##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION  FORM 10-QSB (Mark One) [X]
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2004. [   ]
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to Commission File Number 0-31152 CRDENTIA CORP.  Delaware
    
    76-0585701(State or other jurisdiction of
    
    (IRS Employer Identification No.)incorporation or organization)
 14114 Dallas Parkway, Suite 600, Dallas, Texas 75254
(Address of principal executive offices) (972)850-0780
(Issuers telephone number) 13,126,518 shares of Common Stock, $.0001 par value, outstanding on November 9,
2004. Transitional Small Business
Disclosure Format (check one): Yes [   ] No [X]




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CRDENTIA CORP. Form 10-QSB Quarterly Report
For Quarterly Period Ended September 30, 2004 Table of Contents PagePART I  FINANCIAL INFORMATION
    
    
    3Item 1. Condensed Consolidated Financial Statements
    
    
    3Condensed Consolidated Balance Sheets at September 30, 2004
(unaudited) and December 31, 2003
    
    
    3Condensed Consolidated Statements of Operations (unaudited)
for the Three and Nine Months Ended September 30, 2004 and 2003
    
    
    5Condensed Consolidated Statements of Cash Flows (unaudited)
for the Nine Months Ended September 30, 2004 and 2003
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis or Plan of Operation
    
    
    26Item 3. Controls and Procedures
    
    
    37PART II  OTHER INFORMATION
    
    
    39Item 1. Legal Proceedings
    
    
    39Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    39Item 3. Defaults Upon Senior Securities
    
    
    39Item 4. Submission of Matters to a Vote of Security Holders
    
    
    39Item 5. Other Information
    
    
    40Item 6. Exhibits
    
    
    40SIGNATURES
    
    
    44EXHIBIT 10.3EXHIBIT 10.4EXHIBIT 10.7EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2




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PART I. FINANCIAL INFORMATION 
 Item 1. Condensed Consolidated Financial Statements CRDENTIA CORP. 
 Condensed Consolidated Balance Sheets
 September 30, 2004
    
    December 31, 2003(unaudited)Current assets:Cash and cash equivalents
    
    $
    236,920
    
    
    $
    1,469,076Accounts receivable, net of allowance for doubtful
accounts of $120,743 in 2004 and $195,465 in 2003
    
    
    2,978,721
    
    
    
    3,058,084Unbilled receivables
    
    
    318,620
    
    
    
    268,590Other current assets
    
    
    528,421
    
    
    
    333,383Total current assets
    
    
    4,062,682
    
    
    
    5,129,133Property and equipment, net
    
    
    340,899
    
    
    
    363,815Goodwill
    
    
    12,980,972
    
    
    
    8,519,821Intangible assets, net
    
    
    3,554,401
    
    
    
    3,462,736Other assets
    
    
    860,908
    
    
    
    120,895Total assets
    
    $
    21,799,862
    
    
    $
    17,596,400
 See accompanying notes to unaudited condensed consolidated financial statements. 3




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CRDENTIA CORP.
Condensed Consolidated Balance Sheets September 30, 2004
    
    December 31, 2003(unaudited)Current liabilities:Accounts payable and accrued expenses
    
    $
    2,143,057
    
    
    $
    901,410Accrued employee compensation and benefits
    
    
    502,623
    
    
    
    612,439Subordinated convertible notes, net of discount
    
    
    165,000
    
    
    
    250,833Revolving lines of credit
    
    
    2,323,764
    
    
    
    2,871,890Current portion of notes payable to lenders, net of
discount
    
    
    1,280,181
    
    
    
    191,667Current portion of notes payable to sellers
    
    
    590,172
    
    
    
    1,435,115Other current liabilities
    
    
    92,083
    
    
    
    86,644Total current liabilities
    
    
    7,096,880
    
    
    
    6,349,998Long term bonus payable
    
    
    863,202
    
    
    
    801,000Notes payable to lenders, less current portion
    
    
    
    
    
    
    27,777Notes payable to sellers, less current portion
    
    
    2,370,538
    
    
    
    3,925,983Total liabilities
    
    
    10,330,620
    
    
    
    11,104,758Commitments and contingenciesConvertible preferred stock, 10,000,000 shares authorizedSeries A convertible preferred stock$0.0001 par value, 2,750,000 shares issued and no shares
outstanding in 2004 and 1,750,000 shares issued and
outstanding in 2003 (liquidation preference of $1,750,000
in 2003)
    
    
    
    
    
    
    1,750,000Series B convertible preferred stock$0.0001 par value, 6,250,000 shares issued and 3,750,000
shares
outstanding in 2004 (liquidation preference of $750,000
in 2004)
    
    
    750,000
    
    
    
    Series B-1 convertible preferred stock$0.0001 par value, 50,547 shares issued and 46,435 shares
outstanding in 2004 (liquidation preference of $2,786,100
in 2004)
    
    
    10,283,350
    
    
    
    Series C convertible preferred stock$0.0001 par value, 38,930 shares issued and outstanding
in 2004 (liquidation preference of $11,679,000 in 2004)
    
    
    677,638
    
    
    
    Series C preferred stock warrants
    
    
    1,658,162
    
    
    
    13,369,150
    
    
    
    1,750,000Stockholders equity:Common stock, par value $0.0001,
50,000,000 shares authorized in 2004 and 2003,
14,160,224 shares issued and 13,083,818 shares
outstanding
in 2004 and 7,355,758 shares issued and 6,279,352
shares outstanding in 2003
    
    
    1,416
    
    
    
    736Additional paid in capital
    
    
    69,106,462
    
    
    
    60,547,358Deferred stock compensation
    
    
    (735,402
    )
    
    
    (828,000
    )Accumulated deficit
    
    
    (70,272,384
    )
    
    
    (54,978,452
    )Total stockholders equity
    
    
    (1,899,908
    )
    
    
    4,741,642Total liabilities and stockholders equity
    
    $
    21,799,862
    
    
    $
    17,596,400
 See accompanying notes to unaudited condensed consolidated financial statements. 4




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CRDENTIA CORP. 
 Condensed Consolidated Statements of Operations
(unaudited)
 Three Months Ended September 30,
    
    Nine Months Ended September 30,2004
    
    2003
    
    2004
    
    2003Revenue from services
    
    $
    5,526,945
    
    
    $
    589,108
    
    
    $
    17,234,443
    
    
    $
    589,108Direct operating expenses
    
    
    4,266,717
    
    
    
    430,234
    
    
    
    13,522,086
    
    
    
    430,234Gross margin
    
    
    1,260,228
    
    
    
    158,874
    
    
    
    3,712,357
    
    
    
    158,874Operating expenses:Selling, general and administrative
expenses
    
    
    2,561,217
    
    
    
    436,684
    
    
    
    6,766,896
    
    
    
    916,638Loss on impairment of customer related
intangibles
    
    
    121,440
    
    
    
    
    
    
    
    121,440
    
    
    
    Non-cash stock based compensation expense
    
    
    140,425
    
    
    
    14,475,099
    
    
    
    299,880
    
    
    
    14,555,921Total operating expenses
    
    
    2,823,082
    
    
    
    14,911,783
    
    
    
    7,188,216
    
    
    
    15,472,559Loss from operations
    
    
    (1,562,854
    )
    
    
    (14,752,909
    )
    
    
    (3,475,859
    )
    
    
    (15,313,685
    )Non-cash
expense for conversion of debt
    
    
    7,497,250
    
    
    
    
    
    
    
    7,497,250
    
    
    
    Interest expense, net
    
    
    713,266
    
    
    
    12,789
    
    
    
    1,712,376
    
    
    
    17,648Loss before income taxes
    
    
    (9,773,370
    )
    
    
    (14,765,698
    )
    
    
    (12,685,485
    )
    
    
    (15,331,333
    )Income tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    $
    (9,773,370
    )
    
    $
    (14,765,698
    )
    
    $
    (12,685,485
    )
    
    $
    (15,331,333
    )Deemed dividend related to beneficial
conversion
feature on Series A convertible preferred
stock
    
    $
    
    
    
    $
    
    
    
    $
    1,000,000
    
    
    $
    Deemed dividend related to beneficial
conversion
feature on Series B convertible preferred
stock
    
    
    
    
    
    
    
    
    
    
    1,250,000
    
    
    
    Deemed dividend related to beneficial
conversion
feature on Series B-1 convertible
preferred stock
    
    
    1,233,480
    
    
    
    
    
    
    
    1,233,480
    
    
    
    Deemed dividend related to beneficial
conversion
feature on Series B-1 warrants issued
    
    
    360,000
    
    
    
    
    
    
    
    360,000Deemed dividend related to beneficial
conversion
feature on Series C convertible preferred
stock
    
    
    677,382
    
    
    
    
    
    
    
    677,382
    
    
    
    Net loss attributable to common stockholders
    
    $
    (12,044,232
    )
    
    $
    (14,765,698
    )
    
    $
    (17,206,347
    )
    
    $
    (15,331,333
    )Basic and diluted net loss per common share
attributable to common stockholders
    
    $
    (1.86
    )
    
    $
    (4.44
    )
    
    $
    (2.71
    )
    
    $
    (4.32
    )Weighted-average shares of common stock outstanding
    
    
    6,478,271
    
    
    
    3,327,187
    
    
    
    6,349,072
    
    
    
    3,551,858
 See accompanying notes to unaudited condensed consolidated financial statements. 5




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CRDENTIA CORP. 
 Condensed Consolidated Statements of Cash Flow
(unaudited)
 Nine Months Ended September 30,2004
    
    2003Cash flows from operating activities:Net loss
    
    $
    (12,685,485
    )
    
    $
    (15,331,333
    )Adjustment to reconcile net loss to net cash
used in operating activities:Amortization of subordinated convertible
note discounts
    
    
    654,167
    
    
    
    Depreciation and amortization
    
    
    740,226
    
    
    
    2,085Provision for bad debt, net of recovery
    
    
    50,050
    
    
    
    3,488Non-cash stock based compensation expense
    
    
    299,880
    
    
    
    14,555,921Amortization of debt issue costs to interest expense
    
    
    283,732
    
    
    
    Amortization of long term bonus payable
    
    
    62,202
    
    
    
    Amortization of long-term debt warrants
    
    
    40,503
    
    
    
    Non-cash
expense for conversion of debt
    
    
    7,497,250
    
    
    
    Loss on impairment of customer intangibles
    
    
    121,440
    
    
    
    Changes in operating assets and liabilities, net
of effects of purchases of subsidiaries:Accounts receivable
    
    
    91,155
    
    
    
    122,858Unbilled receivables
    
    
    (50,030
    )
    
    
    Other current assets and liabilities
    
    
    (285,551
    )
    
    
    111,758Other assets
    
    
    67,746
    
    
    
    Accounts payable and accrued expenses
    
    
    1,243,162
    
    
    
    534,384Accrued employee compensation and benefits
    
    
    (109,817
    )
    
    
    (129,587
    )Net cash used in operating activities
    
    
    (1,979,370
    )
    
    
    (130,426
    )Cash flows from investing activities:Purchase of property and equipment
    
    
    (166,648
    )
    
    
    (2,063
    )Cash paid for acquisition of subsidiaries, net of cash
received
    
    
    (4,213,933
    )
    
    
    (269,862
    )Other investing activities
    
    
    
    
    
    
    (44,161
    )Net cash used in investing activities
    
    
    (4,380,581
    )
    
    
    (316,086
    )Cash flows from financing activities:Issuance of preferred stock
    
    
    5,060,760
    
    
    
    Net decrease in revolving lines of credit
    
    
    (548,126
    )
    
    
    (128,394
    )Proceeds from notes payable to lenders
    
    
    2,697,802
    
    
    
    986,111Payment of notes payable to lenders
    
    
    (719,444
    )
    
    
    (168,889
    )Payment of notes payable to sellers
    
    
    (257,494
    )
    
    
    Payment of debt issue costs
    
    
    (1,105,703
    )
    
    
    Net cash provided by financing activities
    
    
    5,127,795
    
    
    
    688,828Net decrease in cash
    
    
    (1,232,156
    )
    
    
    242,316Cash and cash equivalents at beginning of period
    
    
    1,469,076
    
    
    
    125,463Cash and cash equivalents at end of period
    
    $
    236,920
    
    
    $
    367,779
 See accompanying notes to unaudited condensed consolidated financial statements. 6




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CRDENTIA CORP. 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2004
 Note 1. Organization and Summary of Significant Accounting Policies Organization Crdentia Corp (the Company), a Delaware corporation, is a provider of
healthcare staffing services in the United States. Such services include
travel nursing, per diem staffing, contractual clinical services and private
duty home health care. The Company considers these different services to be one
segment. Each of these services relate solely to providing healthcare staffing
to customers and the Company utilizes common systems, databases, procedures,
processes and similar methods of identifying and serving these customers. At the beginning of 2003, we were a development stage company with no
commercial operations. During that year, we pursued our operational plan of
acquiring companies in the healthcare staffing field and completed the
acquisition of four companies. The companies we acquired in 2003  Baker
Anderson Christie, Inc., New Age Nurses, Inc., Nurses Network, Inc., and PSR
Nurse Recruiting, Inc. and PSR Nurses Holdings Corp., which hold the limited
partner and general partner interests in PSR Nurses, Ltd.  provide the
foundation for our future growth. During 2004, we completed the acquisitions of Arizona Home Health Care/Private
Duty, Inc. and Care Pros Staffing, Inc. Basis of Presentation The accompanying unaudited financial data as of and for the three months and
nine months ended September 30, 2004 and 2003 have been prepared by the Company
pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been condensed or
omitted pursuant to such rules and regulations. These unaudited condensed
consolidated financial statements should be read in conjunction with the
audited financial statements and the notes thereto included in the Companys
annual Report on Form 10-KSB for the fiscal year ended December 31, 2003. In the opinion of management, all adjustments (which include only normal
recurring adjustments) necessary to present fairly the financial position,
results of operations, and cash flows as of and for the three months and nine
months ended September 30, 2004 have been made. The results of operations for
the three months and nine months ended September 30, 2004 are not necessarily
indicative of the operating results for the full year. Certain of the prior year financial statement amounts have been reclassified to
conform to the current year presentation. These reclassifications had no impact
on previously reported net loss or accumulated deficit. Liquidity The Company has a working capital deficit of approximately $3.0 million and
incurred a cash flow loss from operations of approximately $2.0 million for the
nine months ended September 30, 2004. Operating results and cash flows during
the nine months were not sufficient to meet certain loan covenants related to our
senior lender at September 30, 2004 and subsequently. The 7




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CRDENTIA CORP. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004 Company has received waivers
for these debt covenant violations. Despite
these financial challenges, the Company has made considerable progress in
developing additional sources of capital and in achieving profitable
operations:  
    
    Through September 30, 2004, the Company raised over $5 million
through the issuance of convertible preferred stock.
    
    Through September 30, 2004, the Company paid off or converted $2.2
million of notes payable to selling shareholders, and $740,000 of other
subordinated debt was paid off or converted to preferred stock.
    
    In October 2004, the Company implemented a restructuring program to
reduce its cost structure primarily through workforce and
administrative cost reductions. As a result, approximately $125,000 was
incurred as a restructuring charge during October 2004.
    
    In November 2004, the Company reached agreement on and the Board of
Directors approved the terms of the acquisition of a company generating
approximately $1.2 million in gross monthly revenues. Management
believes this acquisition will improve the Companys revenue,
profitability and cash flows.
    
    In November 2004, the Company reached an agreement to convert
approximately $2.7 million of Seller Notes and accrued interest to
Series B-1 Convertible Preferred Stock. Although there can be no assurance that all of the above initiatives will be
accomplished, some have already been accomplished, and management believes that
its plan to succeed relative to the remaining initiatives is reasonable.
Collectively, management believes these initiatives, if completed, will allow
the Company to generate net income and positive cash flows from
operations for the fiscal year 2005.
However, if the Company is unable to accomplish these objectives and the
business continues to decline, we would be forced to significantly curtail our
operations until additional capital could be raised. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty. Accounts Receivable Accounts receivable includes approximately $18,000 as advances to employees
related to hours worked, but not yet paid as a result of the normal payroll
cycle. These employee advances are included with Other Current Assets in the
financial statements. Goodwill and Intangible Assets Intangible assets other than goodwill consist of customer relationships and
international nurse contracts and are presented net of accumulated
amortization. Intangibles are amortized over their respective useful lives
estimated to be five years. Goodwill is assessed for impairment at least
annually. The valuation of these intangibles is determined based upon
valuations performed by third-party specialists and managements best estimates
of fair value. As a result, the ultimate value and recoverability of these
assets is subject to the validity of the assumptions used. Due to the decline in revenue related to a significant customer relationship
that was acquired with a merger agreement in 2003, the Company reviewed the
customer related intangible asset 8




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CRDENTIA CORP. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004 for impairment. As a result of this analysis, $121,440 was recorded as an
impairment loss in September 2004. Income Taxes The Company accounts for income taxes under an asset and liability approach
that requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been recognized in the
Companys financial statements or tax return. A valuation allowance is
recorded, based on currently available information, when it is more likely than
not that any or all of a deferred tax asset will not be realized. The Company
files a consolidated Federal income tax return with its subsidiaries. Revenue Recognition and Allowances The Company recognizes revenue generally on the date the Companys healthcare
staff provides services to healthcare facilities or individuals in their home. Accounts receivable are uncollateralized customer obligations due under normal
trade terms. The Company provides services to various public and private
medical facilities such as hospitals and nursing care facilities. Management
performs continuing credit evaluations of the customers financial condition.
In addition, the Company provides home healthcare to individuals on a private
pay arrangement or state funded insurance reimbursement. Senior management reviews accounts receivable on a regular basis to determine
if any receivables will potentially be uncollectible. An allowance for doubtful
accounts is recorded based upon managements evaluation of current industry
conditions, historical collection experience and other relevant factors which,
in the opinion of management, require recognition in estimating the allowance.
After all attempts to collect a receivable have failed, the receivable is
written off against the allowance. Stock-Based Compensation As permitted under the provisions of Statement of Financial Accounting Standard
(SFAS) No. 123, Accounting for Stock-Based Compensation, the Company continues
to account for employee stock-based transactions under Accounting Principles
Board Opinion (APB) No. 25, Accounting for Stock Issued to Employees. However,
SFAS 123 requires the Company to disclose pro forma net income and earnings per
share as if the fair value method had been adopted. Under the fair value
method, compensation cost is measured at the grant date based on the fair value
of the award and is recognized over the service period, which is usually the
vesting period. For non-employees, cost is also measured at the grant date,
using the fair value method, but is actually recognized in the financial
statements over the vesting period or immediately if no further services are
required. If the Company had elected the fair value method of accounting for employee
stock-based compensation, compensation cost would be accrued at the estimated
fair value of the stock award grants over the service period, regardless of
later changes in stock prices and price volatility. The date of grant fair
values for options granted have been estimated based on a modified
Black-Scholes pricing model with the assumptions identified in the following
table: 9




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CRDENTIA CORP. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004 September 30, 2004Dividend Yield
    
    
    Volatility
    
    
    162.4
    %Risk-Free Interest Rates
    
    
    4.5
    %Expected Lives in Years
    
    0-5 years
 The table below shows net loss per share for September 30, 2004 as if the
Company had elected the fair value method of accounting for stock options. Three Months Ended September 30,
    
    Nine Months Ended September 30,2004
    
    2003
    
    2004
    
    2003Net loss as reported attributable to common stockholders
    
    $
    (12,044,232
    )
    
    $
    (14,765,698
    )
    
    $
    (17,206,347
    )
    
    $
    (15,331,333
    )Add:Stock-based compensation included in reported net income,
net of related tax effects
    
    
    140,425
    
    
    
    
    
    
    
    299,880
    
    
    
    Deduct:Total stock-based employee compensation determined under the
fair value method for all awards, net of related tax effects
    
    
    (2,144,537
    )
    
    
    
    
    
    
    (2,352,628
    )
    
    
    Proforma net loss, as adjusted
    
    $
    (14,048,344
    )
    
    $
    (14,765,698
    )
    
    $
    (19,259,095
    )
    
    $
    (15,331,333
    )Loss per share attributable to common stockholders:Basic and diluted, as reported
    
    $
    (1.86
    )
    
    $
    (4.44
    )
    
    $
    (2.71
    )
    
    $
    (4.32
    )Basic and diluted, as adjusted
    
    $
    (2.17
    )
    
    $
    (4.44
    )
    
    $
    (3.03
    )
    
    $
    (4.32
    )
 On September 10, 2004, William S. Leftwich resigned as Chief Financial Officer
of the Company to pursue other interests. In connection with his resignation,
the Company entered into a separation agreement whereby 25% of the stock
options (27,626 shares) granted to him would accelerate and become vested.
Additionally, the Company provided Mr. Leftwich until September 10, 2005 to
exercise these options. These stock options have been revalued as new options
as of September 10, 2004 and included in compensation expense in accordance
with the fair value method of accounting and will be revalued at each
subsequent reporting date until the options are either exercised or expire. As
a result of the revaluation, $53,770 was recorded to stock compensation expense
at September 30, 2004. Note 2. Acquisitions Care Pros Staffing, Inc. On August 13, 2004, the Company acquired Care Pros Staffing, Inc. in exchange
for $275,000 in cash, $275,000 in notes and $39,706 of net acquisition costs.
The primary purpose of the acquisition was to enable the Company to expand its
presence in the per diem segment of the 10




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CRDENTIA CORP. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004 nurse staffing industry. The following table summarizes the assets acquired
and liabilities assumed as of the closing date: Cash acquired
    
    $
    86Tangible assets acquired
    
    
    61,842Customer related intangible assets
    
    
    51,993Goodwill
    
    
    475,785Total assets acquired
    
    $
    589,706Liabilities assumed
    
    
    Net assets acquired
    
    $
    589,706
 The acquisition was accounted for using the purchase method of accounting.
Customer related intangible assets will be amortized over their useful life of
five years. Allocation of the excess of merger consideration over the net book
value of assets acquired between goodwill and customer relationships was
determined by managements estimate. The Company will be required to issue
shares of its Common Stock to the former stockholders of Care Pros Staffing,
Inc. should its results of operations exceed performance standards established
in the merger agreement. Arizona Home Health Care/Private Duty, Inc. On August 31, 2004, the Company completed the merger of Arizona Home Health
Care/Private Duty, Inc. (AHHC) in exchange for $3,900,000 in cash, 200,000
shares of the Companys Common Stock valued at $690,000, (determined by the
average of $3.45 per share as of the two days prior to and subsequent to the
acquisition date as quoted on the OTC Bulletin Board), and $77,154 of net
acquisition costs. The primary purpose of the acquisition was to enable the
Company to expand its presence in the home health care and per diem segment of
the nurse staffing industry. The following table summarizes the assets acquired
and liabilities assumed as of the closing date: Cash acquired
    
    $
    35,000Tangible assets acquired
    
    
    76,853Customer related intangible assets
    
    
    705,487Goodwill
    
    
    3,849,814Total assets acquired
    
    $
    4,667,154Liabilities assumed
    
    
    Net assets acquired
    
    $
    4,667,154
 The acquisition was accounted for using the merger method of accounting.
Customer related intangible assets will be amortized over their useful life of
five years. Allocation of the excess of merger consideration over the net book
value of assets acquired between goodwill and customer relationships was
determined by managements estimate. The Company will be required to issue
additional shares of its Common Stock to the former stockholders of AHHC should
its results of operations exceed performance standards established in the
merger agreement. 11




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CRDENTIA CORP. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004 As of September 30, 2004, $41,139 was recorded in the financial statements as a
payable to the selling shareholders of AHHC. The amount is related to customer
payments received on accounts receivable that were not purchased by the
Company. A selling shareholder of AHHC joined the Company as an Executive Vice
President. Thus, approximately $20,000 of the amount payable to the selling
shareholders of AHHC is a related party transaction with an employee. Unaudited Pro Forma Summary Information The following unaudited pro forma summary approximates the consolidated results
of operations as if the AHHC and Care Pros Staffing, Inc. acquisitions had
occurred as of the beginning of each period presented, after giving effect to
certain adjustments, including amortization of specifically identifiable
intangibles and interest expense. The pro forma financial information does not
purport to be indicative of the results of operations that would have occurred
had the transactions taken place at the beginning of the periods presented or
of future results of operations. Three Months Ended September 30,
    
    Nine Months Ended September 30,2004
    
    2003
    
    2004
    
    2003Revenue from services
    
    $
    7,048,880
    
    
    $
    3,650,063
    
    
    $
    23,464,458
    
    
    $
    9,771,973Net loss from operations
    
    $
    (9,805,553
    )
    
    $
    (15,125,560
    )
    
    $
    (12,798,310
    )
    
    $
    (16,410,919
    )Net loss attributable to common stockholders
    
    $
    (12,076,415
    )
    
    $
    (15,125,560
    )
    
    $
    (17,319,172
    )
    
    $
    (16,410,919
    )Basic and diluted net loss per common share
attributable to common stockholders
    
    $
    (1.83
    )
    
    $
    (4.29
    )
    
    $
    (2.65
    )
    
    $
    (4.37
    )Weighted-average shares of common stock outstanding
    
    
    6,610,636
    
    
    
    3,527,187
    
    
    
    6,526,444
    
    
    
    3,751,858
 Note 3. Accounts Payable and Accrued Expenses Accounts payable and accrued expenses consist of the following: September 30, 2004
    
    December 31, 2003Accounts payable
    
    $
    1,318,421
    
    
    $
    655,701Accrued expenses
    
    
    783,497
    
    
    
    245,709Payable to AHHC
    
    
    41,139
    
    
    
    $
    2,143,057
    
    
    $
    901,410
 Accounts payable and accrued expenses at September 30, 2004 include
approximately $860,000 for legal expenses incurred with Morrision & Foerster
LLP, the Companys legal counsel. These costs primarily relate to
acquisitions, unregistered sales of equity securities, financing transactions
and general corporate matters. The Company currently has a payment agreement
with Morrison & Foerster LLP. 12




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CRDENTIA CORP. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004 Note 4. Subordinated Convertible Notes During 2003, the Company issued $910,000 in Convertible Subordinated Promissory
Notes (the Notes) to twelve investors. Subject to the conversion provisions
set forth in the Notes, the unpaid principal together with all accrued interest
on the Notes is due and payable in full one year following the issuance date of
each such note (from September to December, 2004). Interest accrues on the
unpaid principal balance at a rate of ten percent (10%) per annum, simple
interest, and is payable in quarterly payments. The notes are convertible to
Common Stock at the holders option, prior to the due date, at an initial
conversion price of $1.50 per share. The conversion price was subsequently
adjusted to $1.00 per share upon the issuance of the Series A Convertible
Preferred Stock. The Company recorded a beneficial conversion charge of
$910,000 which represents the lesser of the proceeds or beneficial conversion
feature of $3.4 million. The beneficial conversion was calculated as the
difference between the conversion price and the Companys Common Stock market
price at the date the note proceeds were received. The beneficial conversion
charge is amortized over the one year life of the notes, resulting in interest
expense of $654,000 for the nine months ended September 30, 2004. On September 30, 2004, $740,000 of the principal amount of the Notes plus
accrued interest was converted into 12,642 shares of Series B-1 Convertible
Preferred Stock. The holders of such notes included the Companys Chairman and
Chief Executive Officer, a member of the Companys Board of Directors and an
entity whose managing member is also on the Companys Board of Directors. The
remainder of the Notes plus accrued interest are due on November 16, 2004 for
$120,000 and March 2, 2005 for $50,000. Note 5. Revolving Line of Credit On June 16, 2004, the Company entered into a Loan & Security Agreement with a
company specializing in healthcare finance, pursuant to which the Company
obtained a revolving credit facility up to $15,000,000 (the Loan). The Loan
has a term of three years and bears interest at a rate equal to the greater of
three percent (3.0%) per annum over the prime rate or nine and one-half percent
(9.5%) per annum (9.5% at September 30, 2004). Accounts receivable serves as
security for the Loan and it is subject to financial and reporting covenants.
Customer payments are used to repay the advances on the credit facility after
deducting charges for interest expense, unused line and account management
fees. The financial covenants are for the maintenance of minimum net worth,
minimum debt service coverage ratio, minimum EBITDA, maximum capital
expenditure limits and maximum operating lease obligations. At September 30,
2004, the Company was out of compliance with financial covenants of the Loan,
for which a waiver was received from the lender. Until such time as the Company
demonstrates its ability to comply with the financial covenants of the Loan,
the outstanding balance has been classified as a current liability on the
Balance Sheet. 13




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CRDENTIA CORP. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004 The Company had credit facilities with two commercial financing institutions
for the financing of eligible accounts receivable. These accounts receivables
served as security of the lines of credit. The Company paid interest monthly at
24% per annum on one obligation and approximately 10% on the other, based on
the daily outstanding balance. Customer payments were used to repay the
advances from the financing institutions after deducting charges for bad debts,
reserves for charge backs, and interest expense. These credit facilities were
paid off on June 16, 2004 with the proceeds from the Loan as described above. The Company had a variable rate installment note with a financial institution
in the amount of $250,000. The note was subject to the same security as the
related line of credit with the same financial institution. Under the terms of
the loan, the Company was required to make monthly payments plus accrued
interest on the unpaid principal at the institutions Base Rate plus 2%. The
loan was paid off on June 16, 2004, with the proceeds from the Loan as
described above. Note 6. Notes Payable to Lender Pursuant to a loan agreement dated August 31, 2004, the Company obtained a term
loan credit facility (Term Loan) in the amount up to $10.0 million from a
company specializing in healthcare finance. The Company may obtain loans under
the agreement to fund permitted acquisitions. Any loans obtained under the Term
Loan agreement are due and payable in full on August 31, 2007 and bear interest
at the rate of fifteen and one-quarter percent (15.25%) per annum. On August
31, 2004, the Company received proceeds from the Term Loan of approximately
$2.7 million for the acquisitions of Arizona Home Health Care/Private Duty,
Inc. and Care Pros Staffing, Inc. The Term Loan provides that the Company shall issue warrants to purchase shares
of Common Stock to the lender up to 12% of the Companys overall capitalization
on the date of borrowing. On August 31, 2004, the Company issued a warrant to
purchase 906,758 shares of Common Stock in connection with the first borrowing
under the credit facility. As a result, the Term Loan has been recorded net of
a discount of $1.5 million which represents the estimated fair market value
related to the warrants at the date of issuance. As the warrants are
immediately exercisable, the fair market value was determined by the ratio of
the Common Stock equivalent value per share on the date of issuance as quoted
on the OTC Bulletin Board. The discount was recorded as additional paid in
capital and will be amortized to interest expense over the life of the Term
Loan. The Term Loan financial covenants are for the maintenance of minimum net worth,
minimum debt service coverage ratio, minimum EBITDA, maximum capital
expenditure limits and maximum operating lease obligations. At September 30,
2004, the Company was out of compliance with financial covenants of the Term
Loan, for which a waiver was received from the lender. Until such time as the
Company demonstrates its ability to comply with the financial covenants of the
Term Loan, the outstanding balance has been classified as a current liability
on the Balance Sheet. 14




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CRDENTIA CORP. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004 Makewell Agreement Pursuant with the Term Loan, MedCap Partners L.P. (a member of the Companys
Board of Directors is the managing member of MedCap Management & Research LLC,
the general partner of MedCap Partners L.P.) entered into a Makewell Agreement
with the lender to provide equity to the Company (in the form of purchases of
additional shares of Series C Convertible Preferred Stock and warrants) up to
$1.0 million based on the Companys monthly financial results. The proceeds
from the shares issued under the Makewell Agreement are to be used to pay down
the balance of the revolving line of credit Loan (as described in Note 5
above), which will allow the Company additional availability to draw on the
Loan. The Makewell Agreement terminates upon the earlier of the termination of
the Loan, the date on which an aggregate of $1.0 million in contributions have
been made under the Makewell Agreement, or January 25, 2005. As described in
Note 13 below, the Makewell Agreement terminated on November 3, 2004 with the
payment of an aggregate of $1.0 million in contributions. In connection with the Makewell Agreement, the Company agreed that for every
share of Series C Convertible Preferred Stock purchased by MedCap Partners L.P.
under the Makewell Agreement, the Company would grant MedCap Partners L.P. a
warrant to purchase 2.5 shares of Series C Convertible Preferred Stock. For
every share over 4,333 shares purchased by MedCap Partners L.P. under the
Makewell Agreement, the Company would grant MedCap Partners L.P. an additional
warrant to purchase 10 shares of Series C Convertible Preferred Stock (for a
total of 12.5 warrants to purchase Series C for every share over 4,333). On September 23, 2004, MedCap Partners L.P. purchased 3,090 shares of Series C
Convertible Preferred Stock for cash proceeds of $185,400 in connection with
the terms of the Makewell Agreement (see Note 9 for description of Series C
Convertible Preferred Stock issued). The proceeds were used to reduce the
amount outstanding on the revolving line of credit Loan. Note 7. Notes Payable to Sellers The following table sets forth the notes payable to selling shareholders of the
acquisitions completed by the Company. September 30, 2004
    
    December 31, 2003New Age Staffing, Inc.
    
    $
    
    
    
    $
    1,385,000Nurses Network, Inc.
    
    
    
    
    
    
    114,432PSR Nurses
    
    
    2,708,106
    
    
    
    3,861,666Care Pros Staffing, Inc.
    
    
    252,604
    
    
    
    Total Seller notes
    
    $
    2,960,710
    
    
    $
    5,361,098Less current portion
    
    
    590,172
    
    
    
    1,435,115Long term Seller notes
    
    $
    2,370,538
    
    
    $
    3,925,983
 15




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##### Table of Contents



CRDENTIA CORP. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004 The note to the sellers of New Age Staffing, Inc. with the principal amount of
$1,385,000 was payable in equal installments of $65,952, beginning January 31,
2004, for 21 months plus interest at 4%. The note was payable to a former
owner who was hired by the Company as a Vice President. Two notes to the sellers of Nurses Network, one with a balance of $64,000 was
due in three equal installments on October 2, 2004, October 2, 2005 and October
2, 2006. Interest was accrued at a financial institutions Base Rate plus 1%
(5% at June 30, 2004). The second note, in the amount of $50,432 plus interest
accrued at a financial institutions Base Rate plus 1% (5% at June 30, 2004)
was due and payable on July 2, 2004. Of the original note, $91,932 was payable
to a member of the Companys Board of Directors. The Company assumed two notes from the PSR entities, one with an approximate
balance of $188,911, which is based on outstanding credit card balances owed by
the previous seller. The Company will make at least minimum payments on the
credit card balances until they are paid in full. The second note had a
principal amount of $2,525,000. Interest only payments are payable each month
at a rate of 8%. Principal and interest payments begin on December 1, 2004 for
eight years. Both of these notes are convertible to Common Stock at the
holders option at the then current market price of the Common Stock. A note to a seller of the PSR entities with a principal amount of $1,200,000 is
payable over a three year period beginning November 30, 2003 at an interest
rate of 12%. This note is convertible to Common Stock at the holders option at
the then current market price for the Common Stock. Four notes to the sellers of Care Pros Staffing, Inc. totaling $275,000 are
payable in monthly installments over one year from August 13, 2004 and bear
interest at the rate of 5% per year. One of the selling shareholders of Care
Pros Staffing, Inc. was hired by the Company as a Vice President. Thus,
$63,151 of these notes at September 30, 2004 is with an employee. On August 9, 2004, holders of approximately $2.2 million of the notes payable
and accrued interest to selling shareholders accepted a cash payment of $225,000 to reduce the
principal outstanding and converted their remaining balance to equity.
Approximately $127,000 of the seller notes converted to Common Stock (40,822
shares at $3.10 per share price) and $1.8 million converted to Series B-1
Convertible Preferred Stock (29,989 shares at $60.00 per share price).
Approximately $1.0 million of the notes were with an employee and approximately
$96,000 of the notes were with a member of the Companys Board of Directors.
The conversion was recorded as an inducement and as a result of the fair market
value of the preferred stock issued to convert the debt, approximately $7.5
million was recorded as a loss on the conversion. Note 8. Long Term Bonus Payable On December 16, 2003, the board of directors granted the Chief Executive
Officer two cash bonuses in the amount of $540,000 each. The bonuses are to be
paid on December 31, 2006 and 16




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CRDENTIA CORP. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004 January 4, 2007. The present value of bonuses has been recorded at our
estimated incremental cost of borrowing of 10%. Note 9. Convertible Preferred Stock Convertible Preferred Stock Issued and Outstanding The Company is authorized to issue 10,000,000 shares of preferred stock at a
par value of $0.0001. Currently there are 9,089,477 shares issued and
3,835,365
shares outstanding consisting of the following: September 30, 2004
    
    December 30, 2003Shares
    
    Shares
    
    Shares
    
    SharesIssued
    
    Outstanding
    
    Issued
    
    OutstandingSeries A Convertible Preferred Stock
    
    
    2,750,000
    
    
    
    
    
    
    
    1,750,000
    
    
    
    1,750,000Series B Convertible Preferred Stock
    
    
    6,250,000
    
    
    
    3,750,000
    
    
    
    
    
    
    
    Series B-1 Convertible Preferred Stock
    
    
    50,547
    
    
    
    46,435
    
    
    
    
    
    
    
    Series C Convertible Preferred Stock
    
    
    38,930
    
    
    
    38,930
    
    
    
    
    
    
    
    
 The conversion price of all Convertible Preferred Stock is subject to
appropriate adjustment in the event of stock splits, stock dividends, reverse
stock splits, capital reorganizations, recapitalizations, reclassifications,
and similar occurrences as well as the issuance of Common Stock in
consideration of an amount less than the theneffective conversion price. All Convertible Preferred Shares issued and outstanding are convertible
currently at the option of the holder. The Company has evaluated the potential
effect of any beneficial conversion terms related to convertible instruments.
As a result, the convertible instruments may have a carrying amount that
differs significantly from its redemption amount. In such cases, the difference
between the carrying amount and the redemption amount (limited to the actual
proceeds received) is recorded as a beneficial conversion feature and deducted
as a deemed dividend in determining net loss available to common shareholders.
The table below summarizes the redemption requirements and beneficial
conversion of the Convertible Preferred Shares outstanding: BeneficialCommon Shares
    
    ConversionSeries of Convertible
    
    Shares
    
    Carrying
    
    Issuable
    
    Recorded atPreferred Stock
    
    Outstanding
    
    Amount
    
    Upon Conversion
    
    IssuanceB
    
    
    3,750,000
    
    
    $
    750,000
    
    
    
    1,250,000
    
    
    $
    1,250,000B-1
    
    
    46,435
    
    
    
    10,283,350
    
    
    
    4,643,500
    
    
    
    1,233,480C
    
    
    38,930
    
    
    
    677,638
    
    
    
    3,893,000
    
    
    
    677,3823,835,365
    
    
    $
    11,710,988
    
    
    
    9,786,500
    
    
    $
    3,160,862
 17




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CRDENTIA CORP. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004 Series A Convertible Preferred Stock (Series A) On December 17, 2003, the Company issued an aggregate of 1,750,000 share of
Series A at a per share price of $1.00 to two investors, which included MedCap
Partners L.P. The Company recorded a deemed dividend due to the beneficial
conversion price of $1,750,000 which represents the lesser of the proceeds or
the beneficial conversion of $5.2 million. On February 4, 2004, the Company issued an additional 1,000,000 shares of
Series A at a per share price of $1.00 to MedCap Partners L.P. The Company
recorded a deemed dividend due to the beneficial conversion price of $1,000,000
which represents the lesser of the proceeds or the beneficial conversion of
$1.4 million. The holders of the Series A Convertible Preferred Stock (Series A) are entitled
to receive, when declared by the Board of Directors, a quarterly dividend in
the amount equal to .025 shares of Common Stock for each share of outstanding
Series A held by them. Unless previously voluntarily converted prior to such
time, the Series A will automatically convert into Common Stock at a conversion
ratio of one share of Common Stock for three shares of Series A, one year from
the date of issuance of such shares. The holders of Series A have been granted
registration rights by the Company. Once the Series A has been converted into
Common Stock, the Company is obligated to register the Common Stock on a best
efforts basis. In the event of any liquidation or winding up of the Company,
the holders of the Series A will be entitled to receive in preference to the
holders of Common Stock an amount equal to their initial purchase price plus
any declared but unpaid dividends. On April 8, 2004 the Board of Directors declared a dividend to the Series A
stockholders equal to .025 shares of Common Stock for each holder of Series A.
As a result, 68,750 shares of Common Stock were issued on May 26, 2004. The Series A dividend amount was adjusted to .04167 shares of Common Stock as a
result of (i) the issuance of shares of Series B Convertible Preferred Stock on
June 16, 2004 at a price per share of $0.20, and (ii) the reverse stock split
effected by the Company as of the close of business on June 28, 2004. On September 30, 2004 the Board of Directors declared a dividend and
distribution to the Series A stockholders. The dividend and distribution
consisted of quarterly dividends that were payable on June 16, 2004, September
16, 2004 and December 16, 2004 in consideration for early conversion of the
Series A into Common Stock. As a result, 343,750 shares of Common Stock were
issued on September 30, 2004 related to the dividend and distribution. On September 30, 2004, the holders of Series A converted into 4,583,333 shares
of Common Stock. 18




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CRDENTIA CORP. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004 Series B Convertible Preferred Stock (Series B) On June 16, 2004, the Company issued 6,250,000 shares of Series B at a per
share price of $0.20 to MedCap Partners L.P. The Company recorded a deemed
dividend due to the beneficial conversion price of $1,250,000 which represents
the lesser of the proceeds or the beneficial conversion of $2.4 million. The holder of the Series B Convertible Preferred Stock (Series B) is entitled
to receive a quarterly dividend in an amount equal to .00833 shares of Common
Stock for each share of outstanding Series B held by them. In the event of any
liquidation or winding up of the Company, the holder of the Series B shares
will be entitled to receive in preference to the holders of Common Stock, and
any other series of Preferred Stock, an amount equal to the amount of their
purchase price. Unless previously voluntarily converted prior to such time the
Series B shares will be automatically converted into Common Stock at a
conversion ratio of one share of Common Stock for three shares of Series B upon
the earlier of the closing of an underwritten public offering of Common Stock
pursuant to a registration statement under the Securities Act of 1933, as
amended, with aggregate net proceeds of at least $25 million or the date
specified by written consent or agreement of the holders of a majority of the
then outstanding shares of Series B. On September 30, 2004 the Board of Directors declared a dividend and
distribution to the Series B holder. The dividend and distribution consisted of
quarterly dividends that were payable on September 30, 2004, December 31, 2004,
March 31, 2005 and June 30, 2005 in consideration for early conversion of the
Series B into Common Stock. As a result, 114,583 shares of Common Stock were
issued on September 30, 2004 related to the dividend and distribution. On September 30, 2004, the holder converted 2,500,000 shares of Series B into
833,333 shares of Common Stock. Series B-1 Convertible Preferred Stock (Series B-1) On August 9, 2004, the Company issued 3,750 shares of Series B-1 Convertible
Preferred Stock at a per share price of $60.00 to an investor for cash proceeds
of $225,000. The Company recorded a deemed dividend due to the beneficial
conversion price of $225,000 which represents the lesser of the proceeds or the
beneficial conversion of $937,500. Also on August 9, 2004, the Company issued 4,166 shares of Series B-1
Convertible Preferred Stock at a per share price of $60.00 to the Companys
Chairman and Chief Executive Officer for cash proceeds of $249,960. The Company
recorded a deemed dividend due to the beneficial conversion price of $249,960
which represents the lesser of the proceeds or the beneficial conversion of
$1.0 million. On August 9, 2004, the Company issued 29,989 shares of Series B-1 Convertible
Preferred Stock, issued 40,822 shares of Common Stock and paid approximately
$225,000 in cash in 19




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CRDENTIA CORP. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004 exchange for the cancellation of all the outstanding principal and accrued and
unpaid interest under certain promissory notes (Seller Notes) that were issued
in 2003 in connection with the purchase of certain subsidiaries. Portions of
the Seller Notes were held by a current employee who was a former owner of the
subsidiary purchased and by a member of the Companys Board of Directors. See
discussion of the Seller Notes in Note 6. The conversion was recorded as an
inducement and the Series B-1 was recorded at fair market value on the date of
issuance of $9.3 million. As a result of the fair market valuation,
approximately $7.5 million was recorded as a loss on the
conversion of
debt. On September 30, 2004, the Company issued 12,642 shares of Series B-1
Convertible Preferred Stock in exchange for the cancellation of $758,640 in
outstanding principal plus accrued and unpaid interest under certain
Convertible Subordinated Promissory Notes (Notes) issued in 2003. The holders
of such Notes included the Companys Chairman and Chief Executive Officer, a
member of the Companys Board of Directors and an entity whose managing member
is also on the Companys Board of Directors. The Company recorded a deemed
dividend due to the beneficial conversion price of $758,640 which represents
the lesser of the cancelled principal and accrued interest or the beneficial
conversion of $3.7 million. The holders of the Series B-1 are entitled to receive a quarterly dividend in
an amount equal to 2.5 shares of Common Stock for each share of outstanding
Series B-1 held by them. If any dividend is declared on the Common Stock, the
holders of the Series B-1 will be entitled to receive dividends out of the
legally available funds as if each share of Series B-1 had been converted to
Common Stock. The holders of the Series B-1 have the right, at the option of
the holder at any time, to convert shares of the Series B-1 into shares of the
Companys Common Stock at an initial conversion ratio of one hundred shares of
Common Stock for each one share of Series B-1. Unless previously voluntarily
converted prior to such time the Series B-1 shares will be automatically
converted into Common Stock at an initial conversion ratio of one hundred
shares of Common Stock for each share of Series B-1 upon the earlier of the
closing of an underwritten public offering of Common Stock pursuant to a
registration statement under the Securities Act of 1933, as amended, with
aggregate net proceeds of at least $25 million or the date specified by written
consent or agreement of the holders of a majority of the then outstanding
shares of Series B-1. On August 31, 2004, the Company issued MedCap Partners L.P. a warrant to
purchase 6,000 shares of Series B-1 Convertible Preferred Stock for $60 per
share for five years. The beneficial conversion value, limited to the deemed
proceeds of $360,000, has been recognized as a deemed dividend to the holder of
the warrant. On September 30, 2004, the Board of Directors declared a dividend and
distribution to the Series B-1 holders. The dividend and distribution consisted
of quarterly dividends that were payable on September 30, 2004. Additionally,
the Board of Directors declared a distribution equal to the dividends that
would have been payable on December 31, 2004, March 31, 2005 and June 30, 2005
in consideration for certain shareholders electing early conversion of the
Series B-1 into Common Stock. As a result, 157,203 shares of Common Stock were
issued on September 30, 2004 related to the dividend and distribution. 20




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CRDENTIA CORP. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004 On September 30, 2004, certain holders of 4,112 shares of Series B-1 converted
their shares into 411,200 shares of Common Stock. Series C Convertible Preferred Stock (Series C) On August 31, 2004, the Company issued 35,840 shares of Series C Convertible
Preferred Stock (Series C) in exchange for cash proceeds of $2,150,400. The
shares were issued to certain accredited investors as well as MedCap Partners
L.P. and the Companys Chairman and Chief Executive Officer. The purchasers
were granted Series C Warrants to purchase an aggregate of 89,600 Series C
Convertible Preferred Shares. The Series C Warrants are exercisable for a
period of five years at a price per Series C share of $60.00. The Company
valued the warrants at $1.5 million and has accordingly reduced the face value
of the Series C by this amount. As the warrants are immediately exercisable,
the fair market value was determined by the ratio of the Common Stock
equivalent value per share on the date of issuance as quoted on the OTC
Bulletin Board. The Company recorded a deemed dividend due to the beneficial
conversion price of $624,000 which represents the lesser of the value assigned
to the Series C and the beneficial conversion of $11.9 million. On September 23, 2004, MedCap purchased 3,090 shares of Series C Convertible
Preferred Stock in connection with the terms of the Makewell Agreement (see
Note 6). The Company issued warrants to purchase an additional 7,725 shares of
Series C for $60.00 per share for five years. The Company valued the warrants
at $132,000 and has accordingly reduced the face value of the Series C
Preferred Shares by this amount. The Company recorded a deemed dividend due to
the beneficial conversion price of $54,000 which represents the lesser of the
value assigned to the Series C and the beneficial conversion of $1.0 million. The holders of Series C are entitled to receive, when declared by the Board of
Directors, a dividend on each quarter end beginning September 30, 2004 and
ending December 31, 2005 in an amount equal to 2.5 shares of Common Stock for
each share of outstanding Series C held by them. In the event of any
liquidation or winding up of the Company, the holders of the Series C will be
entitled to receive in preference to the holders of Common Stock an amount
equal to five times their initial purchase price plus any declared but unpaid
dividends and any remaining liquidation proceeds will thereafter be distributed
on a pro rata basis to the holders of the Companys Common Stock and any other
series of Preferred Stock expressly entitled to participate in such
distribution. Unless previously voluntarily converted prior to such time, the Series C will
be automatically converted into Common Stock at an initial conversion ratio of
one hundred shares of Common Stock for each share of Series C upon the earlier
of (i) the closing of an underwritten public offering of our Common Stock
pursuant to a registration statement under the Securities Act of 1933, as
amended, with aggregate net proceeds of at least $25 million, or (ii) the date
specified by written consent or agreement of the holders of a majority of the
then outstanding shares of Series C. The description of the foregoing rights,
preferences and privileges of the Series C is 21




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CRDENTIA CORP. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004 qualified in its entirety by the Certificate of Designations, Preferences and
Rights of Series C filed with the Secretary of State of the State of Delaware
of August 31, 2004. On September 30, 2004, the Board of Directors declared a dividend to the Series
C holders. The dividend consisted of quarterly dividends that were payable on
September 30, 2004. As a result, 97,325 shares of Common Stock were issued on
September 30, 2004 related to the dividend and distribution. Warrants to Purchase Convertible Preferred Stock As of September 30, 2004, warrants to purchase Convertible Preferred Stock were
granted as follows (There were no warrants outstanding at September 30, 2003
and none of the warrants granted have been exercised.): Series of Convertible
    
    
    
    
    
    Exercise PricePreferred Stock
    
    Warrants
    
    per ShareB-1
    
    
    6,000
    
    
    $
    60.00C
    
    
    97,310
    
    
    $
    60.00103,310
 Note 10. Common Stock On June 28, 2004, the Company affected a one-for-three reverse stock split of
the outstanding shares of Common Stock. All common share and per share
information included in these financial statements have been retroactively
adjusted to reflect the reverse stock split. On May 18, 2004, the Company and a current investor entered into a Stock
Purchase Agreement pursuant to which both parties agreed to purchase an
aggregate of 588,671 shares of our Common Stock from certain of our
stockholders. Under the Stock Purchase Agreement, the investor purchased
338,671 shares of Common Stock for $762,011 on May 18, 2004. The remaining
250,000 shares of Common Stock were delivered to an escrow agent. These shares
will be released from escrow as follows: (i) beginning on July 1, 2004 and
continuing on the first day of each month through and including June 1, 2005,
the Company, or its assignee, shall pay $31,250 to the escrow agent, and the
escrow agent shall cause 10,417 shares to be transferred to us or our assignee;
and (ii) beginning on July 1, 2005 and continuing on the first day of each
month through and including June 1, 2006, the Company, or its assignee, shall
pay $46,875 to the escrow agent, and the escrow agent shall cause 10,417 shares
to be released to us or our assignee. The escrow agent shall distribute funds
received from the Company, or its assignee, to the stockholders who are parties
to the Stock Purchase Agreement. For July, 2004 through October, 2004, the
Company assigned its right to purchase under the Stock Purchase Agreement to an
existing shareholder. 22




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CRDENTIA CORP. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004 On September 30, 2004, the Company issued (i) 4,583,333 shares of Common Stock
in connection with the voluntary conversion of 2,750,000 shares of Series A
Convertible Preferred Stock (Series A); (ii) 833,333 shares of Common Stock in
connection with the voluntary conversion of 2,500,000 shares of Series B
Convertible Preferred Stock (Series B); and (iii) 411,200 shares of Common
Stock in connection with the voluntary conversion of 4,112 shares of Series B-1
Convertible Preferred Stock (Series B-1). All such conversions were effected
pursuant to the provisions of the Companys Amended and Restated Certificate of
Incorporation and the Certificate of Designations, Preferences and Rights of
each respective series of Preferred Stock. Warrants to Purchase Common Stock Pursuant to the Term Loan (see Note 6), the Company agreed to issue Common
Stock warrants to the lender, at $3.15 per share, to purchase up to 12% of the
total capitalization of the Company as defined in the Term Loan. The Company
made its first draw on the facility in the amount of approximately $2.7 million
on August 31, 2004. The Company issued a warrant for 906,758 shares of Common
Stock related to the Term Loan. The Company valued the warrant at approximately
$1,500,000 and recorded this as a discount to the debt. As the warrants are
immediately exercisable, the fair market value was determined by the ratio of
the Common Stock equivalent value per share on the date of issuance as quoted
on the OTC Bulletin Board. The debt will be recorded at face value of
approximately $2,700,000 less a discount of approximately $1,500,000, which
will be amortized over the life of the Term Loan of three years to interest
expense. Note 11. Commitments and Contingencies Commitment to Issue Additional Warrants under the Makewell Agreement In accordance with the terms of the Makewell Agreement (see Note 6) the Company
has agreed to sell up to 16,667 additional shares of equity instruments for
$60.00 per share. For each share purchased up to 4,333 shares, the Company will
issue warrants to purchase 2.5 additional shares of Series C Preferred Stock
for $60.00 per share. The warrants are exercisable for a period of five years.
For shares purchased in excess of 4,333, the Company is required to issue
warrants to purchase an additional twelve and one-half (12.5) Series C
Convertible Preferred shares. Commitment to Issue Additional Common Stock Warrants In accordance with the terms of the Term Loan (see Note 6), the Company agreed
to issue warrants to purchase Common Shares to the lender up to 12% of the
Companys overall capitalization at a price of $3.15 per share. On August 31,
2004, the Company issued a warrant for 906,758 Common Shares in connection with
the first borrowing on the credit facility. If borrowing were to continue up to
the maximum of $10,000,000, the Company would have to issue an additional
2,451,605 warrants to purchase Common Shares. 23




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CRDENTIA CORP. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004 Note 12. Supplemental Disclosure to the Cash Flow Statement Nine months ended September 30,2004
    
    2003Supplemental cash flow disclosures:Cash paid for interest
    
    $
    713,689
    
    
    $
    14,407Cash paid for income taxes
    
    $
    
    
    
    $
    Non-cash investing and financing activities:Conversion of debt into common stock
    
    $
    126,548
    
    
    $
    Conversion of debt into preferred stock
    
    $
    9,296,590
    
    
    $
    Conversion of preferred stock into common stock
    
    $
    3,496,720
    
    
    $
    Issuance of the following in connection with a merger:Common stock issued
    
    $
    690,000
    
    
    $
    2,651,261Note payable issued
    
    $
    275,000
    
    
    $
    1,650,000Preferred stock warrants
    
    $
    1,658,162
    
    
    $
    Common stock warrants
    
    $
    1,458,124
    
    
    $
    
 Note 13. Subsequent Events Issuance of Series C Convertible Preferred Stock Under the Makewell Agreement Pursuant to the Makewell Agreement (see Note 6), the Company issued to MedCap
Partners L.P., (i) 1,250 shares of Series C Convertible Preferred Stock (Series
C) on October 12, 2004, (ii) 5,000 shares of Series C on October 18, 2004,
(iii) 1,417 shares of Series C on October 25, 2004 and (iv) 5,910 shares of
Series C on November 3, 2004. Such shares of Series C were issued at a cash
price per share of $60.00. Each share of Series C is convertible into one
hundred shares of the Companys Common Stock. Pursuant to the terms of the Companys Series C, the Company is obligated to
issue warrants to purchase 2.5 shares of Series C for each share of Series C
purchased. As a result, in connection with the Companys issuances of the
shares of Series C described above, MedCap Partners L.P., was granted (i) a
warrant to purchase 65,685 shares of Series C on October 18, 2004, (ii) a
warrant to purchase 17,712 shares of Series C on October 25, 2004 and (iii) a
warrant to purchase 73,875 shares of Series C on November 3, 2004. Such
warrants are exercisable for a period of five years at a price per share of
Series C of $60.00. Negative operating results have required the Company to issue Series C in
excess of the 4,333 shares as described in Note 6 by 12,334 shares. As a
result, 123,340 shares of Series C covered by the warrants granted on October
18, 2004, October 25, 2004 and November 3, 2004 are additional warrant shares. The Makewell Agreement terminated on November 3, 2004 as MedCap Partners L.P.
has made an aggregate of $1.0 million in contributions under the Makewell
Agreement. 24




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CRDENTIA CORP. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004 Restructuring Charges During October 2004, the Company implemented a restructuring program to reduce
its cost structure primarily through workforce and administrative cost
reductions. As a result, approximately $125,000 was incurred as a
restructuring charge during October 2004. Conversion of Seller Notes During November 2004, the Company entered into an agreement to convert
approximately $2.7 million of Seller Notes and accrued interest to Series B-1
Convertible Preferred Stock. As a result, the Company issued 45,450 shares of
Series B-1 Convertible Preferred Stock. The conversion will be recorded as an
inducement and the Series B-1 will be recorded at fair market value on the date
of issuance of $19.8 million. As a result of the fair market valuation,
approximately $17.1 million will be recorded as a loss on the
conversion of
debt. 25




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Item 2. Managements Discussion and Analysis of Operations The following discussion and analysis should be read in conjunction with the
unaudited condensed consolidated financial statements and notes thereto
included in Part I  Item 1 of this report, and Managements Discussion and
Analysis of Operations and Risk Factors contained in our report on Form 10-KSB
for the years ended December 31, 2003 & 2002 as filed with the Securities and
Exchange Commission on March 30, 2004. Available Information We maintain a corporate website at www.crdentia.com. Our annual reports on Form
10-KSB, quarterly reports on Form 10-QSB, current reports on Form 8-K, and
amendments to these reports, are made available, free of charge, through this
website as soon as reasonably practicable after being filed with or furnished
to the Securities and Exchange Commission. We will provide reasonable
quantities of electronic or paper copies of filings free of charge upon
request. In addition, we will provide a copy of the above referenced charters
to stockholders upon request. Forward-Looking Statements Some of the information contained in this report may constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act
of 1995. Any such forward-looking statements are based on current expectations
and projections about future events. The words estimate, plan, intend, expect,
anticipate and similar expressions are intended to identify forward-looking
statements which involve, and are subject to, known and unknown risks,
uncertainties and other factors which could cause our actual results, financial
or operating performance, or achievements to differ materially from future
results, financial or operating performance, or achievements expressed or
implied by such forward-looking statements. Projections and assumptions
contained and expressed herein were reasonably based on information available
to us at the time so furnished and as of the date of this filing. All such
projections and assumptions are subject to significant uncertainties and
contingencies, many of which are beyond our control, and no assurance can be
given that the projections will be realized. Readers are cautioned not to place
undue reliance on any such forward-looking statements, which speak only as of
the date hereof. Careful consideration should be given to those risks and
uncertainties set forth below under the heading Risk Factors, as well as
those risk factors discussed in our Form 10-KSB for the year ended December 31,
2003 . Actual results that we achieve may differ materially from any forward
looking statements due to such risks and uncertainties, and we undertake no
obligation to publicly release any revisions to these forward-looking
statements to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events. 26




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Overview We are a provider of healthcare staffing services, focusing on the areas of
travel nursing, per diem staffing, contractual clinical services, and private
duty home care. Our travel nurses are recruited domestically as well as
internationally, and placed on temporary assignments at healthcare facilities
across the United States. Our per diem nurses are local nurses placed at
healthcare facilities on short-term assignments. Our contractual clinical
services employees provide complete clinical management and staffing for
healthcare facilities and our private duty home care employees provide nursing
case management and staffing for skilled and non-skilled care in the home. We
consider the different services described above to be one segment as each of
these services relate solely to providing healthcare staffing to customers and
utilize similar recruitment methods, common systems, databases, procedures,
processes and similar methods of identifying and serving these customers. At the beginning of 2003, we were a development stage company with no
commercial operations. During the year, we pursued our operational plan of
acquiring companies in the healthcare staffing field and completed the
acquisition of four companies. As a result, at the end of 2003 we were
providing temporary healthcare in 25 states and had contracts with
approximately 150 healthcare facilities. Approximately 67% of our revenue in
the first three quarters of 2004 was derived from the placement of travel
nurses and approximately 19% from per diem services. The balance came from a
mix of private duty nursing and complete clinical management. We believe that the companies we acquired in 2003  Baker Anderson Christie,
Inc., New Age Nurses, Inc., Nurses Network, Inc., and PSR Nurse Recruiting,
Inc. and PSR Nurses Holdings Corp., which hold the limited partner and general
partner interests in PSR Nurses, Ltd.  provide the foundation for our future
growth. During 2004, we continue to streamline the operations we acquired in
2003 and, in the third quarter of 2004, we completed the acquisition of two
additional companies. We have continued to follow our plan to build and
strengthen our existing business and to target acquisitions of specialized
companies in the healthcare staffing field. For the three and nine months ended September 30, 2004, sales to one customer,
Rhode Island Hospital, represented approximately 14% of our revenues. In the
third quarter of 2004, we experienced a decline in revenue at this facility and
some travel nurse assignments have not been renewed. The Company is
aggressively managing this relationship in an attempt to regain all or a
portion of the previous position with this customer, but there can be no
assurance that we will recapture the lost revenue. Our top ten customers for
the three and nine months ended September 30, 2004 accounted for 48% and 54% of
our revenues, respectively. During the first three quarters of 2004 and 2003, most of our customers were
acute care hospitals located throughout the continental United States. As we
grow, we anticipate that acute care facilities will continue to be the majority
of our customer base but that the overall percentage will decline as we
increase our presence in the home health area. The gross margin on our revenues has increased over the levels that our
business has historically achieved. In the third quarter, our results improved
to a gross margin of approximately 22.8%, primarily due to the efforts of our
operational staff in controlling the costs associated with the revenues and in
increasing the bill rates received on some contracts as they renew.
Additionally, the acquisition of Arizona Home Health Care/Private Duty, Inc.
contributed to the margin improvement Our gross margin is the difference
between the revenue we realize when we bill our customers for 27




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the services of our healthcare professionals and our direct operating costs,
which include the cost of the healthcare professionals and the related housing
and travel costs, certain employment related taxes and workers compensation
insurance coverage. Our margin can be increased by our continuing efforts to
increase the number of international nurses under contract and to slightly
alter our overall product mix to include more home health and allied health
services, which generally have higher margins. Our limited operating history in the healthcare staffing industry makes it
difficult to forecast our future operating results. To date, we have not
achieved profitability in any quarterly period, and as of September 30, 2004,
we had an accumulated deficit of $70.3 million of which a
substantial portion relates
to non-cash items. We cannot be certain that our
revenues will increase and increase at a rate sufficient to achieve and
maintain profitability. Our success in achieving profitability will depend on our ability to increase
revenues, to consummate acquisitions of healthcare companies, to implement our
marketing strategy and to achieve a revenue stream from the sale of services,
while not exceeding budgeted expenses. As we continue to implement our business
plan, we will be subject to all of the risks inherent in an emerging business,
including the need to provide reliable and effective services, to develop
marketing expertise, to generate sales and to raise capital sufficient to fund
our growth. In the event that our market declines significantly or fails to
grow as anticipated, our business, financial condition and results of
operations will likely be materially adversely affected. Critical Accounting Policies The Companys discussion and analysis of its financial condition and results of
operation are based on the Companys financial statements, which have been
prepared in accordance with accounting policies generally accepted in the
United States of America. The Company believes certain critical accounting
policies affect its more significant judgments and estimates used in the
preparation of financial statements. A description of the Companys critical
accounting policies is set forth in the Companys Form 10-K for the year ended
December 31, 2003. As of, and for the three and nine month periods ended
September 30, 2004, there have been no material changes or updates to the
Companys critical accounting policies except for the possible outcome and
impact of the current Exposure Draft on Stock Compensation. Results of Operations Our revenue in the third quarter of 2004 of $5.5 million was approximately the
same as the second quarter revenue and was approximately 12% below the revenue
realized in the first quarter of 2004. Since our average revenue per nurse
remained relatively constant between the quarters, this decline can be
attributed in part to a decrease in the number of nurses we had under contract.
The decline in the number of nurses is the result of the termination by the
Company of a large contract with a hospital group that had a slow payment
history. The termination of this one contract resulted in the loss of a number
of nurse positions. At December 31, 2003, we partially reserved the outstanding
receivables from this hospital group but, ultimately, fully recovered all
amounts owed to us by early in the second quarter of 2004. . During the first nine months of 2004, our selling, general and administrative
expense was comprised, primarily, of personnel costs, legal, audit and
administrative fees related to being a public company and various other office
and administrative expenses. Almost two-thirds of our selling, general and
administrative expense is personnel related. Our September 2003 year to date
selling, general and 28




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administrative expense was only a fraction of that experienced in the same
period in 2004 because we were in our development stage in early 2003 and did
not have any operations until our first acquisition of an operating entity in
August 2003. Outlook In the remaining months of 2004, we intend to continue a growth strategy by
strengthening the businesses acquired in 2003 and to further expand our
operations through acquisitions. We have acquired two additional businesses in
the third quarter of this year and have accomplished 50% of our goal of
acquiring at least four additional companies in 2004. We are also exploring
opportunities in the allied health and home health areas. As we acquire
companies, we expect to realize immediate savings in their operations as we
integrate them into our operations and as we decrease their general and
administrative costs by merging their back office and support operation into
ours. We have engaged an independent consulting firm to assist us in
identifying acquisition targets that meet general guidelines with regard to
revenue, gross profit margin and projected earnings. We have begun the process
of contacting the companies that have been so identified and are in various
stages of discussions with several companies. Liquidity and Capital Resources The Company has a working capital deficit of $3.0 million and incurred a cash
flow loss from operations of $2.0 million for the nine months
ended September 30, 2004. Operating results and cash flows during the nine months were not
sufficient to meet certain loan covenants related to our senior lender at September 30,
2004 and subsequently. The Company has received waivers for these debt
covenant violations. Despite these financial challenges, we believe we have
made considerable progress in developing additional sources of capital and in
achieving profitable operations:  
    
    Through September 30, 2004, the Company raised over $5 million
through the issuance of convertible preferred stock.
    
    Through September 30, 2004, the Company paid off or converted $2.2
million of notes payable to selling shareholders, and $740,000 of other
subordinated debt was paid off or converted to preferred stock.
    
    In October 2004, the Company implemented a restructuring program to
reduce its cost structure primarily through workforce and administrative
cost reductions. As a result, approximately $125,000 was incurred as a
restructuring charge during October 2004.
    
    In November 2004, the Company reached agreement on and the Board of
Directors approved the terms of the acquisition of a company generating
approximately $1.2 million in gross monthly revenues. Management
believes this acquisition will improve the Companys revenue,
profitability and cash flows.
    
    In November 2004, the Company reached an agreement to convert
approximately $2.7 million of Seller Notes and accrued interest to
Series B-1 Convertible Preferred Stock. Although there can be no assurance that all of the above initiatives will be
accomplished, some have already been accomplished, and management believes that
its plan to succeed relative to the remaining initiatives is reasonable.
Collectively, management believes these initiatives, if completed, will allow
the Company to generate net income and positive cash flows from
operations for the fiscal year 2005. However, if the Company is unable to accomplish these objectives and the
business continues to decline, we would be forced to significantly curtail our
operations until additional capital could be raised. 29




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Risk Factors We were formed in November 1997, and commenced operations on August 7, 2003
following our acquisition of Baker Anderson Christie, Inc. Any investment in
our Common Stock involves a high degree of risk. You should consider carefully
the following information about these risks, together with the other
information contained in this report, before you decide to buy our Common
Stock. The risks and uncertainties described below are not the only ones we
face. Additional risks and uncertainties not presently known to us or that we
currently deem immaterial may also impair our operations. If any of the
following risks actually occur, our business would likely suffer and our
results could differ materially from those expressed in any forward-looking
statements contained in this report including those contained in the section
captioned Managements Discussion and Analysis of Operations under Item 2.
In such case, the trading price of our Common Stock could decline, and you may
lose all or part of the money you paid to buy our Common Stock. If we fail to raise additional capital in the near future, our business will
fail. We have limited cash resources and will need to raise additional capital
through public or private financings or other arrangements in order to meet
current commitments and continue development of our business. We cannot assure
you that additional capital will be available to us when needed, if at all, or,
if available, will be obtained on terms attractive to us. Our failure to raise
additional capital when needed could cause us to curtail or cease our
operations. We have financed our operations since inception primarily through the private
placement of equity and debt securities and loan facilities. Although our
management recognizes the need to raise funds in the near future, there can be
no assurance that we will be successful in consummating any fundraising
transaction, or if we do consummate such a transaction, that its terms and
conditions will not require us to give investors warrants or other valuable
rights to purchase additional interest in our company, or be otherwise
unfavorable 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 that could impede our ability to raise
additional funding. The issuance of additional securities could impose
additional restrictions on how we operate and finance our business. In
addition, our current debt financing arrangements involve significant interest
expense and restrictive covenants that limit our operations. Our need to raise additional capital in the future could have a dilutive effect
on your investment. We will need to raise additional capital. One possibility for raising
additional capital is the public or private sale of our Common Stock or
securities convertible into or exercisable for our Common Stock. If we sell additional shares of our Common Stock, such sales will further
dilute the percentage of our equity that our existing stockholders own. In
addition, our recent private placement financings have involved the issuance of
securities at a price per share that represented a discount to the trading
prices listed for our Common Stock on the OTC Bulletin Board and it is possible
that we will close future private placements involving the issuance of
securities at a discount to prevailing trading prices. Depending upon the
price per share of securities that we sell in the future, a stockholders
interest in us could be further diluted by any adjustments to the number of
shares and the applicable 30




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exercise price required pursuant to the terms of the agreements under which we
previously issued securities. No assurance can be given that previous or
future investors, finders or placement agents will not claim that they are
entitled to additional anti-dilution adjustments or dispute our calculation of
any such adjustments. Any such claim or dispute could require us to incur
material costs and expenses regardless of the resolution and, if resolved
unfavorably to us, to effect dilutive securities issuances or adjustments to
previously issued securities. In addition, future financings may include
provisions requiring us to make additional payments to the investors if we fail
to obtain or maintain the effectiveness of SEC registration statements by
specified dates or take other specified action. Our ability to meet these
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 additional dilutive securities, or could lead to costly and
disruptive disputes. In addition, these provisions could require us to record
additional non-cash expenses. Our credit facility imposes significant expenses and restrictive covenants upon
us. In June 2004 we obtained a $15 million revolving credit facility (the
Revolving Facility) from Bridge Healthcare Finance, LLC. In August 2004 we
obtained a $10 million term loan credit facility from Bridge Opportunity
Finance, LLC (the Term Facility and together with the Revolving Facility, the
Credit Facility). Bridge Opportunity Finance, LLC is an affiliate of Bridge
Healthcare Finance, LLC. The Credit Facility involves significant interest expenses and other fees. In
addition, except in certain limited circumstances, the Revolving Facility
cannot be pre-paid in full without us incurring a significant pre-payment
penalty. The Credit Facility imposes various restrictions on our activities with out the
consent of the lenders, including a prohibition on fundamental changes to us or
our direct or indirect subsidiaries (including certain consolidations, mergers
and sales and transfer of assets, and limitations on our ability or any of our
direct or indirect subsidiaries to grant liens upon our property or assets).
In addition, under the Credit Facility we must meet certain net worth, earnings
and debt service coverage requirements. The Credit Facility includes events of
default (with grace periods, as applicable) and provides that, upon the
occurrence of certain events of default, payment of all amounts payable under
the Credit Facility, including the principal amount of, and accrued interest
on, the Credit Facility may be accelerated. In addition, upon the occurrence
of certain insolvency or bankruptcy related events of default, all amounts
payable under the Credit Facility, including the principal amount of, and
accrued interest on, the Credit Facility shall automatically become immediately
due and payable. The expenses and restrictions associated with the Credit Facility have the
effect of limiting our operations. In addition, our failure to pay required
interest expenses and other fees or to meet restrictions under the Credit
Facility would have a material adverse affect on us. The ability to attract and retain highly qualified personnel to operate and
manage our operations is extremely important and our failure to do so could
adversely affect us. Presently, we are dependent upon the personal efforts of our management team.
The loss of any of our officers or directors could have a material adverse
effect upon our business and future prospects. We do not presently have
key-person life insurance upon the life of any of our officers or directors.
Additionally, as we continue our planned expansion of commercial operations, we
will require the services of additional skilled personnel. There can be no
assurance that we can attract persons with 31




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the requisite skills and training to meet our future needs or, even if such
persons are available, that they can be hired on terms favorable to us. We may face difficulties integrating our acquisitions into our operations and
our acquisitions may be unsuccessful, involve significant cash expenditures or
expose us to unforeseen liabilities. We continually evaluate opportunities to acquire healthcare staffing companies
that complement or enhance our business and frequently have preliminary
acquisition discussions with some of these companies. In addition, during 2003
we acquired four businesses and during the first nine months of 2004 we
acquired two businesses. These acquisitions involve numerous risks, including:  potential loss of clients or key employees of acquired companies;  difficulties integrating acquired personnel and distinct cultures into
our business;  difficulties integrating acquired companies into our operating,
financial planning and financial reporting systems;  diversion of management attention from existing operations; and  assumption of liabilities and exposure to unforeseen liabilities of
acquired companies, including liabilities for their failure to comply with
healthcare regulations. These acquisitions may also involve significant cash expenditures, debt
incurrence and integration expenses that could seriously harm our financial
condition and results of operations. We may fail to achieve expected
efficiencies and synergies. Any acquisition may ultimately have a negative
impact on our business and financial condition. We have had a short operating history. We were formed in November 1997 and commenced operations on August 7, 2003 with
our acquisition of Baker Anderson Christie, Inc. We are subject to all the
risks inherent in a new business venture, many of which are beyond our control,
including the ability to implement successful operations, lack of capital to
finance acquisitions and failure to achieve market acceptance. In addition, we
face significant competition from many companies virtually all of which are
larger, better financed and have significantly greater market recognition than
us. The successful implementation of our business strategy depends upon the ability
of our management to monitor and control costs. With respect to our planned operations, management cannot accurately project or
give any assurance with respect to our ability to control development and
operating costs and/or expenses in the future. Consequently, as we expand our
commercial operations, management may not be able to control costs and expenses
adequately, and such operations may generate losses. 32




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We may become subject to new governmental regulations and oversight, which
could adversely affect our ability to continue or expand our business strategy. Our operations are subject to government regulations which place restrictions
on the conduct of our business. It is possible that, in the future,
significant new regulations may be legislated. Although we cannot predict the
extent of any such future regulations, a possibility exists that future or
unforeseen changes may have an adverse impact upon our ability to continue or
expand our operations as presently planned. There is a lack of an active public market for our Common Stock. The quotation of shares of our Common Stock on the OTC Bulletin Board began on
February 24, 2003. There can be no assurances, however, that a market will
develop or continue for our Common Stock. Our Common Stock may be thinly
traded, if traded at all, even if we achieve full operation and generate
significant revenue and is likely to experience significant price fluctuations.
In addition, our stock is defined as a penny stock under Rule 3a51-1 adopted
by the Securities and Exchange Commission under the Securities Exchange Act of
1934, as amended. In general, a penny stock includes securities of companies
which are not listed on the principal stock exchanges or the National
Association of Securities Dealers Automated Quotation System (Nasdaq) or
National Market System (Nasdaq NMS) and have a bid price in the market of
less than $5.00; and companies with net tangible assets of less than $2,000,000
($5,000,000 if the issuer has been in continuous operation for less than three
years), or which have recorded revenues of less than $6,000,000 in the last
three years. Penny stocks are subject to rule 15g-9, which imposes
additional sales practice requirements on broker-dealers that sell such
securities to persons other than established customers and accredited
investors (generally, individuals with net worth in excess of $1,000,000 or
annual incomes exceeding $200,000, or $300,000 together with their spouses, or
individuals who are officers or directors of the issuer of the securities). For
transactions covered by Rule 15g-9, a broker-dealer must make a special
suitability determination for the purchaser and have received the purchasers
written consent to the transaction prior to sale. Consequently, this rule may
adversely affect the ability of broker-dealers to sell our Common Stock, and
therefore, may adversely affect the ability of our stockholders to sell Common
Stock in the public market. If we are unable to attract qualified nurses and healthcare professionals for
our healthcare staffing business, our business could be negatively impacted. We rely significantly on our ability to attract and retain nurses and
healthcare professionals who possess the skills, experience and licenses
necessary to meet the requirements of our hospital and healthcare facility
clients. We compete for healthcare staffing personnel with other temporary
healthcare staffing companies and with hospitals and healthcare facilities. We
must continually evaluate and expand our temporary healthcare professional
network to keep pace with our hospital and healthcare facility clients needs.
Currently, there is a shortage of qualified nurses in most areas of the United
States, competition for nursing personnel is increasing, and salaries and
benefits have risen. We may be unable to continue to increase the number of
temporary healthcare professionals that we recruit, decreasing the potential
for growth of our business. Our ability to attract and retain temporary
healthcare professionals depends on several factors, including our ability to
provide temporary healthcare professionals with assignments that they view as
attractive and to provide them with competitive benefits and wages. We cannot
assure you that we will be successful in any of these areas. The cost of
attracting temporary healthcare professionals and providing them with
attractive benefit packages may be higher than we anticipate and, as a result,
if we are unable to pass 33




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these costs on to our hospital and healthcare facility clients, our
profitability could decline. Moreover, if we are unable to attract and retain
temporary healthcare professionals, the quality of our services to our hospital
and healthcare facility clients may decline and, as a result, we could lose
clients. The temporary staffing industry is highly competitive and the success and
future growth of our business depend upon our ability to remain competitive in
obtaining and retaining temporary staffing clients. The temporary staffing industry is highly competitive and fragmented, with
limited barriers to entry. We compete in national, regional and local markets
with full-service agencies and in regional and local markets with specialized
temporary staffing agencies. Some of our competitors include Medical Staffing
Network Holdings, Inc., AMN Healthcare Services, Inc., Cross Country, Inc.,
World Health Alternatives, Inc. and On Assignment, Inc. All of these companies
have significantly greater marketing and financial resources than we do. Our
ability to attract and retain clients is based on the value of the service we
deliver, which in turns depends principally on the speed with which we fill
assignments and the appropriateness of the match based on clients requirements
and the skills and experience of our temporary employees. Our ability to
attract skilled, experienced temporary professionals is based on our ability to
pay competitive wages, to provide competitive benefits, to provide multiple,
continuous assignments and thereby increase the retention rate of these
employees. To the extent that competitors seek to gain or retain market share
by reducing prices or increasing marketing expenditures, we could lose revenues
and our margins could decline, which could seriously harm our operating results
and cause the trading price of our stock to decline. As we expand into new
geographic markets, our success will depend in part on our ability to gain
market share from competitors. We expect competition for clients to increase in
the future, and the success and growth of our business depend on our ability to
remain competitive. Our business depends upon our continued ability to secure and fill new orders
from our hospital and healthcare facility clients, because we do not have
long-term agreements or exclusive contracts with them. We generally do not have long-term agreements or exclusive guaranteed order
contracts with our hospital and healthcare facility clients. The success of our
business depends upon our ability to continually secure new orders from
hospitals and other healthcare facilities and to fill those orders with our
temporary healthcare professionals. Our hospital and healthcare facility
clients are free to place orders with our competitors and may choose to use
temporary healthcare professionals that our competitors offer them. Therefore,
we must maintain positive relationships with our hospital and healthcare
facility clients. If we fail to maintain positive relationships with our
hospital and healthcare facility clients, we may be unable to generate new
temporary healthcare professional orders and our business may be adversely
affected. Fluctuations in patient occupancy at our clients hospitals and healthcare
facilities may adversely affect the demand for our services and therefore the
profitability of our business. Demand for our temporary healthcare staffing services is significantly affected
by the general level of patient occupancy at our hospital and healthcare
clients facilities. When occupancy increases, hospitals and other healthcare
facilities often add temporary employees before full-time employees are hired.
As occupancy decreases, hospitals and other healthcare facilities typically
reduce their use of temporary employees before undertaking layoffs of their
regular employees. In addition, we may 34




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experience more competitive pricing pressure during periods of occupancy
downturn. Occupancy at our clients hospitals and healthcare facilities also
fluctuates due to the seasonality of some elective procedures. We are unable to
predict the level of patient occupancy at any particular time and its effect on
our revenues and earnings. Healthcare reform could negatively impact our business opportunities, revenues
and margins. The U.S. government has undertaken efforts to control increasing healthcare
costs through legislation, regulation and voluntary agreements with medical
care providers and drug companies. In the recent past, the U.S. Congress has
considered several comprehensive healthcare reform proposals. The proposals
were generally intended to expand healthcare coverage for the uninsured and
reduce the growth of total healthcare expenditures. While the U.S. Congress did
not adopt any comprehensive reform proposals, members of Congress may raise
similar proposals in the future. If any of these proposals are approved,
hospitals and other healthcare facilities may react by spending less on
healthcare staffing, including nurses. If this were to occur, we would have
fewer business opportunities, which could seriously harm our business. State governments have also attempted to control increasing healthcare costs.
For example, the state of Massachusetts has recently implemented a regulation
that limits the hourly rate payable to temporary nursing agencies for
registered nurses, licensed practical nurses and certified nurses aides. The
state of Minnesota has also implemented a statute that limits the amount that
nursing agencies may charge nursing homes. Other states have also proposed
legislation that would limit the amounts that temporary staffing companies may
charge. Any such current or proposed laws could seriously harm our business,
revenues and margins. Furthermore, third party payers, such as health maintenance organizations,
increasingly challenge the prices charged for medical care. Failure by
hospitals and other healthcare facilities to obtain full reimbursement from
those third party payers could reduce the demand or the price paid for our
staffing services. We operate in a regulated industry and changes in regulations or violations of
regulations may result in increased costs or sanctions that could reduce our
revenues and profitability. The healthcare industry is subject to extensive and complex federal and state
laws and regulations related to professional licensure, conduct of operations,
payment for services and payment for referrals. If we fail to comply with the
laws and regulations that are directly applicable to our business, we could
suffer civil and/or criminal penalties or be subject to injunctions or cease
and desist orders. Our business is generally not subject to the extensive and complex laws that
apply to our hospital and healthcare facility clients, including laws related
to Medicare, Medicaid and other federal and state healthcare programs. However,
these laws and regulations could indirectly affect the demand or the prices
paid for our services. For example, our hospital and healthcare facility
clients could suffer civil or criminal penalties or be excluded from
participating in Medicare, Medicaid and other healthcare programs if they fail
to comply with the laws and regulations applicable to their businesses. In
addition, our hospital and healthcare facility clients could receive reduced
reimbursements, or be excluded from coverage, because of a change in the rates
or conditions set by federal or state governments. In turn, violations of or
changes to these laws and regulations that 35




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adversely affect our hospital and healthcare facility clients could also
adversely affect the prices that these clients are willing or able to pay for
our services. Competition for acquisition opportunities may restrict our future growth by
limiting our ability to make acquisitions at reasonable valuations Our business strategy includes increasing our market share and presence in the
temporary healthcare staffing industry through strategic acquisitions of
companies that complement or enhance our business. We have historically faced
competition for acquisitions. In the future, such competition could limit our
ability to grow by acquisitions or could raise the prices of acquisitions and
make them less attractive to us. Significant legal actions could subject us to substantial uninsured
liabilities. In recent years, healthcare providers have become subject to an increasing
number of legal actions alleging malpractice, product liability or related
legal theories. Many of these actions involve large claims and significant
defense costs. In addition, we may be subject to claims related to torts or
crimes committed by our employees or temporary healthcare professionals. In
some instances, we are required to indemnify our clients against some or all of
these risks. A failure of any of our employees or healthcare professionals to
observe our policies and guidelines intended to reduce these risks, relevant
client policies and guidelines or applicable federal, state or local laws,
rules and regulations could result in negative publicity, payment of fines or
other damages. Our professional malpractice liability insurance and general
liability insurance coverage may not cover all claims against us or continue to
be available to us at a reasonable cost. If we are unable to maintain adequate
insurance coverage or if our insurers deny coverage we may be exposed to
substantial liabilities. We may be legally liable for damages resulting from our hospital and healthcare
facility clients mistreatment of our healthcare personnel. Because we are in the business of placing our temporary healthcare
professionals in the workplaces of other companies, we are subject to possible
claims by our temporary healthcare professionals alleging discrimination,
sexual harassment, negligence and other similar activities by our hospital and
healthcare facility clients. The cost of defending such claims, even if
groundless, could be substantial and the associated negative publicity could
adversely affect our ability to attract and retain qualified healthcare
professionals in the future. Execution of our business strategy and growth of our business are substantially
dependent upon our ability to attract, develop and retain qualified and skilled
sales personnel. Execution of our business strategy and continued growth of our business are
substantially dependent upon our ability to attract, develop and retain
qualified and skilled sales personnel who engage in selling and business
development for our services. The available pool of qualified sales personnel
candidates is limited. We commit substantial resources to the recruitment,
training, development and operational support of our sales personnel. There can
be no assurance that we will be able to recruit, develop and retain qualified
sales personnel in sufficient numbers or that our sales personnel will achieve
productivity levels sufficient to enable growth of our business. Failure to
attract and retain productive sales personnel could adversely affect our
business, financial condition and results of operations. 36




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We have a substantial amount of goodwill and other intangible assets on our
balance sheet. Our level of goodwill and other intangible assets may have the
effect of decreasing our earnings or increasing our losses. As of September 30, 2004, we had $16.5 million of unamortized goodwill and
other intangible assets on our balance sheet, which represents the excess of
the total purchase price of our acquisitions over the fair value of the net
assets acquired. At September 30, 2004, goodwill and other intangible assets
represented 76% of our total assets. In July 2001, the Financial Accounting Standards Board issued SFAS No. 141,
Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets.
SFAS No. 141 requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001, as well as all purchase
method business combinations completed after June 30, 2001. SFAS No. 142
requires that, subsequent to January 1, 2002, goodwill not be amortized but
rather that it be reviewed annually for impairment. In the event impairment is
identified, a charge to earnings would be recorded. We have adopted the
provisions of SFAS No. 141 and SFAS No. 142. Although it does not affect our
cash flow, amortization of goodwill or an impairment charge to earnings has the
effect of decreasing our earnings or increasing our losses, as the case may be.
If we are required to write down a substantial amount of goodwill, our stock
price could be adversely affected. Demand for medical staffing services is significantly affected by the general
level of economic activity and unemployment in the United States. When economic activity increases, temporary employees are often added before
full-time employees are hired. However, as economic activity slows, many
companies, including our hospital and healthcare facility clients, reduce their
use of temporary employees before laying off full-time employees. In addition,
we may experience more competitive pricing pressure during periods of economic
downturn. Therefore, any significant economic downturn could have a material
adverse impact on our financial position and results of operations. 
 Item 3. Controls and Procedures We maintain disclosure controls and procedures, as such term is defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended (the Exchange Act), that are designed to ensure that information
required to be disclosed by us in reports that we file or submit under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission rules and forms,
and that such information is accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure. In
designing controls and procedures, and in light of our limited cash resources,
it has been necessary for our management to apply its judgment in evaluating
the cost-benefit relationship of disclosure controls and procedures. During its November 2004 review of our disclosure controls and procedures,
management became aware of a significant deficiency related to the reporting of
stock-based transactions. Specifically, the deficiency arose from the
application of accounting principles in connection with the recording of a
beneficial conversion premium on the induced conversion of Seller
Notes into shares of our Series B-1 Preferred Stock that
were issued in August 2004. We have sought to address this deficiency
with additional training for key personnel, recruitment of additional key
personnel and increased internal review by management and our audit 37




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committee throughout each
reporting period. We are continuing our efforts to implement
appropriate corrective measures in accordance with our resource
availability. During this reporting period, the Company has
successfully completed a number of transactions with complex
accounting treatments and continues to improve the accounting and
reporting process. Based on their evaluation as of the end of the period covered by this Quarterly
Report on Form 10-QSB, our Chief Executive Officer and Chief Financial Officer
have concluded that, subject to the limitations noted above, our disclosure
controls and procedures were effective to ensure that material information
relating to us is made known to them, particularly during the period in which
this Quarterly Report on Form 10-QSB was being prepared. However, in light of
limitations placed upon us as a result of our limited cash resources, there can
be no assurance that additional deficiencies and/or weakness, with respect to
our disclosure controls and procedures, will not arise in the future. There have been no other changes in our internal controls over financial
reporting during our most recent fiscal quarter that have materially affected
or are likely to materially affect our internal control over financial
reporting. 38




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PART II. OTHER INFORMATION 
 Item 1. Legal Proceedings There is no material litigation currently pending against us. 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds (a)Pursuant to the terms of a Loan and Security Agreement  Term Loans (the
Term Loan Agreement) entered on August 31, 2004 by the Company, Baker
Anderson Christine, Inc. (Baker), New Age Staffing, Inc. (New Age), Nurses
Network, Inc. (Nurses), PSR Nurses, Ltd. (PSR, Ltd.), PSR Nurse Recruiting,
Inc. (PSR Recruiting), PSR Nurses Holdings Corp. (PSR Holdings), CRDE Corp.
(CRDE), AHHC Acquisition Corporation (AHHC), CPS Acquisition Corporation
(CPS), and Bridge Opportunity Finance, LLC (BOF), the Company agreed to
issue Common Stock Warrants to BOF for a maximum of 12% of the total
capitalization of the Company. It connection with its first draw under the
Term Loan Agreement, of approximately $2.7 million, on August 31, 2004, the
Company issued a warrant to BOF to purchase 906,758 shares of Common Stock. On September 25, 2004, MedCap Partners L.P. (MedCap) purchased 3,090 shares
of Series C Convertible Preferred Stock, at a price per share of $60.00, in
connection with the terms of a Makewell Agreement entered on August 31, 2004 by
the Company, MedCap, Bridge Healthcare Finance, LLC (BHF) and BOF. In
connection with this purchase, the Company also issued to MedCap warrants to
purchase an additional 7,725 shares of Series C for $60.00 per share for five
years. The proceeds of this sale were used to pay down the amount outstanding
under the Loan and Security Agreement  Revolving Loans, entered June 16, 2004
by the Company, Baker, New Age, Nurses, PSR, Ltd., PSR Recruiting, PSR
Holdings, and Bridge Healthcare Finance, LLC. The shares of Series C Preferred Stock and warrants to purchase shares of
Series C Preferred Stock and Common Stock, respectively, were issued pursuant
to an exemption from registration provided by section 4(2) of the Securities
Act of 1933, as amended (the Securities Act), and/or Regulation D promulgated
under the Securities Act. 
 Item 3. Defaults Upon Senior Securities None. 
 Item 4. Submission of Matters to a Vote of Security Holders None. 39




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Item 5. Other Information As of the date of this quarterly report on Form 10-QSB, our audit committee has
only two members, and we do not have an audit committee financial expert (as
defined in Item 401(e) of Regulation S-B promulgated under the Securities
Exchange Act of 1934, as amended) serving on our audit committee. Mr. C. Fred
Toney, who had previously been designated by our Board of Directors as the
audit committee financial expert, resigned from our audit committee on November
1, 2004 in order for the Company to comply with regulations. Our Board of
Directors has not yet designated a replacement audit committee financial
expert. Effective as of
November 15, 2004 we appointed James J. TerBeest as Chief
Financial Officer. Mr. TerBeest takes over the position from
Vicki L. Smith who assumed the role on an interim basis in September
2004. Ms. Smith returned to her duties as Vice President of Finance
with a principal focus on executing the Companys merger and
acquisition efforts. 
 Item 6. Exhibits  (a)
    
    Exhibits Exhibit No.
    
    Description2.1
    (1)
    
    Agreement and Plan of Reorganization, dated as of August 26,
2004, by and among Crdentia Corp., CRDE Corp., AHHC Acquisition
Corporation, Arizona Home Health Care/Private Duty, Inc. and the
shareholders of Arizona Home Health Care/Private Duty, Inc.3.1
    (2)
    
    Restated Certificate of Incorporation.3.2
    (3)
    
    Certificate of Amendment to Restated Certificate of Incorporation.3.3
    (4)
    
    Certificate of Amendment to Restated Certificate of Incorporation.3.4
    (5)
    
    Certificate of Correction of Certificate of Amendment to Restated
Certificate of Incorporation.3.5
    (6)
    
    Certificate of Correction of Certificate of Amendment to Restated
Certificate of Incorporation.3.3
    (7)
    
    Restated Bylaws.3.4
    (8)
    
    Certificate of Designations, Preferences and Rights of Series A
Preferred Stock of Crdentia Corp.3.5
    (9)
    
    Certificate of Amendment of Certificate of Designations,
Preferences and Rights of Series A Preferred Stock of Crdentia
Corp.3.6
    (10)
    
    Certificate of Designations, Preferences and Rights of Series B
Preferred Stock of Crdentia Corp.3.7
    (11)
    
    Certificate of Correction of Certificate of Designations,
Preferences and Rights of Series B Preferred Stock of Crdentia
Corp.3.8
    (12)
    
    Certificate of Designations, Preferences and Rights of Series B-1
Preferred Stock of Crdentia Corp.
 40




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Exhibit No.
    
    Description3.9(13)
    
    Certificate of Correction of Certificate of Designations,
Preferences and Rights of Series B-1 Preferred Stock of Crdentia
Corp.3.10(14)
    
    Certificate of Designations, Preferences and Rights of Series C
Preferred Stock of Crdentia Corp.3.11(15)
    
    Certificate of Correction of Certificate of Designations,
Preferences and Rights of Series C Preferred Stock of Crdentia
Corp.4.1(16)
    
    Registration Rights Agreement dated August 9, 2004 by and among
Crdentia Corp. and the investors listed on Schedule A thereto.4.2(17)
    
    Amended and Restated Registration Rights Agreement dated August
31, 2004 by and among Crdentia Corp. and the investors listed on
Schedule A thereto.4.3(18)
    
    Form of Warrant to Purchase Shares of Series C Preferred Stock of
Crdentia Corp. granted to the holders listed on Schedule A
thereto.4.4(19)
    
    Form of Warrant to Purchase Shares of Series B-1 Preferred Stock
of Crdentia Corp. granted to MedCap Partners L.P.4.5(20)
    
    Warrant Agreement dated August 31, 2004 by and among Crdentia
Corp. and Bridge Opportunity Finance, LLC.4.6(21)
    
    Form of Warrant to Purchase Shares of Common Stock of Crdentia
Corp., granted to Bridge Opportunity Finance, LLC.10.1(22)
    
    Loan and Security Agreement dated August 31, 2004 by and among
Crdentia Corp., Baker Anderson Christie, Inc., Nurses Network,
Inc., New Age Staffing, Inc., PSR Nurses, Ltd., PSR Nurse
Recruiting, Inc., PSR Nurses Holdings Corp., CRDE Corp., AHHC
Acquisition Corporation, CPS Acquisition Corporation and Bridge
Opportunity Finance, LLC.10.2(23)#
    
    Executive Employment Agreement, dated as of August 31, 2004 by
and between Crdentia Corp. and William C. Crocker.10.3#
    
    Notice of Stock Option Award and Stock Option Award Agreement
dated August 3, 2004 by and between Crdentia Corp. and James D.
Durham.10.4#
    
    Notice of Stock Option Award and Stock Option Award Agreement
dated August 3, 2004 by and between Crdentia Corp. and Pamela
Atherton.10.5(24)
    
    Separation Agreement and General Release by and between Crdentia
Corp. and William S. Leftwich, dated September 15, 2004.10.6(25)
    
    Makewell Agreement dated August 31, 2004 by and between Crdentia
Corp., MedCap Partners L.P., Bridge Healthcare Finance, LLC and
Bridge Opportunity Finance, LLC.
 41




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Exhibit No.
    
    Description10.7
    
    Amendment to Convertible Subordinated Promissory Note by and
between Crdentia Corp. and The DeLuca Trust, Joseph M. DeLuca
Trustee, dated January 7, 2000, dated September 2, 2004.31.1
    
    Certification of Chief Executive Officer pursuant to Rules
13a-14(a) and 15d-14(a) promulgated pursuant to the Securities
Exchange Act of 1934, as amended.31.2
    
    Certification of Chief Financial Officer pursuant to Rules
13a-14(a) and 15d-14(a) promulgated pursuant to the Securities
Exchange Act of 1934, as amended.32.1
    
    Certification of Chief Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification of Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
    (1)
    
    Previously filed as Exhibit 10.1 to the Form 8-K filed with the
Securities and Exchange Commission on September 7, 2004 and incorporated
herein by reference.(2)
    
    Previously filed as Exhibit 3.1 to the Form 8-K filed with the Securities
and Exchange Commission on August 22, 2002 and incorporated herein by
reference.(3)
    
    Previously filed as Exhibit 3.2 to the Form 10-QSB filed with the
Securities and Exchange Commission on August 12, 2003 and incorporated
herein by reference.(4)
    
    Previously filed as Exhibit 4.1 to the Form 8-K/A filed with the
Securities and Exchange Commission on June 28, 2004 and incorporated
herein by reference.(5)
    
    Previously filed as Exhibit 4.2 to the Form 8-K/A filed with the
Securities and Exchange Commission on June 28, 2004 and incorporated
herein by reference.(6)
    
    Previously filed as Exhibit 4.3 to the Form 8-K/A filed with the
Securities and Exchange Commission on June 28, 2004 and incorporated
herein by reference.(7)
    
    Previously filed as Exhibit 3.2 to the Form 8-K filed with the Securities
and Exchange Commission on August 22, 2002 and incorporated herein by
reference.(8)
    
    Previously filed as Exhibit 4.1 to the Form 8-K filed with the Securities
and Exchange Commission on December 30, 2003 and incorporated herein by
reference.(9)
    
    Previously filed as Exhibit 4.1 to the Form 8-K filed with the Securities
and Exchange Commission on February 20, 2004 and incorporated herein by
reference.(10)
    
    Previously filed as Exhibit 4.1 to the Form 8-K filed with the Securities
and Exchange Commission on June 22, 2004 and incorporated herein by
reference.(11)
    
    Previously filed as Exhibit 4.1 to the Form 8-K/A filed with the
Securities and Exchange Commission on October 10, 2004 and incorporated
herein by reference.(12)
    
    Previously filed as Exhibit 4.1 to the Form 8-K filed with the Securities
and Exchange Commission on August 24, 2004 and incorporated herein by
reference.(13)
    
    Previously filed as Exhibit 4.1 to the Form 8-K/A filed with the
Securities and Exchange Commission on October 10, 2004 and incorporated
herein by reference.(14)
    
    Previously filed as Exhibit 4.1 to the Form 8-K filed with the Securities
and Exchange Commission on September 7, 2004 and incorporated herein by
reference.(15)
    
    Previously filed as Exhibit 4.1 to the Form 8-K/A filed with the
Securities and Exchange Commission on October 10, 2004 and incorporated
herein by reference.
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(16)
    
    Previously filed as Exhibit 4.2 to the Form 8-K filed with the Securities
and Exchange Commission on August 24, 2004 and incorporated herein by
reference.(17)
    
    Previously filed as Exhibit 4.2 to the Form 8-K filed with the Securities
and Exchange Commission on September 7, 2004 and incorporated herein by
reference.(18)
    
    Previously filed as Exhibit 4.3 to the Form 8-K filed with the Securities
and Exchange Commission on September 7, 2004 and incorporated herein by
reference.(19)
    
    Previously filed as Exhibit 4.4 to the Form 8-K filed with the Securities
and Exchange Commission on September 7, 2004 and incorporated herein by
reference.(20)
    
    Previously filed as Exhibit 4.5 to the Form 8-K filed with the Securities
and Exchange Commission on September 7, 2004 and incorporated herein by
reference.(21)
    
    Previously filed as Exhibit 4.6 to the Form 8-K filed with the Securities
and Exchange Commission on September 7, 2004 and incorporated herein by
reference.(22)
    
    Previously filed as Exhibit 10.1 to the Form 8-K filed with the
Securities and Exchange Commission on September 7, 2004 and incorporated
herein by reference.(23)
    
    Previously filed as Exhibit 10.1 to the Form 8-K filed with the
Securities and Exchange Commission on September 7, 2004 and incorporated
herein by reference.(24)
    
    Previously filed as Exhibit 10.1 to the Form 8-K filed with the
Securities and Exchange Commission on September 16, 2004 and incorporated
herein by reference.(25)
    
    Previously filed as Exhibit 10.1 to the Form 8-K filed with the
Securities and Exchange Commission on October 25, 2004 and incorporated
herein by reference.
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SIGNATURES In accordance with the requirements of Section 13 of 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
in its behalf by the undersigned, thereunto duly authorized. Date: November 15, 2004
    
    By:
    
    /s/ James D. DurhamJames D. DurhamChairman and Chief Executive OfficerDate: November 15, 2004
    
    By:
    
    /s/ James J. TerBeestJames J. TerBeestChief Financial Officer
 44