes inestimates 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

·                  sales ofsubstantial 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 raiseadditional capital in the future could have a dilutive effect on yourinvestment.***

We will need toraise additional capital in the future, including at least $2,000,000 by March31, 2008 (of which a significant amount will need to be raised by June 30,2007) in order for us to continue to operate our business.  Since the beginning of 2007, we have raised$3.85 million through the sale of common stock at $0.60 per share in sevenclosings of a private placement.  Ourboard of directors has authorized the sale of an additional $1.15 million incommon stock in subsequent closings of the private placement.  In addition to raising money throughsubsequent closings of the private placement, we may raise additional capitalthrough the public or private sale of common stock or securities convertibleinto or exercisable for our common stock. Such sales could be consummated at a significant discount to the tradingprice of our stock.

If we selladditional shares of our common stock, such sales will further dilute thepercentage of our equity that our existing stockholders own.  In addition, private placement financingscould involve the issuance of securities at a price per share that represents adiscount to the trading prices listed for our common stock on the OTC BulletinBoard.  Depending upon the price pershare of securities that we sell in the future, a stockholder’s interest in uswill be 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 the resolutionand, if resolved unfavorably to us, to affect dilutive securities issuances oradjustments to previously issued securities. In addition, future financings may include provisions requiring us tomake additional payments to the investors if we fail to obtain or maintain theeffectiveness of SEC registration statements by specified dates or take otherspecified action.  Our ability to meetthese requirements may depend on actions by regulators and other third parties,over which we will have no control. These provisions may require us to make payments or issue additionaldilutive securities, or could lead to costly and disruptive disputes.  In addition, these provisions could requireus to record additional non-cash expenses.

***Our creditfacility and revolving note impose significant expenses on us and we couldincur significant additional expenses in the event of default.***

In January 2007,we delivered a Master Revolving Note in the amount of $2.4 million to ComericaBank (the “Comerica Revolving Note”).  InFebruary 2007, we entered into a $10 million working capital facility withSystran Financial Services Corporation (the “Working Capital Facility”).  In connection with our entry into thesecredit arrangements with Comerica and Systran, we terminated our existingrevolving credit facility with Bridge Healthcare Finance, LLC and term loancredit facility with Bridge Opportunity Finance, LLC.  The new Working Capital Facility and ComericaRevolving Note involve significant interest expenses.  The Working Capital Facility has an initialterm of 48 months, and we are obligated to pay Systran certain fees upon earlytermination in the event the arrangement is terminated prior to the end of theterm.  Upon the occurrence of certainevents of default, Systran may immediately collect any obligation owing toSystran under the Working Capital Facility. The Comerica Revolving Note provides that, upon the occurrence ofcertain events of default, Comerica may, without prior notice to us, declareany or all of the indebtedness payable under the note immediately due andpayable.  Our failure to pay required

26

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interest expensesand other fees or to otherwise satisfy the terms of these credit arrangementswould have a material adverse affect on us.

***The agreementsgoverning the convertible debentures contain covenants and restrictions thatmay limit our ability to operate our business.***

The terms of our2006 convertible debentures limit our ability to, among other things, declareor pay dividends or distributions on any equity securities, create or incuradditional indebtedness, create additional liens on our assets and repurchasecommon stock.  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 PartnersL.P. controls a significant amount of our outstanding capital stock, and thismay delay or prevent a change of control of the company or adversely affect ourstock price.***

MedCap PartnersL.P. and MedCap Master Fund L.P. (the “MedCap Funds”) control a significantportion of our outstanding capital stock. In addition, C. Fred Toney, Chairman of our board of directors, is themanaging member of MedCap Management & Research LLC, the general partner ofthe MedCap Funds.  MedCap is able toexercise control over matters requiring stockholder approval, such as theelection of directors and the approval of significant corporate transactions,including transactions involving an actual or potential change of control ofthe company or other transactions that the non-controlling stockholders maydeem to be in their best interests and in which such stockholders could receivea premium for their shares.

***If we do not continue to*attract and retain**key employeesour business could suffer.

We are dependentupon the personal efforts of our management team.  The loss of any of our officers or directorscould have a material adverse effect upon our business and future prospects.  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 alsodepends on our ability to attract and retain qualified and skilled salespersonnel who engage in selling and business development for our services.  The available pool of qualified salespersonnel candidates is limited.  Wecommit substantial resources to the recruitment, training, development andoperational support of our sales personnel. There can be no assurance that we will be able to recruit, develop andretain qualified sales personnel in sufficient numbers or that our salespersonnel will achieve productivity levels sufficient to enable growth of ourbusiness.  Failure to attract and retainproductive sales personnel could adversely affect our business, financialcondition and results of operations.

***If we are unableto attract qualified nurses and healthcare professionals for our healthcarestaffing business, our business could be negatively impacted.***

We rely significantlyon our ability to attract and retain nurses and healthcare professionals whopossess the skills, experience and licenses necessary to meet the requirementsof our hospital and healthcare facility clients.  We compete for healthcare staffing personnelwith other temporary healthcare staffing companies and with hospitals andhealthcare facilities.  We mustcontinually evaluate and expand our temporary healthcare professional networkto keep pace with our hospital and healthcare facility clients’ needs.  Currently, there is a shortage of qualifiednurses in most areas of the United States, competition for nursing personnel isincreasing, and salaries and benefits have risen.  We may be unable to continue to increase thenumber of temporary healthcare professionals that we recruit, decreasing thepotential for growth of our business. Our ability to attract and retain temporary healthcare professionalsdepends on several factors, including our ability to provide temporaryhealthcare professionals with assignments that they view as attractive and toprovide them with competitive benefits and wages.  We cannot assure you that we will besuccessful in any of these areas.  The costof attracting temporary healthcare professionals and providing

27

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them with attractivebenefit packages may be higher than we anticipate and, as a result, if we areunable to pass these costs on to our hospital and healthcare facility clients,our losses could increase.  Moreover, ifwe are unable to attract and retain temporary healthcare professionals, thequality of our services to our hospital and healthcare facility clients maydecline and, as a result, we could lose clients.

***The temporarystaffing industry is highly competitive and the success and future growth ofour business depends upon our ability to remain competitive in obtaining andretaining temporary staffing clients.***

The temporarystaffing industry is highly competitive and fragmented, with limited barriersto entry.  We compete in national,regional and local markets with full-service agencies and in regional and localmarkets with specialized temporary staffing agencies.  Some of our competitors include AMNHealthcare Services, Inc., Cross Country, Inc., Medical Staffing NetworkHoldings, Inc. and On Assignment, Inc. All of these companies have significantly greater marketing andfinancial resources than we do.  Ourability to attract and retain clients is based on the value of the service wedeliver, which in turn depends principally on the speed with which we fillassignments and the appropriateness of the match based on clients’ requirementsand 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, to provide multiple, continuous assignments andthereby 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 newgeographic markets, our success will depend in part on our ability to gainmarket share from competitors.  We expectcompetition for clients to increase in the future, and the success and growthof our business depends on our ability to remain competitive.

***Our businessdepends upon our continued ability to secure and fill new orders from ourhospital and healthcare facility clients, because we do not have long-termagreements or exclusive contracts with them.***

We generally donot have long-term agreements or exclusive guaranteed order contracts with ourhospital and healthcare facility clients. The success of our business depends upon our ability to continuallysecure new orders from hospitals and other healthcare facilities and to fillthose orders with our temporary healthcare professionals.  Our hospital and healthcare facility clientsare free to place orders with our competitors and may choose to use temporaryhealthcare professionals that our competitors offer them.  Therefore, we must maintain positiverelationships 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.

***Fluctuations inpatient occupancy at our clients’ hospitals and healthcare facilities and/ornurse turnover rates may adversely affect the demand for our services andtherefore the profitability of our business.***

Demand for ourtemporary healthcare staffing services is significantly affected by the generallevel of patient occupancy at our hospital and healthcare clients’facilities.  When occupancy increases,hospitals and other healthcare facilities often add temporary employees beforefull-time employees are hired.  Asoccupancy decreases, hospitals and other healthcare facilities typically reducetheir use of temporary employees before undertaking layoffs of their regularemployees.  In addition, we mayexperience more competitive pricing pressure during periods of occupancydownturn.  Occupancy at our clients’hospitals and healthcare facilities also fluctuates due to the seasonality ofsome elective procedures.  We are unableto predict the level of patient occupancy at any particular time and the effecton our revenues and earnings.

***We could be difficultto acquire due to anti-takeover provisions in our charter documents andDelaware law.***

Provisions of ourcertificate of incorporation and bylaws may have the effect of making it moredifficult for a third party to acquire, or of discouraging a third party fromattempting to acquire control of us. These provisions may make it more difficult for stockholders to takecorporate actions and may have the effect of delaying or preventing a change incontrol.  We are subject to theanti-takeover provisions of Section 203

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of the DelawareGeneral Corporation Law.  Subject tospecified exceptions, including the approval of the transaction by the board ofdirectors or the corporation’s stockholders, this section provides that acorporation may not engage in any business combination with any interestedstockholder during the three-year period following the time that suchstockholder becomes an interested stockholder. This provision could have the effect of delaying or preventing a changeof control of us.  These factors couldlimit the price that investors or an acquirer may be willing to pay in thefuture for shares of our common stock.

***We operate in aregulated industry and changes in regulations or violations of regulations mayresult in increased costs or sanctions that could reduce our revenues andprofitability.***

The healthcareindustry is subject to extensive and complex federal and state laws andregulations related to professional licensure, conduct of operations, paymentfor services and payment for referrals. If we fail to comply with the laws and regulations that are directlyapplicable to our business, we could suffer civil and/or criminal penalties orbe subject to injunctions or cease and desist orders.

Our business isgenerally not subject to the extensive and complex laws that apply to ourhospital and healthcare facility clients, including laws related to Medicare,Medicaid and other federal and state healthcare programs.  However, these laws and regulations couldindirectly affect the demand or the prices paid for our services.  For example, our hospital and healthcarefacility clients could suffer civil or criminal penalties or be excluded fromparticipating in Medicare, Medicaid and other healthcare programs if they failto comply with the laws and regulations applicable to their businesses.  In addition, our hospital and healthcarefacility clients could receive reduced reimbursements, or be excluded fromcoverage, because of a change in the rates or conditions set by federal orstate governments.  In turn, violationsof or changes to these laws and regulations that adversely affect our hospitaland healthcare facility clients could also adversely affect the prices thatthese clients are willing or able to pay for our services.

In addition, improperactions by our employees and other service providers may subject us toregulatory and litigation risk.

***Further governmentregulations or healthcare reform could negatively impact our businessopportunities, revenues and margins.***

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

The United Statesgovernment has undertaken efforts to control increasing healthcare coststhrough legislation, regulation and voluntary agreements with medical careproviders and drug companies.  In therecent past, the United States Congress has considered several comprehensivehealthcare reform proposals.  Theproposals were generally intended to expand healthcare coverage for the uninsuredand reduce the growth of total healthcare expenditures.  While Congress did not adopt anycomprehensive reform proposals, members of Congress may raise similar proposalsin the future.  If any of these proposalsare approved, hospitals and other healthcare facilities may react by spendingless on healthcare staffing, including nurses. If this were to occur, we would have fewer business opportunities, whichcould seriously harm our business.

State governmentshave also attempted to control increasing healthcare costs.  For example, the state of Massachusetts hasrecently implemented a regulation that limits the hourly rate payable totemporary nursing agencies for registered nurses, licensed practical nurses andcertified nurses’ aides.  The state of Minnesotahas also implemented a statute that limits the amount that nursing agencies maycharge nursing homes.  Other states havealso proposed legislation that would limit the amounts that temporary staffingcompanies may charge.  Any such currentor proposed laws could seriously harm our business, revenues and margins.

Furthermore, thirdparty payers, such as health maintenance organizations, increasingly challengethe prices charged for medical care. Failure by hospitals and other healthcare facilities to obtain fullreimbursement from those third party payers could reduce the demand or theprice paid for our staffing services.

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***Significant legalactions could subject us to substantial uninsured liabilities.***

In recent years,healthcare providers have become subject to an increasing number of legalactions alleging malpractice, product liability or related legal theories.  Many of these actions involve large claimsand significant defense costs.  Inaddition, we may be subject to claims related to torts or crimes committed byour employees or temporary healthcare professionals.  In some instances, we are required toindemnify 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; relevant client policies and guidelines or applicablefederal, state or local laws, rules and regulations could result in negativepublicity, payment of fines or other damages. Our professional malpractice liability insurance and general liabilityinsurance coverage may not cover all claims against us or continue to beavailable to us at a reasonable cost.  Ifwe are unable to maintain adequate insurance coverage or if our insurers denycoverage we may be exposed to substantial liabilities.

***We may be legallyliable for damages resulting from our hospital and healthcare facility clients’mistreatment of our healthcare personnel.***

Because we are inthe business of placing our temporary healthcare professionals in theworkplaces of other companies, we are subject to possible claims by ourtemporary healthcare professionals alleging discrimination, sexual harassment,negligence and other similar activities by our hospital and healthcare facilityclients.  The cost of defending suchclaims, even if groundless, could be substantial and the associated negativepublicity could adversely affect our ability to attract and retain qualifiedhealthcare professionals in the future.

***We have asubstantial amount of goodwill and other intangible assets on our balancesheet.  Our level of goodwill and otherintangible assets may have the effect of decreasing our earnings or increasingour losses.***

As of March 31,2007, we had $15.9 million of goodwill and other unamortized intangible assetson our balance sheet, which represents the excess of the total purchase priceof our acquisitions over the fair value of the net assets acquired.  At March 31, 2007, goodwill and otherintangible assets represented 67% of our total assets.  An impairment charge of goodwill to earningswould have the effect of decreasing our earnings or increasing our losses, asthe case may be.  If we are required towrite down a substantial amount of goodwill, our stock price could be adverselyaffected.  As a result of the loss ofcustomer base in some operations and the closure of certain operations, ourimpairment analysis of goodwill in 2006 required a charge for impairment ofgoodwill of $10 million.  We also lostcertain customer relationships that were obtained with the TravMed acquisitionwhich necessitated a write-down of $126,000 in 2006 related to intangiblesassigned to these customer relationships.

***Demand for medicalstaffing services is significantly affected by the general level of economicactivity and unemployment in the United States.***

When economicactivity increases, temporary employees are often added before full-timeemployees are hired.  However, aseconomic activity slows, many companies, including our hospital and healthcarefacility clients, reduce their use of temporary employees before laying-offfull-time employees.  In addition, we mayexperience more competitive pricing pressure during periods of economicdownturn.  Therefore, any significanteconomic downturn could have a material adverse impact on our financialposition and results of operations.

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

None

**Item 3.                    Defaults Upon SeniorSecurities**

None

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**Item 4.                    Submission of Matters toa Vote of Security Holders**

None

**Item 5.                    Other Information**

On May 4, 2007,the Company (i) issued 200,000 shares of restricted common stock to William J.Nydam, a member of the Board of Directors; (ii) issued 200,000 shares ofrestricted common stock to Robert J. Kenneth, a member of the Board ofDirectors; and (iii) granted an option to purchase 200,000 shares of commonstock at an exercise price of $0.49 per share to Thomas F. Herman, a member ofthe Board of Directors.  The restrictedshares vest 50% on May 4, 2008 and 50% on May 4, 2009; the option isexercisable with respect to 50% of the shares subject to such option on May 4,2008 and 50% of the shares subject to such option on May 4, 2009.

**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.                                                                                                                                                                                                                                      |
|         |       |                                                                                                                                                                                                                                                                                                                       |
| 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*       |       | 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*       |       | 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.                                 |

 

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| 10.87     |   | 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     |   | 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     |   | Bills, Accounts, and Accounts Receivable Validity  Guaranty dated February 8, 2007 by James D. Durham in favor of Systran  Financial Services Corporation.                                                                                                                                                                                                                                                                                                                                                                                                            |
|      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.90     |   | Bills, Accounts, and Accounts Receivable Validity  Guaranty dated February 8, 2007 by James J. TerBeest in favor of Systran  Financial Services Corporation.                                                                                                                                                                                                                                                                                                                                                                                                          |
|      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.91     |   | 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     |   | Registration Rights Agreement dated April 13, 2007  by and between Crdentia Corp. and Dawson James Securities, Inc.                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.96     |   | Compromise, Settlement and Release Agreement dated  effective March 29, 2007 by and between Crdentia Corp. and William W. Crocker  and William C. Crocker.                                                                                                                                                                                                                                                                                                                                                                                                            |
|      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 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.

*Application has beenmade to the Securities and Exchange Commission to seek confidential treatmentof certain provisions.  Omitted materialfor which confidential treatment has been requested has been filed separatelywith the Securities and Exchange Commission.

(1)           Previously filed on Form 10-QSB withthe Securities and Exchange Commission on August 12, 2003 and incorporatedherein by reference.

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

(3)           Previously filed on Form 8-K/A withthe Securities and Exchange Commission on June 28, 2004 and incorporated hereinby reference.

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

(5)           Previously filed with a CurrentReport on Form 8-K dated January 29, 2007 and incorporated herein by reference.

(6)           Previously filed with a CurrentReport on Form 8-K dated February 28, 2007 and incorporated herein byreference.

(7)           Previously filed with a CurrentReport on Form 8-K dated March 8, 2007 and incorporated herein by reference.

(8)           Previously filed with a CurrentReport on Form 8-K dated March 26, 2007 and incorporated herein by reference.

(9)           Previously filed with a CurrentReport on Form 8-K dated April 4, 2007 and incorporated herein by reference.

(10)         Previously filed with a Current Reporton Form 8-K dated April 12, 2007 and incorporated herein by reference.

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**SIGNATURES**

Pursuant to the requirements of Section 13 or 15(d) of the SecuritiesExchange Act of 1934, the Registrant has duly caused this Report to be signedon its behalf by the undersigned, thereunto duly authorized.
|                      |   |                                 | CRDENTIA CORP. |
|----------------------|--------|--------------------------------------|----------------|
|                 |   |                                 |           |
| Dated: May 15,  2007 | By:    |  /s/ John  Kaiser               |           |
|                 |   | John Kaiser                          |
|                 |   | Chief Executive Officer and Director |
|                 |   | (Principal Executive Officer)        |
|                 |   |                                 |
|                 |   |                                 |
| Dated: May 15,  2007 | By:    | /s/ James J. TerBeest |           |
|                 |   | James J. TerBeest                    |
|                 |   | Chief Financial Officer              |
|                 |   | (Principal Financial and Accounting  |
|                 |   | Officer)                             |
|                      |        |                                      |                |  |  |

 

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