SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended March 31, 2012

OR

For the transition period from                     to                    

Commission File No. 333-72376

MEDICAL CONNECTIONS HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: (561) 353-1110

Former name, former address and former fiscal year, if changed since last report.

Indicate by a check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.       Yes þ     No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  þ  No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)    Yes o     No þ

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of Common Stock as of the latest practicable date:

 22,811,676 shares of Common Stock, $.001 par value as of May 1, 2012

INDEX

PART I. – FINANCIAL INFORMATION 

Item 1. Financial Statements

MEDICAL CONNECTIONS HOLDINGS, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

MARCH 31, 2012 (UNAUDITED) AND DECEMBER 31, 2011

See the accompanying notes to the condensed consolidated financial statements

MEDICAL CONNECTIONS HOLDINGS, INC. AND SUBSIDIARY

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011

See the accompanying notes to the condensed consolidated financial statements

MEDICAL CONNECTIONS HOLDINGS, INC. AND SUBSIDIARY

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011

See the accompanying notes to the condensed consolidated financial statements

Medical Connections Holdings, Inc. and Subsidiary

Notes to Condensed Consolidated Financial Statements (unaudited)

March 31, 2012

NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION

Medical Connections Holdings, Inc. and its wholly-owned subsidiary (the “Company,” “we” or “us”) is a healthcare staffing company which provides staffing services for allied professionals and nurses to our clients on a national basis.  We provide recruiting and staffing services for permanent and temporary positions, with an option for the clients and candidates to choose the most beneficial working arrangements.

The Company operates under a holding company structure and has one direct wholly-owned operating subsidiary, Medical Connections, Inc., a Florida corporation (“Medical Connections”) which was formed in 2002.

On June 20, 2011, the Company effectuated a 1-for-10 reverse stock split. All share and per share data for all periods presented have been revised to give retroactive effect to the reverse stock split.

In our opinion, the unaudited accompanying condensed consolidated balance sheets and unaudited related condensed consolidated interim statements of operations and cash flows include the adjustments (consisting of normal and recurring items) necessary for their fair presentation in conformity with United States generally accepted accounting principles (“GAAP”) and represent our accounts after the elimination of inter-company transactions. Preparing financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Actual results could differ from these estimates. The unaudited information included in this Form 10-Q should be read in conjunction with the consolidated financial statements contained in our 2011 Form 10-K which was filed with the Securities and Exchange Commission on March 30, 2012. Interim results are not necessarily indicative of expected results for a full year or for any interim periods in the future. 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of Medical Connections Holdings, Inc., and its wholly-owned subsidiary. All material inter-company transactions and balances have been eliminated in consolidation.

USE OF ESTIMATES 

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates.

CASH AND CASH EQUIVALENTS

Cash and cash equivalents consists principally of currency on hand, demand deposits at commercial banks, and liquid investment funds having  a maturity of three months or less at the time of purchase.

The Company maintains cash and cash equivalent balances at a single financial institution which are insured by the Federal Deposit Insurance Corporation.

ALLOWANCES FOR DOUBTFUL ACCOUNTS / SALES ALLOWANCE

Accounts are written off against the allowance when management determines that an account is uncollectible. Recoveries of accounts previously written off are recorded when received. Estimated allowances for doubtful accounts ($50,000 as of March 31, 2012 and December 31, 2011, respectively) are determined to reduce the Company’s receivables to their carrying value, which approximates fair value. Estimated allowances for sales “falloffs” ($10,000 as of March 31, 2012 and December 31, 2011, respectively) provide for that portion of permanent placement revenue that may be discounted after a reasonable period of time. All allowances are estimated based on historical collection experience, specific review of individual customer accounts, and current economic and business conditions. A summary of the allowance of doubtful accounts is as follows:

SECURED BORROWING

During the three month period ended March 31, 2012, the Company entered into a Factoring and Security Agreement with an unrelated party (the “Purchaser”) in which the Company receives advances on its Eligible Receivables, as defined in the Agreement.  The Company pays the Purchaser a service fee of 1.79% of advances outstanding less than 30 days and an additional fee of .67% for each additional ten-day period. The advances are repaid upon collection of the receivables.  The Purchaser has the ability to require the Company to repurchase certain of the receivables plus any unpaid fees. The Company accounts for these factoring transactions as secured borrowings. The maximum amount of funds available pursuant to the Factoring and Security Agreement is $2 million. The agreement has a one year term unless terminated prior thereto. As of March 31, 2012, the amount of secured borrowings is $442,213.

INCOME TAXES

The Company accounts for income taxes in accordance with ASC 740, Income Taxes.  Under this standard, deferred income taxes are determined based on the estimated future tax effects of differences between the financial statement and tax basis of assets and liabilities given the provisions of enacted tax laws. Deferred income tax provisions and benefits are based on changes to the assets or liabilities from year to year. In providing for deferred taxes, the Company considers tax regulations of the jurisdictions in which it operates, estimates of future taxable income, and available tax planning strategies. If tax regulations, operating results or the ability to implement tax-planning strategies vary, adjustments to the carrying value of deferred tax assets and liabilities may be required. Valuation allowances are recorded related to deferred tax assets based on the “more likely than not” criteria of ASC 740.

ASC 740-10 requires that the Company recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the “more-likely-than-not” threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority.

The Company recorded no income tax expense or benefit for the periods presented due to the net operating losses incurred during those periods and a valuation allowance established against 100% of the Company’s net deferred tax assets.

EARNINGS (LOSS) PER SHARE OF COMMON STOCK

Income (Loss) per share: Basic net loss per share excludes dilution and is computed by dividing the loss attributable to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted loss per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that shared in the loss of the Company. Diluted loss per share is computed by dividing the loss available to common stockholders by the weighted average number of common shares outstanding for the period and dilutive potential common shares outstanding unless consideration of such dilutive potential common shares would result in anti-dilution. No common stock equivalents were considered in the calculation of diluted loss per share as their effect would have been anti-dilutive for the periods ended March 31, 2012 and 2011. 

Common Stock equivalents as of March 31, 2012 include stock options and warrants to purchase 3,085,000 and 243,900 shares, respectively, of common stock. 

REVENUE RECOGNITION

The Company records its transactions under the accrual method of accounting whereby revenue is recognized when the services are rendered and collection is reasonably assured. The Company recognizes revenue from permanent placement services when employment commences.   Adjustments to the fee for these services occur if the candidate’s performance is not satisfactory requiring the Company to find a replacement candidate.  Contract appointments includes contracts for what is commonly known as “travel positions,” which are for allied health professionals, nurses or physicians who are willing to take temporary assignments outside their home region. Under this arrangement, we are the employer of record for the healthcare professional. The healthcare facility remits a fee to us that includes all employment overhead, as well as a surcharge for the service. The revenue from this activity is earned from the bill rate for the service which is invoiced and recognized off of weekly time cards. 

The Company considers the different services described above to aggregate into one line of business. Temporary staffing services represented approximately 89.5% and 92.9%, respectively, of the Company’s consolidated revenue while permanent placements represented approximately 10.5% and approximately 7.1%, respectively, for the three months ended March 31, 2012 and 2011, respectively. 

FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amount reported in the consolidated balance sheets for cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and secured financing approximate fair value because of the immediate or short-term maturity of these financial instruments.

RECLASSIFICATIONS

Certain amounts in 2011 were reclassified to conform to the 2012 presentation. These reclassifications had no effect on net loss for the periods presented.

NOTE 3 - GOING CONCERN

The accompanying condensed consolidated financial statements have been prepared and are presented assuming the Company’s ability to continue as a going concern. The Company has sustained recurring operating losses, has had to rely on capital raising activities to meet operating cash needs and has insufficient recurring revenues to sustain its operations or to fund expenses at this time.  These circumstances raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result from the outcome of this uncertainty.

In order to address the need to satisfy its continuing obligations and realize its long-term strategy, management’s plans include continuing to fund Company operations through the sale of common stock or other securities, such as preferred stock or debt, and seeking financing from third party lenders.

While the Company presently does not have a line of credit, it will continue to seek possible financing from other sources.

There can be no assurance that the above actions will be successful, additional financing will be available or that the Company will obtain any such financing on terms suitable to the Company. 

NOTE 4 - PROPERTY AND EQUIPMENT

Property and equipment consist of the following at March 31, 2012 and December 31, 2011:

Depreciation expense for the three months ended March 31, 2012 and 2011 was $28,444 and $29,040, respectively.

NOTE 5 - STOCKHOLDERS’ EQUITY

Effective as of June 20, 2011, the Company effectuated a 1-for-10 reverse stock split. All shares and per share data for all periods presented have been revised to give retroactive effect to the reverse stock split.

On March 16, 2012, the Company filed an amendment to the Company’s Articles of Incorporation to increase its authorized capital stock to 100 million shares of common stock and 10 million shares for all classes of preferred stock. 

SERIES A PREFERRED STOCK

As of March 31, 2012, the Company had 100,000 shares of Series A Preferred Stock authorized, $0.001 par value per share, and 5,554 shares were issued and outstanding.  Each holder of the Series A Preferred Stock may convert each share of Preferred Stock into nineteen shares (the “Conversion Ratio”) of the Company’s common stock at any time. The Conversion Ratio is subject to adjustment in the event of any recapitalization or reorganization.  Until such shares of Series A Preferred Shares are exchanged for shares of the Company’s common stock, each holder of a Series A Preferred Share shall be entitled to one vote per share on all matters which are brought to a vote by the Company’s shareholders.  Holders of the Series A Preferred Stock have no other rights or preferences. As of March 31, 2012, a total of 47,726 shares of Series A Preferred Stock have been converted into 906,794 shares of our Common Stock. 

SERIES B PREFERRED STOCK

As of March 31, 2012, the Company has 50,000 shares of Series B Preferred Stock authorized, $0.001 par value per share, and no shares issued and outstanding. The par value per share of Series B Preferred Stock is $0.001. Each share of Series B Preferred Stock has 10 votes per share and the Series B Preferred Stock is not convertible into shares of the Company’s Common Stock.

SERIES C PREFERRED STOCK

As of March 31, 2012, the Company has 215,000 shares of Series C Preferred Stock authorized, $0.001 par value per share, and 215,000 shares issued and outstanding. Each share of Series C Preferred Stock has 100 votes per share and will vote together with holders of the Company’s Common Stock and Series A and B Preferred Stock as a single class on all matters presented to the Company’s stockholders at an annual or special meeting (or pursuant to written consent), except with respect to the matters relating to the election of directors.  The holders of a majority of shares of the Company’s Series C Preferred Stock have the right to appoint a majority of the directors serving on the Company’s Board. The Series C Preferred Stock does not have any dividend or liquidation preferences and is not convertible into shares of the Company’s Common Stock.

COMMON STOCK

As of March 31, 2012, the Company has 100,000,000 shares of common stock authorized, $0.001 par value per share, and 22,460,006 issued and outstanding.

WARRANTS AND OTHER EQUITY TRANSACTIONS

During the three months ended March 31, 2012, the Company did not issue any warrants to purchase shares of the Company’s Common Stock. During the three months ended March 31, 2012, the Company granted an aggregate of 3,085,000 options to its officers, directors and employees at an exercise price of $0.32 per share. The options are immediately vested and they are exerciseable for a period of ten years after the grant date. As a result of this issuance, the Company recorded compensation expense of $459,665 during the three months ended March 31, 2012. The weighted average grant date fair value of the options issued were $0.149 per share.

During the three months ended March 21, 2012, the Company sold 5,328,008 shares of its common stock for total net proceeds of $804,950 in a private placement offering. During the three months ended March 31, 2011, the Company sold 2,137,430 shares of its common stock for total proceeds of $136,780 in a private placement offering.

The fair value of the options was estimated using the Black-Sholes options pricing model. The following assumptions were used in valuing these options: 

The expected volatility was based on the historical volatility of the Company’s common stock over the past five years. The Company has determined the expected holding periods by applying the simplified method which represents the average of the immediate vesting period and the ten year maturity period. The risk free interest rate is based on the US Treasury yield for the same period of the expected term at the time of the grant.

NOTE 6 – STOCK-BASED COMPENSATION

At March 31, 2012, the Company had a stock-based compensation plan, its 2010 Stock Incentive and Compensation Plan, which reserved 10 million shares for issuance. The Plan provides for the grant of options, restricted stock, stock appreciation rights, performance shares and performance units to our employees, consultants and non-employee directors. The Company measures the grant date fair value of its awards using an option pricing model. The related fair value is then amortized over the vesting period of the equity instruments.

NOTE 7 - CONTINGENCIES

In December 2010, the Company and Anthony Nicolosi, the Company’s President, were served with a Cease and Desist Order (the “Order”), with a Notice of Right To Hearing, from the Alabama Securities Commission styled “In the Matter of Medical Connections Holdings, Inc., Anthony Nicolosi,” (Adm. Order No. CD-2010-0062). The Order requires the cessation of offering or selling securities into, within or from the State of Alabama during the pendency of the Order. The Cease and Desist Order alleges that Mr. Nicolosi omitted material facts in the sale of a security to a single Alabama investor and violated the agent registration requirements in Alabama. The Company made a rescission offer to the Alabama investor which included information that the Alabama Securities Commission alleged should have been disclosed to the investor relating to the name change of Mr. Nicolosi and his regulatory history concerning a disciplinary proceeding instituted by the Financial Industry Regulatory Authority (“FINRA”) and settled by means of an Acceptance Waiver and Consent. The Alabama investor rejected the rescission offer. The Company had an informal meeting with the Alabama Securities Commission in March 2011 in the process of attempting to resolve the matter. Discussions are still in progress in an attempt to resolve the matter. There has been no adjudication as to the truth of the allegations upon which the Order was based. The Company is not able to predict the outcome of this matter and there is no related accrual as of March 31, 2012.

On April 11, 2012, the Company, along with approximately 25 other Defendants, has been sued for breach of contract (Count I) and breach of the implied covenant of good faith and fair dealing (Count II) in a case styled Kimberly Crugnale and Relogent, LLC (the “Plaintiffs”) v. Medical Connections, Inc. et al. –Case No. CV2012 -0044074 which was filed in Superior Court of Arizona, County of Maricopa  The Plaintiffs allege that they entered into a written contract with the Company in or about 2006, pursuant to which the Company agreed to compensate the Plaintiffs to house their traveling healthcare professionals throughout the United States.   The Plaintiff alleges that the Defendants, including the Company, failed to compensate them pursuant to the terms of the contract and circumvented the Plaintiffs by dealing directly with certain rental properties in violation of the contract.  The Company denies the material allegations of the Complaint.   While the case is in its early stages and we cannot render an opinion as to the outcome, we do not believe that this matter will materially and adversely affect the Company.

The Company and certain of its subsidiaries are subject to various other pending or threatened legal proceedings arising out of the normal course of business or operations. In view of the inherent difficulty of predicting the outcome of such matters, the Company cannot state what the eventual outcome of these matters will be. However, based on current knowledge, management believes that the amount of any incremental liability arising from these matters is not expected to have a material adverse effect on the Company’s consolidated financial condition or results of operations. The Company is not able to predict the outcome of this matter and there is no related accrual as of March 31, 2012. 

NOTE 8 – SUBSEQUENT EVENTS

On April 20, 2012, the Company filed an amendment to its Articles of Incorporation to increase its authorized Series C preferred shares to 665,000 shares. On April 20, 2012, the Company issued 450,000 shares of Series C Preferred Stock to its executive officers.

ITEM 2.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

In this Quarterly Report on Form 10-Q, the terms “Company,” “we,” “us,” and “our” refer to Medical Connections Holdings, Inc. and its wholly-owned subsidiary.

Forward Looking Statements

This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact, including statements regarding  industry prospects or future results of operations or financial position, made in this Quarterly Report on Form 10-Q are forward-looking. We use words such as anticipates, believes, expects, future, intends, and similar expressions to identify forward-looking statements. Forward-looking statements reflect management’s current expectations and are inherently uncertain. Actual results could differ materially for a variety of reasons, including, those risks described in our Annual Report on Form 10-K for the year ended December 31, 2011 filed with the Securities and Exchange Commission (“SEC”) on March 31, 2012, and the risks discussed in other SEC filings. These risks and uncertainties, as well as other risks and uncertainties, could cause our actual results to differ significantly from management’s expectations. The forward-looking statements included in this Quarterly Report on Form 10-Q reflect the beliefs of our management on the date of this report. We undertake no obligation to update publicly any forward-looking statements for any reason.

General

We are a healthcare staffing company which provides staffing services for allied professionals and nurses to our clients on a national basis. We provide recruiting and staffing services for permanent and temporary positions, with an option for the clients and candidates to choose the most beneficial working arrangements.

We operate under a holding company structure and currently have one direct wholly-owned operating subsidiary, Medical Connections, Inc., a Florida corporation (“Medical Connections”) which was formed in 2002.

On June 20, 2011, we effectuated a 1-for-10 reverse stock split. All share and per share data for all periods presented have been revised to give retroactive effect to the reverse stock split.

Executive Overview

We generate revenues primarily from travel contract appointments and permanent placement hires:

Contract Appointments: This activity represents temporary hires (typically, 13 week contracts) made by healthcare facilities to cover short-term staffing needs at their facilities. These shortages in staffing may occur for a variety of reasons, including high-seasonal activity at the healthcare facility, or permanent employees may be taking vacations or leaves of absence. This also includes contracts for what is commonly known as “travel positions,” which are for allied health professionals, nurses or physicians who are willing to take temporary assignments outside their home region. Under this arrangement, we are the employer of record for the healthcare professional. The healthcare facility remits a fee to us that includes all employment overhead, as well as a surcharge for the service. The gross profit from this activity is earned from the surcharge for the service.

Permanent Placement Hires: This activity includes the hiring of allied health professionals, nurses, physicians, pharmacists and other medical personnel to be employed in healthcare or research facilities. Under this arrangement, we receive a placement fee based on a percentage of the employee’s initial annual salary, or a negotiated fee, which is predetermined based upon medical specialty.

For the three months ended March 31, 2012, our revenue was $1,663,321, derived primarily from allied and nursing travel contacts, and our net loss was $1,445,529 or $(0.07) per share. Loss from operations was $1,283,691 for the three months ended March 31, 2012, which was slightly higher than our operating loss for the first quarter of 2011.

Due to our historical operating losses and deficits, among other factors, our independent registered public accounting firm has raised doubts about our ability to continue as a going concern in their report on our consolidated financial statements as of and for the year ended December 31, 2011.  Despite historical losses, we believe that we will be able to satisfy ongoing operating expenses. We have done so to date by raising capital through the sale of equity securities. We will continue to do so, and/or consider other alternatives for raising capital, including but not limited to the sale of preferred stock or debt securities and/or seek financing from third party lenders, until such time as revenues from operations satisfy operating expenses. There can be no assurance that we will be able to raise capital or that additional third party financing will be available, or if available, will be offered on terms that will not adversely impact our stockholders.

We manage our day-to-day operations by focusing on key metrics such as number of travelers placed with healthcare facilities, permanent placement orders filled with employers, gross margins on each contract, number of hours worked, and profitability of each contract. We also closely monitor our accounts receivable, to make sure we are within contract payment terms. Our sales staff is given specific goals by which their performance is consistently measured.

Our goal is to continue to grow the Company both organically and by acquisition. Organically, we will need to attain new nationwide contracts with healthcare facilities and to locate and place qualified allied and nursing professionals into these facilities. With acquisitions, we will need to locate other allied/nursing staffing companies whose business matches our own in order to successfully integrate operations. Both efforts have challenges associated with them. Organic growth will require us to obtain new contracts and professionals daily and to do so in an economy that remains lackluster. With acquisitions, we will need to locate, purchase, and integrate a similar sized company or companies with a similar business model in order to maximize the accretiveness of the transaction. There can be no assurances that we will be able to implement such plans. 

Three Months Ended March 31, 2012 (“first quarter 2012”) Compared with Three Months Ended March 31, 2011 (“first quarter 2011”)

Revenue for the first quarter of 2012 was $1,663,321, a decrease of $367,318, or 18.1%, when compared with $2,030,639 in the first quarter of 2011. The two main components of revenue are contract appointments and permanent placement hires.

Revenue from contract appointments was $1,487,990, a decrease of $398,688 or 21.1% when compared with revenue of $1,886,678 in the first quarter of 2011.  The decline was attributable to the continuance of focus on higher margin contracts and eliminating split-fee and other low-margin placements. While this effort resulted in a decrease in contract revenue in the first quarter of 2012, it also resulted in a 16.1% improvement in gross profit margin (20.2% in the first quarter of 2012 compared to 17.4% in the first quarter of 2011).

Revenue from permanent placement hires increased $31,370, or 21.8%, to $175,331 for the first quarter of 2012 compared to $143,961 in the first quarter of 2011. The increase reflects slightly improved hiring demand. Direct costs of revenue for permanent placement are minimal, amounting to $500 in both the first quarters of 2012 and 2011.

Direct costs associated with contract appointments decreased $370,566, or 23.8%, to $1,187,241 in the first quarter of 2012 compared with $1,557,807 in the first quarter of 2011. The decrease was the result of lower revenue during the period. The gross profit from contract appointments decreased $28,122 to $300,749 or 20.2% of revenue in the first quarter of 2012 compared with $328,871 or 17.4% of revenue in the first quarter of 2011.

Advertising and marketing expenses were $108,707 in the first quarter of 2012, an increase of $61,596 or 130.7% when compared to the $47,111 expensed in the first quarter of 2011. The increase is related to the Company’s increased marketing efforts to gain new revenue.

Recruiting salaries and costs increased $67,751, or 18.3%, to $437,541 in the first quarter of 2012, due to increased recruiter staffing levels.

Professional and consulting fees decreased $70,344 or 39.5%, to $107,914 in the first quarter of 2012 compared with $178,258 in the first quarter of 2011 due to reductions in the need for legal and other outside services and consultants.

General and administrative expenses increased $475,890, or 75.63%, to $1,105,109 in the first quarter of 2012 from $629,219 in the first quarter of 2011.  The increase is due primarily to the expensing of $459,665 for the stock option grants made in the first quarter of 2012.

Other expenses, net in the first quarter of 2012 were $161,838, an increase of $46,461, or 40.3%, when compared with $115,377 in other expenses, net in the first quarter of 2011.  The increase was primarily related to the increase in expenses for investor relations and investment banking.

Net loss for the first quarters ended March 31, 2012 and March 31, 2011 was $1,445,529 and $867,423, respectively, a 66.6% increase.

Liquidity and Capital Resources

During the three month period ended March 31, 2012, the Company entered into a Factoring and Security Agreement with an unrelated party (the “Purchaser”) in which the Company receives advances on its Eligible Receivables, as defined in the Agreement.  The Company pays the Purchaser a service fee of 1.79% of advances outstanding less than 30 days and an additional fee of .67% for each additional ten-day period. The advances are repaid upon collection of the receivables.  The Purchaser has the ability to require the Company to repurchase certain of the receivables plus any unpaid fees. The Company accounts for these factoring transactions as secured borrowings. The maximum amount of funds available pursuant to the Factoring and Security Agreement is $2 million. The agreement has a one year term unless terminated prior thereto. As of March 31, 2012, the amount of secured borrowings is $442,213.

As of March 31, 2012, total current assets were $1,110,293 as compared with $1,020,061 as of December 31, 2011. Total current liabilities increased $249,209 to $901,018 in the first quarter of 2012 from $651,809 in the first quarter of 2011, primarily due to the timing of payments to vendors and accrued expenses. Net cash used for operating activities was $1,184,611 in the first quarter of 2012 compared to $702,670 for the same period in 2011. Net cash flow used in investing activities was $8,076 in the first quarter of 2012 related to the acquisition of property compared with net cash flows used in investing activities of $2,689 in the first quarter of 2011. Net cash provided by financing activities was $1,247,163 in the first quarter of 2012. For the period ended March 31, 2011, we raised $136,780 from the sale of an aggregate of 2,137,430 shares of our common stock in private offerings.

Our corporate headquarters are located at 4800 T-Rex Avenue, Suite 310, Boca Raton, Florida 33431.  We operate Medical Connections, Inc. from this office.   We lease approximately 10,000 square feet of space with a monthly base rent expense of $14,245. Additionally, operating expenses and taxes are approximately $7,400 per month payable to the lessor.  Our current lease expires on May 15, 2016.

Despite historical losses, we believe that we will be able to satisfy ongoing operating expenses over the next 12 months. We have done so to-date by raising capital through the sale of our common stock. We will continue to do so, and/or consider other alternatives for raising capital, including but not limited to the sale of preferred stock or debt securities and/or seek financing from third party lenders, until such time as revenues from operations satisfy operating expenses. There can be no assurance that we will be able to raise capital, a market for our stock or third-party financing will be available, or if available, will be offered on terms that will not adversely impact our stockholders.

Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and the disclosure of contingencies. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may be materially different from those estimates. The following policies are those that we consider to be the most critical. See Note 2, “Summary of Significant Accounting Policies” to our consolidated financial statements included in this Annual Report for further description of these and all other accounting policies.  The following are deemed to be the most significant accounting policies affecting the Company:

Revenue Recognition: The Company records its transactions under the accrual method of accounting whereby revenue is recognized when the services are rendered and collection is reasonably assured.  Contract appointments includes contracts for what is commonly known as “travel positions,” which are for allied health professionals, nurses or physicians who are willing to take temporary assignments outside their home region. Under this arrangement, we are the employer of record for the healthcare professional. The healthcare facility remits a fee to us that includes all employment overhead, as well as a surcharge for the service. The revenue from this activity is earned from the commission and surcharge for the service which is billed and recognized off of weekly time cards.   The Company recognizes revenue from permanent placement services when employment commences.    Adjustments to the fee for these services occur if the candidate’s performance is not satisfactory requiring the Company to find a replacement candidate.

Allowances for Doubtful Accounts: Accounts are written off when management determines that an account is uncollectible.  Recoveries of accounts previously written off are recorded when received. Estimated allowances for doubtful accounts are determined to reduce the Company's receivables to their carrying value, which approximates fair value. In addition to maintaining an allowance for bad debt, we also maintain a sales allowance reserve for that portion of permanent placement revenue that may “falloff” after a reasonable period of time.  A reasonable period of time means that as each client’s payment history is unique to that client, we take that payment history into account when determining if payment of a particular invoice will not be forthcoming.   Allowances and reserves are estimated based on historical collection experience, specific review of individual customer accounts, and current economic and business conditions and are reviewed on a quarterly basis to determine their adequacy. Historically, we have not incurred any significant credit related losses.

Off-Balance Sheet Arrangements

We have not entered into any off-balance sheet arrangements. We do not anticipate entering into any off-balance sheet arrangements during the next 12 months.

Not applicable.

Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) and determined that our disclosure controls and procedures were effective as of March 31, 2012. The evaluation considered the procedures designed to ensure that the information required to be disclosed by us in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.

During the period covered by this Quarterly Report on Form 10-Q, there was no change in our internal control over financial reporting (as such term is defined in Rules 13a-15(d) and 13d-15(d) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Because of its inherent limitations, internal controls over financial reporting may not prevent or detect misstatements. Projections of any evaluation or effectiveness to future periods are subject to risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

PART II. OTHER INFORMATION

See Note 7 — Contingencies in the Notes to Condensed Consolidated Financial Statements contained in PART I, ITEM I of this Quarterly Report for information about legal proceedings in which we are involved.

There have been no material changes in the risk factors associated with the Company’s operations since the filing of the Company’s 2011 Form 10-K, which was filed with the SEC on March 30, 2012.

During the three month period ended March 31, 2012, we sold 5,328,008 shares of our common stock to accredited or sophisticated investors for aggregate proceeds of $804,950. We also issued an aggregate of 3,085,000 options to our officers, directors and employees. These options were immediately vested, the exercise price of these options is $.32 per share and they expire ten years after the date of grant. These securities were issued in transactions that were exempt from registration under Regulation D Rule 506 and/or Section 4(2) of the Securities Act of 1933, as amended (“Securities Act”), as transactions by an issuer not involving a public offering.   All of the investors were knowledgeable, sophisticated and had access to comprehensive information about the Company and represented their intention to acquire the securities for investment only and not with a view to distribute or sell the securities. The Company placed legends on the securities stating that the securities were not registered under the Securities Act and set forth the restrictions on their transferability and sale.

None

Not Applicable.

Item 5. Other Events

Effective as of January 19, 2012, Medical Connections, Inc. entered into a Factoring Agreement with Paragon Group, Inc. (“Paragon”) (the “Factoring Agreement”). Under the Factoring Agreement, Medical Connections, Inc. receives advances on certain eligible receivables, as defined in the Factoring Agreement. The Company pays Paragon a service fee of 1.79% of advances outstanding less than 30 days and an additional fee of .67% for each additional ten-day period. The advances are repaid upon collection of the receivables. Paragon has the ability to require Medical Connections, Inc. to repurchase certain of the receivables plus any unpaid fees. The maximum amount of funds available pursuant to the Factoring Agreement is $2 million. The Factoring Agreement is for a term of one year, unless terminated prior thereto.

In connection with the entry into the Factoring Agreement, the Company executed a corporate guaranty (“Corporate Guaranty”) in favor of Paragon and the Company’s three executive officers executed guaranties of validity (“Validity Guaranties”) in favor of Paragon. In addition, Medical Connections, Inc. granted Paragon a security interest against certain collateral, including but not limited to accounts, chattel paper, inventory, equipment, instruments, investment property, deposit accounts and general intangibles. The description of the Factoring Agreement, the Corporate Guaranty and the Validity Guaranties, and the terms thereof are qualified in their entirety to the full text of such agreements, which are filed as exhibits 10.8, 10.9, and 10.10 to this Quarterly Report on Form 10-Q.

+ Filed herewith

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized

In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

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