Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10–Q

x   Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

               For the quarterly period ended September 30, 2004

OR

o   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 000–31249

CRITICAL HOME CARE, INC.
(Exact name of registrant as specified in its charter)

Registrant’s telephone no.: 248–352–7530

          Indicate by 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.                    o Yes     x  No

          Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b–2 of the Exchange Act).                     o Yes     x No

          As of November 12, 2004,  80,448,761 shares of common stock, $0.001 par value, of the Registrant were outstanding.

Table of Contents

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PART I:  Financial Information

Item 1.            Financial Statements

The financial statements of the Registrant included herein have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission.  Although certain information normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America has been condensed or omitted, the Registrant believes that the disclosures are adequate to make the information presented not misleading.  Readers are urged to carefully review and consider the various disclosures made by us in this quarterly report on Form 10–Q, the quarterly report on Form 10–Q for the period ended June 30, 2004, our Current Report on Form 8–K filed on July 23, 2004, our annual report on Form 10–KSB filed on February 18, 2004, and our other filings with the Securities and Exchange Commission.  These reports and filings attempt to advise interested parties of the risks and factors that may affect our business, financial condition and results of operation and prospects. 

The consolidated financial statements included herein reflect all adjustments, consisting only of normal recurring items, which, in the opinion of management, are necessary to present a fair statement of the results for the interim periods presented.

The results for interim periods are not necessarily indicative of trends or results to be expected for a full year.  

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Critical Home Care, Inc.
Consolidated Balance Sheet
(Unaudited)

4

5

Critical Home Care, Inc.
Consolidated  Statements of Operations
(Unaudited)

6

Critical Home Care, Inc.
Consolidated  Statements of Operations
(Unaudited)

7

Critical Home Care, Inc.
Consolidated  Statements of Cash Flows
(Unaudited)

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 1 – BASIS OF PRESENTATION OF CONSOLIDATED FINANCIAL STATEMENTS

          The accompanying unaudited consolidated financial statements as of September 30, 2004, and for the periods ended September 30, 2004 and 2003, have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America. These interim financial statements include all adjustments which management considers necessary to make the financial statements not misleading. The results of operations for the three months ended September 30, 2004, are not necessarily indicative of results that may be expected for any other interim period or for the remainder of the year.

          The consolidated financial statements as of September 30, 2004 and for the three months ended September 30, 2004 and for the period from May 10, 2004 to September 30, 2004, include the accounts of Critical Home Care, Inc. and its wholly owned subsidiaries (collectively referred to as “Critical” or the “Company”).  The balance sheet as of March 31, 2004 and the statements of income for the period from April 1, 2004 to May 9, 2004, and for the three months ended September 30, 2003 and the six months ended September 30, 2003, include the accounts of Arcadia Services, Inc. (predecessor) and subsidiaries prior to the effect of the acquisition and merger described in Note 4. All significant intercompany balances and transactions have been eliminated in consolidation.

MERGER AND RECAPITALIZATION

          Effective May 10, 2004, CHC Sub, Inc., a wholly owned subsidiary of the Company, merged with and into RKDA, Inc., a recently formed Michigan Corporation, (the “RKDA Merger”).  RKDA’s assets consist of all of the capital stock of Arcadia Services, Inc. and the membership interest of SSAC, LLC d/b/a Arcadia Rx.  RKDA acquired Arcadia Services, Inc. on May 7, 2004 pursuant to a Stock Purchase Agreement by and among RKDA, Inc., Arcadia Services, Inc., Addus HealthCare, Inc., and the principal stockholder of Addus HealthCare, Inc. (the “Arcadia Acquisition”).  For descriptions of the terms of the RKDA Merger and the Arcadia Acquisition, please refer to the Form 8–K filed with the Securities and Exchange Commission (the “Commission”) on May 24, 2004, as amended by the accompanying Form 8–K/A filed with the Commission on July 23, 2004.

          For accounting purposes, the transaction between RKDA and Critical was considered a reverse merger, and RKDA, Inc. will be considered the acquirer of the Company for accounting purposes.

          This report should be read in conjunction with Consolidated Financial Statements of Arcadia Services, Inc. and Subsidiaries for the Years Ended March 31, 2004 and 2003, included in the Form 8–K/A filed with the Commission on July 23, 2004.

NOTE 2 – DESCRIPTION OF BUSINESS

          Critical is incorporated in Nevada and based in Southfield, Michigan. The Company is a national provider of staffing and homecare services, durable medical equipment and mail order pharmaceuticals. The Company’s medical staffing service includes registered nurses, travel nurses, licensed practical nurses, certified nursing assistants, respiratory therapists and medical assistants. The non–medical staffing service includes light industrial, clerical, and technical personnel. The homecare services include personal care aides, home care aides, homemakers, companions, physical therapists, occupational therapists, speech pathologists and medical social workers.  The Company markets and sells surgical supplies, orthotic and prosthetic products and durable medical equipment, such as wheelchairs and hospital beds and also provides oxygen and other respiratory therapy services and equipment. Clients and patients are facilities and individuals residing at home. These services are generally paid for by the clients themselves, insurance companies, medicare and state medicaid waiver programs. 

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NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

          Principles of Consolidation – The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All material intercompany balances and transactions have been eliminated in consolidation.

          Use of Estimates – 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 and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements, and revenue and expenses during the reporting period. Actual results could differ from those estimates.

          Revenue Recognition – Revenues for services are recorded in the period the services were rendered at established rates and for products at the time of shipment.

          Allowance for Doubtful Accounts – The Company reviews all accounts receivable balances, and provides for an allowance for uncollectible accounts, and estimates for its bad debt expense based on historical analysis of its records. The basis of this analysis is from the aging of the receivable files, and the patient, payer provider records, and additionally their payment history. Items that are greater than one year old are fully reserved. The balance of any reserve, which is established, is estimated based on the collection history from Company records.  If actual collection experience changes, revisions to the allowance may be required.  Any unanticipated change in customers’ credit worthiness or other matters affecting the collectibility of amounts due from such customers, could have a material effect on the results of operations in the period in which such changes or events occur.  After all attempts to collect a receivable have failed, the receivable is written off against the allowance.

          Inventories – Inventories are valued at cost. Cost is determined by first in, first out (FIFO) method. 

          Fixed Assets and Depreciation – The Company’s policy is to depreciate or amortize fixed assets over the estimated useful lives of the assets (3–15 years) by use of the straight–line method.

          Impairment of Long–Lived Assets – The Company reviews its long–lived assets for impairment whenever changes in circumstances indicate that the carrying amount of an asset may not be recoverable. To determine if impairment exists, the Company compares the estimated future undiscounted cash flows from the related long–lived assets to the net carrying amount of such assets. Once it has been determined that an impairment exists, the carrying value of the asset is adjusted to fair value. Factors considered in the determination of fair value include current operating results, trends and the present value of estimated expected discounted future cash flows.

          Goodwill – Goodwill represents the excess of purchase price over net assets of businesses acquired.  The Company follows Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets.”  Accordingly, goodwill is not amortized but is tested for impairment annually, and between annual tests in certain circumstances.  The test for impairment requires the company to make several estimates about fair value, most of which are based on projected discounted future cash flows.  The estimates associated with the goodwill impairment test are considered critical due to judgment required in determining fair value amounts, including projected discounted future cash flows.  Changes in these estimates may result in the recognition of an impairment loss.

          Earnings (Loss) Per Share – Basic earnings per share is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings 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. Outstanding stock options to acquire common shares, and outstanding warrants to acquire common shares,  have not been considered in the computation of dilutive loss per share since their effect would be antidilutive.

          Income Taxes – Income taxes are accounted for under the asset and liability method. Accordingly, deferred tax assets and liabilities are recognized currently for the future tax consequences attributable to the temporary differences between the financial statement carrying amounts of assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets if it is more likely than not that such assets will not be realized.

          The Company considers all available evidence, both positive and negative, to determine whether, based on the weight of that evidence, a valuation allowance is needed for some portion or all of a net deferred tax asset. Judgment is used in considering the relative impact of negative and positive evidence. In arriving at these judgments, the weight given to the potential effect of negative and positive evidence is commensurate with the extent to which it can be objectively verified. The Company records a valuation allowance to reduce our deferred tax assets and review the amount of such allowance annually. When the Company determines certain deferred tax assets are more likely than not to be utilized, the Company will reduce the valuation allowance accordingly.

          Prior to May 10, 2004, Arcadia Services, Inc. elected to be taxed as a Subchapter S–corporation with the individual shareholders reporting their respective share of income on their income tax return. Accordingly, the Company has no deferred tax assets or liabilities arising in prior periods.

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          The Company has provided a valuation allowance for the deferred tax assets related to the approximate $2,300,000 operating carryovers of Critical expiring through 2024. Internal Revenue Code Section 382 rules limit the utilization of NOLs upon a change in control of a company. It has been determined that a change in control has taken place. Since the change in control has taken place, utilization of the Company’s NOLs will be subject to limitations in future periods, which could have an effect of eliminating substantially all the future income tax benefits of the NOL’s.

          Tax benefits from the utilization of net operating loss carryforwards will be recorded at such time and to such extent, they are more likely than not to be realized.

Stock Based Compensation –

          The Company accounts for its stock option plan under SFAS No. 148, “Accounting for Stock Based Compensation – Transition and Disclosure – an amendment of SFAS No. 123”. As permitted under SFAS No. 123, the Company continues to apply the Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.” As required under SFAS No. 148, the following table presents pro forma net loss and basic and diluted loss per share as if the fair value–based method had been applied to all awards. 

  NOTE 4 – MERGER TRANSACTION

          Effective May 10, 2004 CHC Sub, Inc., a wholly owned subsidiary of Critical Homecare, Inc. merged with and into RKDA, Inc., a recently formed Michigan Corporation,  RKDA's assets consist of all of the capital stock of Arcadia Services, Inc. and the membership interest of SSAC, LLC d/b/a Arcadia Rx.  RKDA acquired Arcadia Services, Inc. on May 7, 2004 pursuant to a Stock Purchase Agreement by and among RKDA, Inc., Arcadia Services, Inc., Addus Healthcare, Inc. and Addus Healthcare's principal shareholder. The purchase price of Arcadia Services, Inc. is $16.8 million and assumption of certain related liabilities.

          The following unaudited pro forma statement of income has been prepared to give effect to the reverse merger. RKDA, Inc. will be considered the acquirer of the Company for accounting purposes. This pro forma statement of income has been prepared as if the merger had been completed as of April 1, 2004.

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          The unaudited pro forma statement of income is presented for illustrative purposes only and is not necessarily indicative of the results of operations that would have actually been reported had the merger occurred on April 1, 2004, nor is it necessarily indicative of the future results of operation. The pro forma statement of operations has been prepared based upon the Company's financial information.

NOTE 5 – NOTE PAYABLE – OFFICER

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NOTE 6 – LONG–TERM DEBT

Long term debt at September 30, 2004 is summarized as follows:

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NOTE 7 –  LINE OF CREDIT – ARCADIA

          On May 7, 2004, Arcadia Services, Inc. and three of its wholly owned–subsidiaries entered into a Credit Agreement with Comerica Bank. The agreement provides the borrowers with a revolving credit facility of up to $14,400,000 due May 7, 2006. The formula base is 85% of the eligible accounts receivable and an overformula advance of $1,467,000. The term on the overformula is one year. The overformula advance shall be paid as follows: $300,000 due November 15, 2004, $83,333 per month from October 7, 2004 through May 7, 2005 and an additional $125,000 per month from February 7, 2005 through May 7, 2005. The initial advance of $11 million was used to fund a portion of the purchase price of the common stock of Arcadia by RKDA from the seller.  RKDA granted Comerica Bank a first priority security interest in all of the issued and outstanding stock of Arcadia. The Arcadia subsidiaries and Arcadia granted the bank security interests in all of their assets and the seller subordinated $500,000 of indebtedness of Arcadia to Arcadia’s indebtedness to Comerica Bank. RKDA and its former principals, Messrs. Elliott and Kuhnert, each executed a personal guaranty to Comerica Bank over all indebtedness of Arcadia and its subsidiaries.

          Advances under the credit facility bear interest at the prime–based rate (as defined) or the Eurodollar–based rate (as defined), at the election of borrowers. Arcadia agreed to various financial covenant ratios; to have any person who acquires Arcadia common stock pledge such stock to Comerica Bank, and along with Messrs. Elliott and Kuhnert, to customary negative covenants. Amounts outstanding under this agreement totaled approximately $13,937,000 at September 30, 2004, of which $1,467,000 is classified as current and $12,470,000 classified as long–term.

NOTE 8 –  ACQUISITIONS

            On July 30, 2004 the Company purchased selected assets of the Staffing Source of St. Petersburg, Florida. The Staffing Source, Inc. with offices in Bradenton, Clearwater and St. Petersburg provides temporary personnel for health care facilities and other business. It reported 2003 sales of $3.3 million. The purchase price is computed per a specified formula based on the annualized revenue, with a minimum total payment of $480,000 and a maximum total payment of $600,000.

            On August 20, 2004 the Company purchased American Oxygen, Inc. of Peoria, Illinois. The purchase price was 200,000 shares of the Company valued at $186,000. American Oxygen operates from two locations in Illinois and sells durable medical equipment, including respiratory/oxygen.

            On August 30, 2004 the Company purchased selected assets of Merit Staffing Resources, Inc (Merit). Merit provides temporary personnel for healthcare facilities and other businesses.  It has offices in Danvers, Dedham, Lakeville, Sandwich, and Weymouth, Massachusetts and reported 2003 sales of $4.7 million. The purchase price is (a) cash equal to a specified percentage of the seller’s accounts receivable under 120 days outstanding as of closing, plus $200,000, subject to a total maximum cash payment at closing of $1.6 million plus (b) forty eight monthly payments computed per a specified formula based on gross margin with a minimum total payment of $864,000 and a maximum total payment of $1.6 million.

            On September 23, 2004 the Company purchased Trinity Healthcare of Winston–Salem, Inc (Trinity). The acquisition was a stock purchase and the price was $5.4 million. Trinity provides oxygen and other respiratory services, as well as home intravenous therapy services. Trinity has locations in Winston–Salem and Huntersville, North Carolina, and Marietta and Demorest, Georgia. Two of Trinity’s selling shareholders were paid the following portions of the purchase price at closing on September 23, 2004:  (a) payment of $2.5 million in cash; (b) issuance of 1,075,410 shares of the Company’s common stock with an aggregate value of $916,250; and (c) delivery of a promissory note in the aggregate principal amount of $660,740, secured by a wholly owned subsidiary under a security agreement subordinated to their primary lender. The promissory note’s term is 21 months beginning January 15, 2005 and maturing October 15, 2006.  The promissory note bears simple interest at 8% per annum commencing January 15, 2005 and provides for equal quarterly payments of principal and interest.  Payment of the promissory note is subject to SSAC’s rights of recoupment/offset and is guaranteed by the Company per an unsecured guaranty. Trinity’s two other selling shareholders will be paid the following portions of the purchase price by January 15, 2005:  (a) $975,510 payable in cash, subject to SSAC’s rights of recoupment/offset and the Company’s unsecured guaranty; and (b) 407,864 shares of the Company’s common stock with an aggregate value of $347,500, of which 305,898 shares with an aggregate value of $260,625 will be escrowed for one year.  The escrowed shares will be subject to SSAC’s rights of recoupment/offset.  Subject to recoupment/offset, the escrowed shares will be released to the two shareholders by January 15, 2006.

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NOTE 9 – AFFILIATE PAYABLE

          Arcadia Services, Inc (Arcadia) a wholly owned subsidiary of the Company  operates primarily through a network of affiliated agencies throughout the United States.  These affiliated agencies are owner–managed businesses, which have been contracted by the Company to sell services under the Arcadia name.  The arrangements with affiliated agencies are formalized through a standard contractual agreement. The affiliates operate in particular regions and are responsible for recruiting and training field service employees and marketing their services to potential customers within the region.  The field service employees are employees of  Arcadia. Arcadia provides sales and marketing support to the affiliates and develops and maintains operating manuals that provide suggested standard operating procedures for the affiliates.

          Each affiliate receives a weekly commission amount based on a percentage of the gross margin of the business generated by the affiliate.  Gross margin is computed by taking the gross amounts billed to Arcadia’s customers in any given week and deducting the total weekly wages, payroll–related taxes and insurance costs (workers’ compensation and disability, as required by law) for field service personnel.

          The affiliate agreement also provides an affiliate reserve for bad debts that are charged against the affiliate’s weekly commission amount.  The affiliate reserve is computed based on 1% of gross sales (billings).  The total amount that can be held by Arcadia is limited to 10% of the current outstanding balance of accounts receivable related to the affiliate. In addition, affiliates are required to reimburse the Company for 50% of any loss  resulting from bad debt experience on accounts receivable.  When a write off happens it is taken against the reserve as opposed to the weekly commission. The total reserve held as of September 30, 2004 is $968,297.

          When Arcadia purchases the customers and hires the employees of an affiliate they will pay additional consideration of up to 10% of first–year revenues generated by the affiliate for affiliating with Arcadia. The estimated payments are accrued on the transaction date. Payments are made in monthly installments over a three–year period. The amounts in excess of one year are considered long term. The short term consideration is $466,000 and the long term consideration amount is $670,059.

          In addition to the consideration, Arcadia may provide cash advances to affiliates to assist the affiliates in beginning their operations or starting up new offices.  These loans are typically $5,000 to $20,000 and are repaid through a reduction of commissions on a mutually agreed upon repayment schedule. The short term portion of the loans is $92,327 and the long term portion is $66,366.

NOTE 10 – STOCKHOLDERS’ EQUITY

          On May 10, 2004, CHC Sub, Inc., a wholly–owned subsidiary of Critical, consummated an Agreement and Plan of Merger under which CHC Sub, Inc., merged with and into RKDA, Inc. The purchase price paid was 21,300,000 shares of Critical common stock and 1,000,000 seven–year class A warrants exercisable at $0.50 per share. The Company retired 1,300,000 shares of the Company’s common stock as part of this transaction. RKDA’s assets consist of all of the capital stock of Arcadia Services, Inc. and the membership interests of SSAC, LLC d/b/a Arcadia Rx. (collectively “Arcadia”). RKDA had acquired Arcadia Services, Inc. through a stock purchase on May 7, 2004.  The Company raised $8,245,000 through a Regulation D private placement of 32,980,000 common shares at a price of $0.25 per share which was completed and terminated on May 27, 2004.  The offering also included 3,298,000 Class A Warrants to purchase 3,298,000 common shares of stock over seven years at an exercise price of $0.50 per share.  The Placement Agent received a 10% sales commission, reimbursement for out–of–pocket expenses and seven year warrants to purchase 2,298,000 shares of the Company’s common stock exercisable on a cashless basis at $0.50 per share.

          Three officers of the Company escrowed 6 million, 4 million and 2 million shares of the Company’s common stock, respectively, pursuant to Escrow Agreements dated as of May 7, 2004 (collectively, the “Escrow Shares”). Fifty (50%) percent of the Escrow Shares will be released from escrow in fiscal 2007 and fiscal 2008, if RKDA, in the case of Messrs. Elliott and Kuhnert, and the Company, in the case of Mr. Bensol, meets the following milestones: for the 12 month period ending March 31, 2006, an Adjusted EBITDA (as defined) of $9.7 million and for the 12 month period ending March 31, 2007, an Adjusted EBITDA of $12.5 million. Alternatively, the Escrow Shares shall be released in fiscal 2008 if RKDA, in the case of Messrs. Elliott and Kuhnert, and the Company, in the case of Mr. Bensol, obtains an Adjusted EBITDA for the 24 month period ending March 31, 2007 of at least $22.2 million. In addition, for any of the Escrow Shares to be released pursuant to the foregoing thresholds, the Company’s, in the case of Mr. Bensol, and RKDA’s, in the case of Messrs. Elliott and Kuhnert, Debt to Adjusted EBITDA ratio must be 2.0 or less. Nevertheless, twenty (20%) percent of the Escrow Shares (2.4 million shares) will be released if the Company’s Common Stock remains at least $1.00 per share for 30 consecutive trading days or the average closing price for any consecutive 45 day period is at least at $1.00 per share, even if the EBITDA thresholds are not met. Upon release of any Escrow Shares, the Company will recognize expense equal to the fair value of the shares at the release date.

          On May 25, 2004, the Company entered into separate agreements with certain managerial employees of Arcadia Services, Inc., that entitled the employees to each purchase 200,000 and 240,000 shares, of the Company's common stock at $0.25 per share. 

NOTE 11 – INCOME TAXES

          Although the Company experienced a loss for the quarter ended September 30, 2004 and the period May 10, 2004 through September 30, 2004, the Company recognized income tax expense of $67,139 and $7,139 for these periods, respectively.  Income tax expense relates to state income taxes as a result of the Company's multi–state locations.

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NOTE 12 – COMMITMENTS

EMPLOYMENT AGREEMENTS

          Three officers of the Company entered into substantially similar employment agreements on May 7, 2004, as Chief Executive Officer, Chief Financial Officer, President and Chief Operating Officer, and Executive Vice President, respectively. Each agreement is for three years, automatically renewable for successive one–year periods unless terminated on three months’ prior written notice. Each officer is being paid $150,000 per annum in salary and is eligible to receive a discretionary annual bonus determined by the Board of Directors. If either Messrs. Elliott, Kuhnert, or Bensol’s employment is terminated by the Company other than for cause (as defined) or by the executive for good reason (as defined), then such executive shall receive twice his base salary. Upon a change in control, other than the RKDA Merger, if the executive’s employment is terminated by the Company other than for cause or by the executive for good reason, the executive shall receive three times his total compensation for the past year.  Each executive agreed not to compete with the Company within North America for the one–year–period following termination of his employment.

          Messrs. Elliott and Kuhnert were each granted stock options to purchase 4 million shares of Common Stock exercisable at $0.25 per share. The options shall vest in six tranches provided certain adjusted EBITDA milestones are met through fiscal 2008, subject to acceleration upon certain events occurring. The options may be exercised by Messrs. Elliott and Kuhnert as long as they are employed by the Company and for one year from termination for any reason provided they have achieved the EBITDA milestones. The expense, if any, related to these options will be recognized in the period the milestones are achieved or are likely to be achieved.

     SETTLEMENT OF CERTAIN LIABILITIES

          On May 13, 2004, David S. Bensol converted $150,000 of his debt into 600,000 shares of the Company’s common stock at $0.25 per share, plus 60,000 Class A warrants identical to those issued in connection with the Company’s May 7, 2004 Offering (See Note 6), pursuant to a resolution of the Board of Directors dated May 4, 2004.

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

General

          The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements and Notes thereto appearing elsewhere in this Form 10–QSB.

          Statements contained in this report include “forward–looking statements” within the meaning of such term in Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934 and as construed by court opinions. Forward–looking statements involve known and unknown risks, uncertainties and other factors, which could cause actual financial or operating results, performances or achievements expressed or implied by such forward–looking statements not to occur or be realized. Such forward–looking statements generally are based on our best estimates of future results, performances or achievements, predicated upon current conditions and the most recent results of the companies involved and their respective industries. Forward–looking statements may be identified by the use of forward–looking terminology such as “may,” “can,” “will,” “could,” “should,” “project,” “expect,” “plan,” “predict,” “believe,” “estimate,” “aim,” “anticipate,” “intend,” “continue,” “potential,” “opportunity” or similar terms, variations of those terms or the negative of those terms or other variations of those terms or comparable words or expressions.

          Readers are urged to carefully review and consider the various disclosures made by us in this Quarterly Report on Form 10–Q, our Quarterly Report on Form 10–Q for the period ended June 30, 2004, our current report on Form 8–K filed on July 23, 2004, our Annual Report on Form 10–KSB filed on February 18, 2004 and our other filings with the Securities and Exchange Commission. These reports and filings attempt to advise interested parties of the risks and factors that may affect our business, financial condition and results of operations and prospects. The forward–looking statements made in this Form 10–Q speak only as of the date hereof and we disclaim any obligation to provide updates, revisions or amendments to any forward–looking statements to reflect changes in our expectations or future events.

Critical Accounting Policies

          The Company has identified the following accounting policies that require significant judgment. The Company believes its judgments relating to allowance for doubtful accounts and goodwill are appropriate.

          Allowance for doubtful accounts – The Company reviews all accounts receivable balances, and provides for an allowance for uncollectable accounts, and estimates for its bad debt expense based on historical analysis of its records. The basis of this analysis is from the aging of the receivable files, and the patient, payer provider records, and additionally their payment history. Items that are greater than one year old are fully reserved. The balance of any reserve, which is established, is estimated based on the collection history from Company records.

          Goodwill – Goodwill represents the excess of purchase price over net assets of businesses acquired. Goodwill was previously amortized on the straight–line method over periods ranging from seven to fifteen years. The Company follows Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets.”  Accordingly, goodwill is not amortized but is tested for impairment annually, and between annual tests in certain circumstances.  The test for impairment requires the company to make several estimates about fair value, most of which are based on projected discounted future cash flows.  The estimates associated with the goodwill impairment test are considered critical due to judgment required in determining fair value amounts, including projected discounted future cash flows.  Changes in these estimates may result in the recognition of an impairment loss.

Results of Operations

          The Three Months Ended September 30, 2004 Compared to the Three Months Ended September 30,2003.

          Sales for the three months ended September 30, 2004 increased by $5,955,841, or 30%, to $25,512,001 as compared to $19,556,160 for the three months ended September 30, 2003. The increase in the amount of $1,016,182 is attributable to the operations of the entities that merged into the company effective May 10, 2004, $3,146,562 is attributable to the three acquisitions done  to the affiliate network prior to the quarter ended September 30, 2004, and $919,921 is attributable to the four acquisitions done during the quarter ended September 30, 2004.  See notes to consolidated financial statements for discussion of various acquisitions made during the three months ended September 2004. In addition, the Company had internal growth of $ 873,176 during the three months ended September 2004.  There were no significant changes in sales prices during the quarter ended September 30, 2004.

          Gross profit for the quarter ended September 30, 2004 remained consistent with the quarter ended September 30, 2003 at 15.1%.

          General and administrative expenses for the quarter ended September 30, 2004 were $3,629,197 compared to $1,975,273 for the three months ended September 30, 2003. The increase of $1,653,924, or 84%, consists of additional general and administrative expenses of the merged entities as discussed in Notes to the consolidated financial statements.

            Depreciation  expense was $53,701 for the three months ended September 30, 2004 compared to $5,655 for the three months ended September 30, 2003. The increase of $48,046 consists primarily of additional depreciation expenses of the merged entities as discussed in Notes to the consolidated financial statements.

          Interest expense was $152,730 for the three months ended September 30, 2004. There was no interest expense for the three months ended September 30, 2003. Interest expense incurred in the three months ended September 30, 2004 is interest paid as a result of borrowings related to the acquisitions discussed in the notes to the consolidated financial statements.

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          Amortization of deferred debt discount was $122,217 for the three months ended September 30, 2004  of which $116,458 represents the amount related to the bridge loan and the remaining $5,759 represents amount related to the note payable. The deferred debt discount is the fair value of stock options and warrants granted to certain noteholders as explained in Note 5 to the consolidated financial statements. The deferred debt discount is being amortized over the life of the promissory note.

          The Six Months Ended September 30, 2004 Compared to the Six Months Ended September 30,2003.

          Sales for the six months ended September 30, 2004 are split between the Predecessor and Successor companies. The sales from May 10, 2004 to September 30, 2004 were $39,133,058 and from April 1, 2004 to May 9, 2004 were $9,486,601. The combined sales for the six months ended September 30, 2004 increased by $10,855,837, or 29%, to $48,619,659 as compared to $37,763,822 for the six months ended September 30, 2003. The increase in the amount of $1,727,438 is attributable to the operations of the entities which merged into the Company effective May 10, 2004, $5,857,949 is attributable to the acquisitions done prior to the quarter ended September 30, 2004 and $919,921 is attributable to the four acquisitions that were done during this quarter. See notes to consolidated financial statements for discussion of various acquisitions made during the six months ended September 2004. In addition, the Company had internal growth of $2,350,529 during the six months ended September 2004. There were no significant changes in sales prices during the period May 10, 2004 through September 30, 2004.

          Gross profit for the period from May 10, 2004 to September 30, 2004 is 15.3% and for the period from April 1, 2004 to May 9, 2004 is 14.4%.  The combined gross profit for the six months ended September 30, 2004 was consistent with the six months ended September 30, 2003 at 15.1%.

          General and administrative expenses for the period from May 10, 2004 to September 30, 2004 were $5,613,299 and for the period from April 1, 2004 to May 9, 2004 were $886,916. Combined general and administrative expenses totaled $6,500,215 for the six months ended September 30, 2004 compared to $3,886,774 for the six months ended September 30, 2003. The net increase of $2,613,441, or 67%, consists of additional the general and administrative expenses related to the merged entities as discussed in the notes to the consolidated financial statements.

          Depreciation  expense was $87,445 for the six months ended September 30, 2004 compared to $5,655 for the six months ended September 30, 2003. The increase of $81,790 consists primarily of additional depreciation expenses of the merged entities as discussed in Notes to the consolidated financial statements                

          Interest expense was $397,012 for the six months ended September 30, 2004. There was no interest expense for the six months ended June 30, 2003. Interest expense incurred in the six months ended September 30, 2004 included $220,913 of interest to the bank, $45,000 of interest on the bridge loan, $90,000 of interest for the conversion rights for the note, and $41,099 of interest to the various note payables. The increase in interest expense is a result of borrowings resulting from the acquisitions of the various merged entities as discussed in the notes to the consolidated financial statements.

          Amortization of deferred debt discount was $157,451 for the six months ended September 30, 2004 of which $151,692 represents the amount related to the bridge loan and the remaining $5,759 represents the amount related to other notes payable. The deferred debt discount is the fair value of stock options and warrants granted to certain noteholders as explained in Notes to the consolidated financial statements. The deferred debt discount is being amortized over the life of the promissory note.

Liquidity and Capital Resources

          The Company’s primary needs for liquidity and capital resources are the funding of operating and administrative expenses related to the management of the Company and its subsidiaries.

          Prior to September 30, 2004, the Company consummated the merger with and into RKDA. This transaction was preceded by the Company obtaining a bridge loan in the amount of $1.5 million. Simultaneous with the RKDA Merger the Company completed the minimum amount of $8 million of a Regulation D Private Placement (the “Offering”). The Company subsequently sold an additional $245,000 of securities and terminated the Offering. The Company sold an aggregate of 32,980,000  shares at $0.25 per share together with 3,298,000 Class A Warrants exercisable for 7 years at $0.50 per share. The Placement agent received warrants to purchase 2,298,000 shares, exercisable on a cashless basis for 7 years at $0.50 per share. The Placement Agent also received a 10% commission and reimbursement of out–of–pocket expenses. The Company used $5 million of the net proceeds to complete the RKDA Merger as described in Note 2, and used the balance for working capital.

          On May 7, 2004, Arcadia Services, Inc. and three of its wholly–owned subsidiaries entered into a Loan Agreement with Comerica Bank. The agreement provides the borrowers with a revolving credit facility of up to $12 million through May 7, 2006. The initial advance on May 7, 2004, was in the amount of $11 million. The initial advance was immediately distributed up to RKDA, Inc., to fund a portion of the purchase price of the capital stock of Arcadia by RKDA from the seller and to pay expenses associated with the transaction. All other advances under the credit facility shall be used solely for working capital purposes. RKDA granted Comerica Bank a first priority security interest in all of the issued and outstanding capital stock of Arcadia. The Arcadia subsidiaries and Arcadia granted the bank a security interest in all of their assets and the seller subordinated $500,000 indebtedness of Arcadia to Arcadia’s indebtedness to Comerica Bank. RKDA and its former principals, Messrs. Elliott and Kuhnert, each executed a personal guaranty to Comerica over all indebtedness of Arcadia and its subsidiaries. On July 29, 2004 the credit limit was increased to $14.4 million

          Advances under the credit facility bear interest at the prime–rate (as defined) or the Eurodollar–based rate (as defined), at the election of borrowers. Arcadia agreed to various financial covenant ratios; to have any person who acquires Arcadia capital stock pledge such stock to Comerica Bank, and along with Messrs. Elliott and Kuhnert, to customary negative covenants.

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         On September 21, 2004 the company obtained promissory note in the amount of $5 million to fund acquisitions. The promissory note bears an interest rate of 6% per annum. The note is due on or before June 21, 2004. The note may be extended at the company’s discretion  for three months bearing a 12% interest rate per annum. The lender also received a warrant to purchase 3,150,000 shares of common stock of the company at $0.95 per share.  The value of these options is being expensed over the life of the note.

Contractual Commitments

          As of  September 30, 2004 the Company had contractual obligations in the form of non–Cancelable operating leases and employment agreements as follows:

Item 3.            Quantitative and Qualitative Disclosures About Market Risk.

            Not applicable.

Item 4.            Controls and Procedures.

          Disclosure Controls and Procedures.  Our chief executive officer and our chief financial officer, after evaluating our “disclosure controls and procedures” (as defined in Rules 13a–15(e) and 15d–15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) have concluded that as of September 30, 2004, our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that information is accumulated and communicated to our management, including our chief executive officer and our chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

          Changes in Internal Controls.  During our fiscal quarter ended September 30, 2004, there was no change in our internal control over financial reporting (as defined in Rule 13a–15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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Part II:  Other Information

Item 1.            Legal Proceedings.

            During our fiscal quarter ended September 30, 2004, there were no material pending legal proceedings, other than ordinary routine litigation incidental to the business, to which the Company or any of its subsidiaries was a party or of which any of their property was the subject.

Item 2.            Unregistered Sales of Equity Securities and Use of Proceeds.

          Sandgrain Securities, Inc.

          On August 10, 2004, the Company engaged Sandgrain Securities, Inc. (“Sandgrain”) as a strategic and investment advisor for a period of six months.  In connection with such engagement, the Company granted Sandgrain and certain of its key employees with 375,000 Class A Warrants to purchase 375,000 shares of Common Stock of the Company.  Such Class A Warrants have an exercise price of $0.25 per share and are exercisable for a period of five years.  The shares issuable upon exercise of the Class A Warrants carry certain registration rights.

          The Sandgrain transaction was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933 because the transaction did not involve any public offering.  The sale of these securities were made without general solicitation or advertising and the transaction did not involve an underwriter.  All of the securities certificates issued in the transaction bear appropriate legends providing, in substance, that the securities have been acquired for investment only and may not be sold, transferred or assigned in the absence of an effective registration statement or opinion of the Company’s counsel that registration is not required.

          American Oxygen, Inc.

          As reported in the Current Report on Form 8–K filed on September 2, 2004, on August 20, 2004, SSAC, LLC, a second–tier, wholly–owned subsidiary of the Company, purchased all the issued and outstanding shares of stock of American Oxygen, Inc. of Peoria, Illinois (“American Oxygen”) in exchange for 200,000 shares of common stock and certain registration rights relative to such shares.  American Oxygen, operating from two locations in Illinois, sells and rents durable medical equipment, including respiratory/oxygen equipment.

          The American Oxygen transaction was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933 because the transaction did not involve any public offering.  The sale of these securities were made without general solicitation or advertising.  There was no underwriter.  All of the securities certificates issued in the transaction bear appropriate legends providing, in substance, that the securities have been acquired for investment only and may not be sold, transferred or assigned in the absence of an effective registration statement or opinion of the Company’s counsel that registration is not required.

          BayStar Capital, II, L.P.

          As reported in the Current Report on Form 8–K filed on September 27, 2004, the Company, on September 21, 2004, entered into a Promissory Note and Warrant Purchase Agreement with BayStar Capital, II, L.P. (“BayStar”), a shareholder of the Company.  BayStar contemporaneously purchased from the Company a Promissory Note and a Warrant to purchase shares of the Company’s common stock.

          The Promissory Note is in the principal amount of $5 million and bears interest at 6% per annum, compounded quarterly.  The Promissory Note is payable on or before June 21, 2005.  The Company may extend the term of the Promissory Note for an additional three months, in which case the interest rate increases to 12% per annum during the three–month extension period.  The Warrant permits BayStar to purchase up to 3,150,000 shares of the Company’s common stock at $0.95 per share.  The Warrant expires on September 21, 2009.  The shares issuable upon exercise of the Warrant carry certain registration and other rights.

          The Promissory Note and Warrant sold to BayStar were issued in a transaction exempt from registration pursuant to Section 4(2) of the Securities Act of 1933 and Rule 506 of Regulation D.  The transaction is exempt under Section 4(2) of the Securities Act of 1933 because it does not involve a public offering.  The sales of these securities were made without general solicitation or advertising.  There was no underwriter.  The transaction is exempt under Rule 506 of Regulation D on the basis that BayStar, an existing shareholder of the Company, is an accredited investor as defined in Rule 501(a) of Regulation D.

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          All of the securities certificates issued in the BayStar transaction bear appropriate legends providing, in substance, that the securities have been acquired for investment only and may not be sold, transferred or assigned in the absence of an effective registration statement or opinion of the Company’s counsel that registration is not required.

          Trinity Healthcare of Winston–Salem, Inc.

          As reported in the Current Report on Form 8–K filed on September 27, 2004, the Company’s second–tier, wholly–owned subsidiary, SSAC, LLC (“SSAC”), entered into an agreement on September 23, 2004 to acquire all of the outstanding common stock of Trinity Healthcare of Winston–Salem, Inc. (“Trinity”) for a purchase price of $5.4 million, payable to Trinity’s four shareholders.  The purchase price is subject to a downward adjustment based on the collections of accounts receivables over the nine–month period beginning August 31, 2004.

          Two of Trinity’s selling shareholders were paid the following portions of the purchase price at closing on September 23, 2004:  (a) payment of $2.5 million in cash; (b) issuance of 1,075,410 shares of the Company’s common stock with an aggregate value of $916,250; and (c) delivery of a promissory note in the aggregate principal amount of $660,740, secured by SSAC under a security agreement subordinated to SSAC’s primary lender.

          Trinity’s two other selling shareholders will be paid the following portions of the purchase price by January 15, 2005:  (a) $975,510 payable in cash, subject to SSAC’s rights of recoupment/offset and the Company’s unsecured guaranty; and (b) 407,864 shares of the Company’s common stock with an aggregate value of $347,500, of which 305,898 shares with an aggregate value of $260,625 will be escrowed for one year.  The escrowed shares will be subject to SSAC’s rights of recoupment/offset.  Subject to recoupment/offset, the escrowed shares will be released to the two shareholders by January 15, 2006.

          All shares of the Company’s common stock acquired by Trinity’s selling shareholders are subject to certain registration rights. 

          In the Stock Purchase Agreement, SSAC agreed to cause the Company to issue 150,000 shares of its common stock to certain Trinity employees (other than Trinity’s shareholders), in satisfaction of certain liabilities Trinity owed to such employees as of the closing date.  On September 23, 2004, the Company issued 150,000 shares of its common stock, with an aggregate value of $127,800, to the Trinity employees.

          The shares of the Company’s common stock delivered to Trinity’s selling shareholders and Trinity’s employees were issued in transactions exempt from registration pursuant to Section 4(2) of the Securities Act of 1933.  These transactions are exempt under Section 4(2) of the Securities Act of 1933 because they do not involve a public offering.  These securities were issued without general solicitation or advertising.  There was no underwriter.  The Company did not receive any proceeds from Trinity’s shareholders or employees in connection with the issuance of the shares of the Company’s common stock.  Trinity’s selling shareholders were (or will be) issued shares of the Company’s common stock as partial payment of the purchase and sale of Trinity’s common stock.  Trinity’s employees were issued shares of the Company’s common stock in satisfaction of certain liabilities Trinity owed such employees as of the closing date.

          All of the securities certificates issued in the Trinity transaction bear appropriate legends providing, in substance, that the securities have been acquired for investment only and may not be sold, transferred or assigned in the absence of an effective registration statement or opinion of the Company’s counsel that registration is not required.

Item 3.            Defaults Upon Senior Securities.

            None.

Item 4.            Submission of Matters to a Vote of Security Holders.

            No matter has been submitted to a vote of security holders during the period covered by this report.

Item 5.            Other Information.

             There is no information required to be disclosed in a report on Form 8–K during the period covered by this report, but not reported.

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Item 6.            Exhibits.

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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 hereunto duly authorized.

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