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EX-31.2 - SECTION 302 PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER CERTIFICATION - ARCADIA RESOURCES, INCexhibit31-2.htm
EX-23.1 - CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM - ARCADIA RESOURCES, INCexhibit23-1.htm
EX-32.1 - SECTION 906 CEO CERTIFICATION - ARCADIA RESOURCES, INCexhibit32-1.htm
EX-32.2 - SECTION 906 PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER CERTIFICATION - ARCADIA RESOURCES, INCexhibit32-2.htm
EX-31.1 - SECTION 302 CEO CERTIFICATION - ARCADIA RESOURCES, INCexhibit31-1.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
—————
Form 10-K
—————
 
þ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
          For the fiscal year ended March 31, 2010
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 001-32935
Arcadia Resources, Inc.
(Exact name of registrant as specified in its charter)
 
NEVADA   88-0331369
(State or other jurisdiction of (I.R.S. Employer I.D. Number)
incorporation or organization)
9320 PRIORITY WAY WEST DRIVE
INDIANAPOLIS, INDIANA 46240
(Address of principal executive offices) (Zip Code)

Registrant’s telephone number: (317) 569-8234
 
Securities registered under Section 12(b) of the Exchange Act: Common Stock, $0.001 par value.
 
Securities registered under Section 12(g) of the Exchange Act: None.
 
Name of each exchange on which securities are registered: American Stock Exchange
 
Indicate by a check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ
 
Indicate by a check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ
 
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. Yes þ No o
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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 Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files), Yes o No o
 
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, non-accelerated filer or a smaller reporting company (as defined in Exchange Act Rule 12b-2).
 
Large Accelerated filer o Accelerated filer þ Non-accelerated filer o Smaller Reporting Company o

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
 
The aggregate market value of the Common Stock held by non-affiliates of the Registrant as of September 30, 2009 based on $1.12 per share (the last reported sale price of our Common Stock quoted on the NYSE Amex Exchange), was approximately $115 million. For purposes of this computation only, all executive officers, directors and 10% beneficial owners of the Registrant are assumed to be affiliates. This determination of affiliate status is not necessarily a determination for other purposes.
 
As of June 10 , 2010, the Registrant had 177,918,000 shares of Common Stock outstanding.
 
Documents incorporated by reference:
 
Portions of the definitive Proxy Statement for the Registrant’s fiscal 2010 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A within 120 days after the Registrant’s fiscal year end on March 31, 2010 are incorporated by reference into Part III of this Report.
 


TABLE OF CONTENTS
 
        Page No.
Part I
Item 1.        Business 4
Item 1A. Risk Factors 9
Item 1B. Unresolved Staff Comments 17
Item 2. Properties 17
Item 3. Legal Proceedings 17
Item 4. Reserved 17
Part II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
18
Item 6. Selected Financial Data 20
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 21
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 45
Item 8. Financial Statements and Supplementary Data 45
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure 45
Item 9A Controls and Procedures 45
Item 9B. Other Information 46
Part III
Item 10. Directors, Executive Officers and Corporate Governance 46
Item 11. Executive Compensation 46
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
47
Item 13. Certain Relationships and Related Transactions, and Director Independence 47
Item 14. Principal Accountant Fees and Services 47
Part IV
Item 15. Exhibits and Financial Statement Schedules 47
 
Signatures 49
Exhibit 23.1 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Exhibit 31.1 SECTION 302 CEO CERTIFICATION
Exhibit 31.2 SECTION 302 CFO CERTIFICATION
Exhibit 32.1 SECTION 906 CEO CERTIFICATION
Exhibit 32.2 SECTION 906 CFO CERTIFICATION



DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
 
We caution you that certain statements contained in this report (including any of our documents incorporated herein by reference), or which are otherwise made by us or on our behalf, are forward-looking statements. Also, documents which we subsequently file with the SEC and are incorporated herein by reference will contain forward-looking statements.
 
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 reasonable 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 are also based on economic and market factors and the industry in which we do business, among other things. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Forward-looking statements speak only as of the date hereof and are not guaranties of future performance. Important factors that could cause actual results to differ materially from the Company’s expectations are disclosed in this Form 10-K. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.
 
Forward-looking statements include statements that are predictive in nature and depend upon or refer to future events or conditions. Forward-looking statements include words such as “believe,” “plan,” “anticipate,” “estimate,” “expect,” “intend,” “seek,” “may,” “can,” “will,” “could,” “should,” “project,” “predict,” “aim,” “continue,” “potential,” “opportunity” or similar forward-looking terms, variations of those terms or the negative of those terms or other variations of those terms or comparable words or expressions. In addition, any statements concerning future financial performance, ongoing business strategies or prospects, and possible future actions, which may be provided by our management, are also forward-looking statements.
 
Other parts of, or documents incorporated by reference into, this report may also describe forward-looking information. Forward-looking statements are based on current expectations and projections about future events. Forward-looking statements are subject to risks, uncertainties, and assumptions about our Company. Forward-looking statements are also based on economic and market factors and the industry in which we do business, among other things. These statements speak only as of the date hereof and are not guaranties of future performance.
 
Readers are urged to carefully review and consider the various disclosures made by us in this Report on Form 10-K and our other filings with the U.S. Securities and Exchange Commission. These reports and filings attempt to advise interested parties certain risks and factors that may affect our business, financial condition and results of operations and prospects.
 
Unless otherwise provided, “Arcadia,” “we,” “us,” “our,” and the “Company” refer to Arcadia Resources, Inc. and its wholly-owned subsidiaries, and when we refer to 2010, 2009 and 2008, we mean the twelve-month period ended March 31 of those respective years, unless otherwise provided.
 
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Part I
 
ITEM 1. BUSINESS
 
Overview
 
Arcadia Resources, Inc., a Nevada corporation, together with its wholly-owned subsidiaries, is a national provider of home care, medical staffing, home health products and pharmacy services operating under the service mark Arcadia HealthCare. In May and June 2009, the Company disposed of its Home Health Equipment (“HHE”), retail pharmacy software and industrial staffing businesses. Subsequent to these divestitures, the Company operates in three reportable business segments: Home Care/Medical Staffing Services (“Services”), Pharmacy and Catalog. The Company’s corporate headquarters are located in Indianapolis, Indiana. The Company conducts its business from approximately 70 facilities located in 18 states. The Company operates pharmacies in Indiana, California and Minnesota and has customer service centers in Michigan and Indiana.
 
Recent Events
 
On May 19, 2009, the Company completed the sale of its HHE business in two separate transactions. The net proceeds of these sales were approximately $8.5 million, of which $7.1 million of cash was received at close. $4.1 million of the proceeds were used to repay existing long-term indebtedness, and the remaining proceeds will be used by the Company for general corporate purposes. These transactions are summarized in the Company’s report on Form 8-K filed May 21, 2009. The HHE business, which made up the majority of the Company’s previously reported HHE business segment, is classified as a discontinued operation for purposes of the 2010 fiscal year results and results for prior years have been restated consistent with this treatment.
 
On May 29, 2009, the Company completed the sale of its industrial staffing business for $250,000 plus a portion of the future earnings of the business. The sale of this business is discussed in Note 3 to the Consolidated Financial Statements included under Item 8 of this report. The industrial staffing business’s financial results have previously been reported as part of the Services segment. As a result of the sale, this business has been classified as a discontinued operation for purposes of the 2010 fiscal year results and results for prior years have been restated consistent with this treatment.
 
On June 11, 2009, the Company completed the sale of its JASCORP retail pharmacy software assets for $2.2 million. The sale of these assets is discussed in Note 3 to the Consolidated Financial Statements included under Item 8 of this report. The retail pharmacy software business’s financial results have previously been reported as part of the Pharmacy segment. As a result of the sale, this business has been classified as a discontinued operation for purposes of the 2010 fiscal year results and results for year periods have been restated consistent with this treatment.
 
Business Strategy
 
The events described in the “Recent Events” section were implemented as part of a plan to refocus the Company’s lines of business. As a result of the events described above, the Company currently has three reportable business segments – Services, Pharmacy, and Catalog. The former “Home Health Equipment” segment, which included the Company’s HHE business, is no longer a business segment of the Company and is treated as a discontinued operation for purposes of the financial statements, as more fully discussed below. The Company continues to operate its home-health oriented products catalog/on-line business. This business was previously included in the HHE segment.
 
The key elements of the Company’s on-going business strategy are:
 
     Business line focus. The Company has refocused its business strategy to support its overall vision of “Keeping People at Home and Healthier Longer”. Population demographics, the projected demand for home health care and the need for more effective management of medication for targeted groups are key drivers behind this strategic focus. The Company provides an array of health care services and products that fulfill these market needs. These services and products include home care services, home health products, specialty pharmacy services and medication management services.
 
     Brand strategy. The Company has adopted the Arcadia HealthCare service mark to better reflect its strategic focus on the health care market. The Company is investing in the promotion of the Arcadia HealthCare service mark as well as the DailyMed™ medication management brand in the health care markets.
 
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     Organic growth and potential acquisitions. In the short term the Company is focused on organic growth of its home care services, medical staffing and specialty pharmacy businesses. With the launch of its proprietary DailyMed™ medication management program, the Company has experienced the largest organic growth (both in percentage and revenue terms) in the Pharmacy business segment, and this trend is expected to continue. In addition to organic growth, longer term, the Company will consider acquisition opportunities in the specialty pharmacy and home care markets, as capital availability permits.
 
     Pharmacy growth plan. The Company has developed an aggressive growth plan for its DailyMed pharmacy business. The DailyMed program is designed to improve compliance and adherence for members with complex chronic drug regimens, improving the quality of life for members living at home and cost reduction opportunities for at-risk payers. The Company is primarily focused on marketing directly to the at-risk payers and other delivery partners focused on cost-effective provision of health care services with an emphasis on caring for people in their home environments. Marketing efforts have been identified and developed to implement the Company’s sales plans to this target group.
 
     Leverage back office/IT systems and services. The Company provides payroll, billing, credit and collection, finance, human resources, compliance and other support services for the Services segment from a centralized location in Southfield, Michigan. The goal of these centralized services is to provide a standardized operating platform, enhance productivity and operating efficiency, and leverage the transactional volume of the businesses to provide a cost-effective support structure. For the Services segment, the business utilizes a common, integrated information technology system across all locations. The system allows scheduling of caregivers to be done efficiently and provides for flexibility and customization of billing formats for our customers.
 
     Reduction of SG&A expense. The Company continues to focus on reducing its overall level of selling, general and administrative (“SG&A”) expense as a percentage of consolidated net revenue. During the past three years, the Company has implemented several actions designed to reduce SG&A expense, including exiting unprofitable business lines, reducing headcount, closing and consolidating executive and support offices, and reducing professional fees. The Company constantly evaluates further cost reduction opportunities. In light of the asset sales during the fiscal first quarter 2010 noted above, the revenue of the Company has been reduced and the scope of its activities has been narrowed. As a result, management made additional reductions in SG&A expenses during fiscal 2010, principally at the corporate level, to bring these expenses more in line with the size and scope of current business operations. Reductions in the Services segment and corporate SG&A were offset by increases in the Pharmacy segment SG&A as this segment grew significantly during fiscal 2010.
 
     Centralized management with local delivery of products and services. The Company’s Executive Committee includes the Chief Financial Officer and Chief Operating Officer and is chaired by the President/Chief Executive Officer. The Executive Committee oversees all day-to-day aspects of the Company’s business including the establishment of operational policies and procedures. Subject to the review and approval of the Company’s Board of Directors, the Executive Committee sets the strategic direction for each business segment and establishes appropriate financial targets and controls. However, the strategies for delivery of the Company’s services and products are done at a business segment and local market level through more than 65 offices. Regional/local managers are given responsibility for tailoring their service and product mix in each office to meet the needs of the regional and local customers they serve.
 
Our Operating Segments
 
As indicated above, the Company’s services and products are organized into three complementary segments. These segments and their service and product offerings are discussed in more detail below.
 
     Services Segment. The Services segment provides home care and medical staffing services across the United States. Operated principally through the Company’s wholly-owned subsidiary, Arcadia Services, Inc. (“ASI”), this segment is a national provider of home care services, including skilled and personal care; and medical staffing services to numerous types of acute care and sub-acute care medical facilities. The Services segment provides nurses, certified nursing assistants, home health aides, homemakers and companions to home care clients. It provides nurses, certified nursing assistants and various allied health professionals to medical facilities. The medical staffing business provides per diem, local contract and travel staffing services to its customers.
 
The Services segment operates through a network of both company-owned offices, as well as affiliate offices that are locally owned and operated under a contractual arrangement with the Company. The Company and the affiliate offices share the gross margin on business generated by the affiliate office using a revenue-based formula. The affiliate offices market to local customers and service the contracts between the Company and those customers. The affiliates also recruit local field staff, which are employed by the Company, and manage the day-to-day assignment of the field employees to meet customer needs. In the Services segment, sales through affiliate offices represent approximately 65% of net revenue, with 35% of sales being done through company-owned offices. The mix of company-owned sales has increased over the past two years as the Company has converted several affiliate offices into company-owned locations.
 
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The sales activity for home care and medical staffing services is primarily performed at company-owned and affiliate offices in local markets across the United States. In the home care market, these offices work with a wide range of referral sources and also sell directly to consumers. Referral sources for home care series include elder law attorneys, financial counselors, case managers, geriatric care managers, physicians, medical social workers, facility discharge planners and numerous other entities that influence the purchase of home care services. Selling efforts focus on our ability to provide high quality, cost-effective services, in a consistent, reliable fashion, performed by trained caregivers who are employed directly by the Company. The Company serviced more than 9,900 home care clients in fiscal 2010.
 
The sales activity for medical staffing is also primarily performed at the local office level. Sales are done via direct contacts with a wide variety of acute-care and sub-acute care facilities, including hospitals, rehabilitation facilities, skilled nursing facilities, hospices and others. Selling efforts focus on our ability to provide highly-skilled staff, often on short notice, on a cost-effective basis. Some facilities utilize vendor managed services (“VMS”) providers who contract on their behalf for these services. The Company serviced approximately 540 facilities in fiscal 2010.
 
The Company also has a central contracting group that pursues contracts for home care and medical staffing services on a national and regional level. These activities are coordinated with the local offices expected to provide the services.
 
Recruitment of home care and medical staffing personnel is done at the local level. Each local office has a different mix of clients and, therefore, has its own requirements for the employees needed to service these clients. All employees hired by the Company go through a rigorous screening process that includes criminal background checks, drug screening and skills assessments.
 
Competition in the Services segment consists of national and regional service providers, as well as smaller locally-owned and operated companies. In the home care segment, competition is highly fragmented with only a few national or regional providers. Because the home care business largely consists of personal care, homemaker/companion services and non-Medicare skilled care, the Company does not compete directly with the larger publicly-traded, Medicare-certified home health agencies. In the medical staffing segment, the Company competes with per diem staffing agencies, as well as agencies focused primarily on travel staffing. Competition in the travel staffing segment is dominated by several large, publicly-traded companies that operate on much larger scale than the Company’s travel staffing business.
 
     Pharmacy Segment. The Pharmacy segment offers the Company’s DailyMed™ medication management system, which was acquired as part of its purchase of PrairieStone Pharmacy, LLC in February 2007. DailyMed™ transfers a patient’s prescriptions, over-the-counter medications and vitamins and organizes them into pre-sorted 30-day supply packages marked with the date and time each dosage should be taken. Our registered pharmacists review the patient’s panel of medications at the time a patient is enrolled and periodically perform more detailed medication therapy management (MTM) reviews to ensure the safety and effectiveness of the patient’s medications. DailyMed™ is aimed at reducing medication errors, improving medication adherence and ultimately lowering the cost of health care for its target customers. The Company is focused on marketing its DailyMed™ products and services to managed care providers and others responsible for managing the health care costs of the targeted population. The Company plans to invest in DailyMed™ as the need for improved systems for medication management creates growth opportunities for this segment.
 
Numerous companies provide products and services in the pharmacy industry. These companies include community-based retail pharmacies, some of whom operate on a national level, and independents operating from a small number of locations; long-term care pharmacies, who provide pharmacy products and services to long-term care facilities such as assisted living and skilled nursing facilities; and providers of MTM services. The Company believes it has a unique competitive position. The Company has integrated various aspects of pharmacy product distribution and MTM services into a method of providing an enhanced system of medication management.
 
     Catalog Segment. The Company also operates a home-health oriented products catalog/on-line business to sell ambulatory and mobility products, respiratory products, daily living aids, bathroom safety products and bathroom/home modification products. We market these products via direct mail and through our e-commerce website. In March 2005, the Company and Sears, Roebuck and Co. executed a licensing agreement which allows the Company to sell similar merchandise for their www.sears.com and mail order catalog businesses. Virtually all of the catalog/on-line home products business is paid privately by the customer.
 
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Segment Financial Information
 
Financial information about the segments can be found in Item 7 of this report, Management’s Discussion and Analysis of Financial Condition and Results of Operations and Note 15 to the Consolidated Financial Statements included under Item 8 of this report.
 
Government Regulation and Compliance
 
Our health care-related businesses are subject to extensive government regulation. The federal government and all states in which we currently operate (or intend to operate) regulate various aspects of our health care-related businesses. In particular, our operations are subject to numerous laws: (a) requiring licensing and approvals to conduct certain activities; (b) targeting the prevention of fraud and abuse; and (c) regulating reimbursement under various government-funded programs. Our locations are subject to laws governing, among other things, pharmacies, nursing services and certain types of home care.
 
The marketing, billing, documentation and other practices of health care companies are subject to periodic review by regional insurance carriers and various government agencies. These reviews include on-site audits, records reviews and investigations of complaints. Violations of federal and state regulations can result in criminal, civil and administrative penalties and sanctions, including disqualification from Medicare and other reimbursement programs.
 
Our operations are subject to: Medicare and Medicaid reimbursement laws; laws permitting Medicare, Medicaid and other payors to audit claims and seek repayment when claims have been improperly paid; laws such as the Health Insurance Portability and Accountability Act (HIPPA) regulating the privacy of individually identifiable health information; laws prohibiting kickbacks and the exchange of remuneration as an inducement for the provision of reimbursable services or products; laws regulating physician self-referral relationships; and laws prohibiting the submission of false claims. Health care is an area of rapid regulatory change. Changes in laws and regulations, as well as new interpretations of existing laws and regulations, may affect permissible activities, the relative costs associated with doing business and reimbursement amounts paid by federal, state and other third party payors. We cannot predict the future changes in legislations and regulations, but such changes could have a material adverse impact on the Company.
 
The Company has a dedicated credentialing and compliance group that manages our licensure, contracting and regulatory compliance. The compliance group oversees the Company’s quality assurance program, which includes periodic audits of the Company’s locations. In addition, compliance with billing and invoicing requirements is performed continually by billing center personnel. The Company believes that it is in material compliance with all laws and regulations applicable to its businesses.
 
Invoicing, Billing and Accounts Receivable Management
 
The Company performs most of its accounts receivable management at a national billing center covering the Services segment. The Company also maintains a billing center for its Pharmacy segment at its Indianapolis, Indiana pharmacy facility. Each of these billing centers has unique information systems, experienced billing personnel and established credit and collection procedures to support their business segments. Within each segment, third-party reimbursement is a detailed and complicated process that requires knowledge of and compliance with regulatory, contractual and billing processing requirements. The majority of our business is invoiced shortly after the time of service or at the time the product is shipped. Accurate billing and successful collections are a key to our business plan.
 
Employees
 
The Company employs full-time management and administrative employees throughout the United States. In addition, the Company employs a variety of field staff, including health care professionals and caregivers, to service the needs of our customers. As of March 31, 2010, the Company had 232 full-time or part-time management and administrative employees and employed approximately 4,000 field employees. We have no unionized employees and do not have any collective bargaining agreements. We believe our relationships with our employees are good.
 
Supply
 
We purchase supplies from various vendors. We are not dependent upon any single supplier and believe that our product needs can be met by an adequate number of various manufacturers.
 
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Environmental Compliance
 
We believe we are currently in compliance, in all material respects, with applicable federal, state and local statutes and ordinances regulating the discharge of hazardous materials into the environment. We do not believe the Company will be required to expend any material amount to remain in compliance with these laws and regulations or that such compliance will materially affect our capital expenditures, earnings or competitive position.
 
Available Information
 
The Company files annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission (the “SEC”). Interested parties may read and copy any documents filed with the SEC at the SEC’s public reference room at 100 F Street, NE, Washington, DC 20549. Please call the SEC at 1-800-SEC-0330 for information on the public reference room. The SEC maintains an internet site that contains annual, quarterly and current reports, proxy and information statements and other information that issuers (including the Company) file electronically with the SEC. The SEC’s internet site is www.sec.gov.
 
Our internet site is www.arcadiahealthcare.com. You can access our investor, media and corporate governance information through our internet site, by clicking on the heading “Investors.” We make available free of charge, on or through our Investors webpage, our proxy statements, annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports filed or furnished pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. Information on our website does not constitute part of this 10-K report or any other report we file with or furnish to the SEC.
 
Executive Officers
 
The following table sets forth information concerning our executive officers, including their ages, positions and tenure as of March 31, 2010:
 
Name         Age         Position(s)         Served as Officer Since
Marvin R. Richardson 52 President and Chief Executive Officer February 2007
Matthew R. Middendorf 40 Chief Financial Officer, Secretary and Treasurer February 2008
Steven L. Zeller 53 Chief Operating Officer September 2007

Marvin R. Richardson. Mr. Richardson, who has over 30 years of health care and retail pharmacy experience, joined the Company in conjunction with its acquisition of PrairieStone Pharmacy, LLC in January, 2007. In 2003, he co-founded PrairieStone Pharmacy LLC headquartered in Minneapolis, Minn. and served as President and CEO. While at PrairieStone, DailyMed™ was launched – a comprehensive Medication Therapy Management (MTM) program along with compliance packaging of pharmaceuticals geared to help those in need better manage their conditions while helping payers reduce unnecessary costs associated with medication waste, avoidable hospitalizations and unintended long-term care admissions. The company was named “Chain of the Year” by Drug Topics magazine in 2005 Prior to his involvement with PrairieStone, Mr. Richardson held various management positions with the Walgreen Co. and was Senior Vice President of Pharmacy Operations for Rite Aid Corporation, overseeing Rite Aid’s 3,500 operating pharmacies. Richardson is a 1980 graduate of Purdue University in West Lafayette, Ind., where he earned his Bachelor of Science degree in Pharmacy. He received the Pharmacy Distinguished Alumni Award in 2008 and was named to the Purdue University Foundation Development Council in 2008. He also serves on the Board of Directors for the Mental Health America of Indiana Association. He has been an advisor to several major government leaders on healthcare policy including Vice President Dan Quayle and current New York City Deputy Mayor and former Indianapolis Mayor Stephen Goldsmith.
 
Matthew R. Middendorf, Chief Financial Officer, Secretary and Treasurer, joined the Company in February 2008 as Chief Financial Officer. Mr. Middendorf previously served as a consultant to the Company, providing day-to-day financial and accounting support to the Interim CFO and working on special projects for the CEO. He has responsibility for internal and external reporting, planning and analysis, and corporate and business unit accounting. Mr. Middendorf formerly served as the Corporate Controller and Director of Financial Reporting for Workstream, Inc., a publicly-traded software company. He worked in public accounting for more than a decade, most recently with Grant Thornton in its Seattle office; and, has significant experience working with mid-size companies in the technology, healthcare and banking industries. Mr. Middendorf holds a Bachelor of Science Degree in Accountancy from the University of Illinois and passed the CPA Exam in 1992.
 
Steve L. Zeller, Chief Operating Officer, joined the Company in September 2007 as part of the Executive Committee. Mr. Zeller is responsible for managing the Company’s day-to-day operations that are reported to the Board and Chief Executive Officer. From 2006 to September 2007, Mr. Zeller was President of BestCare Travel Staffing, LLC, an Arcadia affiliate providing travel nursing and allied health services, a position he held until February 2009. Prior to becoming an Arcadia affiliate in 2006, Mr. Zeller served as a division president for SPX Corporation from 2003 to 2005 and was employed for 18 years at Cummins, Inc., where he last served as Vice President and Managing Director for a European-headquartered power generation subsidiary. He received his Juris Doctor degree from Indiana University in 1981 where he graduated Summa Cum Laude, and received a B.A. in Economics from The College of William and Mary in 1978.
 
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ITEM 1A. RISK FACTORS
 
This Annual Report, including Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. We face a number of risks and uncertainties that could cause actual results or events to differ materially from those contained in any forward-looking statement. Factors that could cause or contribute to such differences include, but are not limited to, the risks and uncertainties listed below. If any of the following risks actually occur, our business, financial condition or results of operations could be materially and adversely affected. In that case, the trading price of our common stock could decline, and you may lose all or part of your investment in us. You should carefully consider and evaluate the risks and uncertainties listed below, as well as the other information set forth in this Report.
 
We have a history of operating losses and negative cash flow that may continue into the foreseeable future.
 
We have a history of operating losses and negative cash flow. While we have achieved positive cash flow from operations in some recent quarters, which was partially due to deferring certain interest amounts, net cash flow has been negative, and we continue to follow a very disciplined approach to cash management. If we fail to execute our strategy to achieve and maintain profitability in the future, investors could lose confidence in the value of our common stock, which could cause our stock price to decline, adversely affect our ability to raise additional capital, and adversely affect our ability to meet the financial covenants contained in our credit agreements. Further, if we continue to incur operating losses and negative cash flow, we may have to implement further significant cost cutting measures, which could include a substantial reduction in work force, location closures, and/or the sale or disposition of certain assets or subsidiaries. We cannot assure that any of the cost cutting measures we implement will be effective or result in profitability or positive cash flow. To achieve profitability, we will also need to, among other things, increase our revenue base, reduce our cost structure and realize economies of scale. If we are unable to achieve and maintain profitability, our stock price could be materially adversely affected.
 
Our indebtedness could adversely affect our financial condition and operations, prevent us from fulfilling our debt service obligations and adversely affect our ability to operate our business.
 
Our indebtedness could have important consequences, including, but not limited to:
  • We may be unable to obtain additional financing for working capital, capital expenditures, acquisitions and general corporate or other purposes.
  • We may be unable to plan for, or react to, changes in our business and general market conditions.
  • We may be more vulnerable in a volatile market and at a competitive disadvantage to less leveraged competitors.
  • Our operating flexibility is more limited due to financial and other restrictive covenants, including restrictions on incurring additional debt, creating liens on our properties, making acquisitions and paying dividends.
  • We are subject to the risks that interest rates and our interest expense will increase.
  • Our ability to use operating cash flow in other areas of our business may be limited because we must dedicate a substantial portion of these funds to make principal and interest payments on our indebtedness.
  • Our ability to make investments or take other actions or borrow additional funds may be limited based on the financial and other restrictive covenants in our indebtedness.
  • The amount we are permitted to draw on our revolving credit facilities may be limited and we may be unable to fund our early-stage pharmacy product and patient care services and home care staffing business strategies.
  • We may be forced to implement cost reductions, which could impact our product and service offerings.
  • We may be unable to successfully implement our growth strategy and spread our cost structure over a larger revenue base and ultimately become profitable.
Due to our debt level, our history of operating losses and negative cash flows, and the current conditions in the credit markets, we may not be able to increase the amount we can draw on our revolving credit facility with Comerica Bank, or to obtain credit from other sources, to fund our future needs for working capital, funding early-stage strategies and ongoing business operations, or acquisitions.
 
9
 


Due to our debt level and the current conditions in the credit market, there is the risk that Comerica Bank or other sources of credit may decline to increase the amount we are permitted to draw on the revolving credit facilities or to lend additional funds for working capital, funding our early-stage pharmacy product and patient care services and home care staffing business strategies, making acquisitions and for other purposes. This development could result in various consequences to the Company, ranging from implementation of cost reductions, which could impact our product and service offerings, to the need to revise management’s business plan for fiscal 2011 that depends on improvements in profitability and a disciplined approach to cash management, to the modification or abandonment of these strategies.
 
We may not be able to meet the financial covenants contained in our credit facilities, and we may not be able to obtain waivers for any violations of those covenants should they occur.
 
Under certain of our existing credit facilities, we are required to adhere to certain financial covenants. We were not in compliance with one financial covenant under our Comerica Bank line of credit as of March 31, 2010, but we received a waiver of this non-compliance from the bank. If there are future covenant violations, our lenders could declare a default under the applicable credit facility and, among other actions, refuse to make additional advances, increase our borrowing costs, further restrict our operations, take possession or control of any asset (including our cash) and demand the immediate repayment of all amounts outstanding under the credit facility. Any of these actions could have a material adverse affect on our financial condition and liquidity. Based on our history of operating losses, we cannot guarantee that we would be able to refinance our existing credit facility or obtain alternative financing.
 
In addition to the financial covenants, our existing credit facility with Comerica Bank includes a subjective acceleration clause and requires the Company to maintain a lockbox. Currently, the Company has the ability to control the funds in the deposit account and determine the amount issued to pay down the line of credit balance. The bank reserves the right under the security agreement to request that the indebtedness be on a remittance basis in the future, whether or not an event of default has occurred. If the bank exercises this right, then the Company would be forced to use its cash to pay down this indebtedness rather than for other needs, including day-to-day operations, expansion initiatives or the pay down of debt which accrues interest at a higher rate.
 
The terms of our credit agreements with various lenders subject us to the risk of foreclosure on certain property.
 
Our wholly-owned subsidiary RKDA, Inc. granted Comerica Bank a first-priority security interest in all of the issued and outstanding capital stock of its wholly-owned subsidiary, Arcadia Services, Inc. and Arcadia Services, Inc. and its subsidiaries granted Comerica Bank security interests in all of their assets. Effective April 2010, we granted H.D. Smith Wholesale Drug Co. a first priority security interest in all of the issued and outstanding ownership interest of its wholly-owned subsidiary PrairieStone Pharmacy, LLC, and PrairieStone granted H.D. Smith a security interest in all of its assets. Additionally, PrairieStone provided our lenders, JANA Master Fund, Ltd. (“JANA”), Vicis Capital Master Fund (“Vicis”), and LSP Partners, LP (“LSP”),a subordinated security interest in its assets. If an event of default occurs under the applicable credit agreements, each lender may, at its option, accelerate the maturity of the debt and exercise its respective right to foreclose on the issued and outstanding capital stock and/or on all of the assets of Arcadia Services, Inc. and its subsidiaries, and/or PrairieStone Pharmacy, LLC and its subsidiaries. Any such default and resulting foreclosure would have a material adverse effect on our financial condition and our ability to continue operations.
 
In order to fund operations, repay our debt obligations, or pursue our growth strategies, we may seek additional equity financing, which could result in dilution to our security holders and adversely affect our stock price.
 
On November 17, 2009, the Company sold certain institutional investors an aggregate of 15,857,141 shares of common stock and 7,135,713 warrants to purchase common stock. The Company raised $10.2 million in net proceeds from this transaction. We may continue to raise additional financing through the equity markets to repay debt obligations and to fund operations. We also plan to continue to expand product and service offerings. Because of the capital requirements needed to pursue our early-stage pharmacy growth strategies, we may access the public or private equity markets whenever conditions appear to us to be favorable, even if we do not have an immediate need for additional capital at that time. To the extent we access the equity markets, the price at which we sell shares may be lower than the current market prices for our common stock. If we obtain financing through the sale of additional equity or convertible debt securities, this could result in dilution to our security holders by increasing the number of shares of outstanding stock. We cannot predict the effect this dilution may have on the price of our common stock.
 
10
 


To the extent we are unable to generate sufficient cash from operations or raise adequate funds from the equity or debt markets, we would need to sell assets or modify or abandon our growth strategy.
 
In addition to the $10.2 million of equity financing raised in November 2009, we finalized an additional $5 million of debt financing in April 2010. The net proceeds from these financing transactions, combined with our cash on hand and line of credit availability, may not be adequate to satisfy our cash needs over the long-term. To the extent that we are unable to generate sufficient cash from operations, or to raise additional funds from the equity or debt markets, we may be required to sell assets or modify or abandon our growth strategy. Asset sales and modification or abandonment of our growth strategy could negatively impact our profitability and financial position, which in turn could negatively impact the price of our common stock.
 
Due to our operating losses during recent fiscal years, our stock could be at risk of being delisted by the NYSE Amex Equities Exchange.
 
Our stock currently trades on the NYSE Amex Equities Exchange (“Amex”). The Amex, as a matter of policy, will consider the suspension of trading in, or removal from listing of any stock when, in the opinion of the Amex (i) the financial condition and/or operating results of an issuer of stock listed on the Amex appear to be unsatisfactory, (ii) it appears that the extent of public distribution or the aggregate market value of the stock has become so reduced as to make further dealings on the Amex inadvisable, (iii) the issuer has sold or otherwise disposed of its principal operating assets, or (iv) the issuer has sustained losses which are so substantial in relation to its overall operations or its existing financial condition has become so impaired that it appears questionable, in the opinion of the Amex, whether the issuer will be able to continue operations and/or meet its obligations as they mature. We have sustained net losses, we had a stockholders deficit as of March 31, 2010 and our stock has been trading at relatively low prices. Delisting of our common stock would adversely affect the price and liquidity of our common stock.
 
Changes in federal and state laws that govern our financial relationships with physicians and other health care providers may impact potential or current referral sources.
 
We offer certain healthcare-related products and services that are subject to federal and state laws restricting our relationship with physicians and other healthcare providers. Generally referred to as “anti-kickback laws,” these laws prohibit certain direct and indirect payments or other financial arrangements that are designed to encourage the referral of patients to a particular medical services provider. In addition, certain financial relationships, including ownership interests and compensation arrangements, between physicians and providers of designated health services, such as our Company, to whom those physicians refer patients, are prohibited by the federal physician self-referral prohibition, known as the “Stark Law,” and similar state laws. Violations of these laws could lead to fines or sanctions that could have a material adverse effect on our business. In addition, changes in healthcare law or new interpretations of existing laws may have a material impact on our business and results of operations.
 
We are required to comply with laws governing the transmission of privacy of health information.
 
The Health Insurance Portability and Accountability Act of 1996, or HIPAA, requires us to comply with standards for the exchange of health information within our Company and with third parties, such as payers, business associates and consumers. These include standards for common health care transactions, such as claims information, plan eligibility, payment information, the use of electronic signatures, unique identifiers for providers, employers, health plans and individuals and security, privacy and enforcement. New standards and regulations may be adopted governing the use, disclosure and transmission of health information with which we may be required to comply. We could be subject to criminal penalties and civil sanctions if we fail to comply with these standards. In addition, compliance with new standards and regulations could increase our costs and adversely affect our results of operations.
 
Because we depend on key management, the loss of the services or advice of any of these persons could have a material adverse effect on our business and prospects.
 
Our success is dependent on our ability to attract and retain qualified and experienced management and personnel. We do not presently maintain key person life insurance for any of our personnel. There can be no assurance that we will be able to attract and retain key personnel in the future, and our inability to do so could have a material adverse effect on us. Our management team will need to work together effectively to successfully develop and implement our business strategies and financial operations. In addition, management will need to devote significant attention and resources to preserve and strengthen relationships with employees, customers and the investor community. If our management team is unable to achieve these goals, our ability to grow our business and successfully meet operational challenges could be impaired.
 
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We do not have long-term agreements or exclusive guaranteed order contracts with our home care, hospital and healthcare facility clients.
 
The success of our Home Care and Medical Staffing business depends upon our ability to continually secure new orders from home care clients, hospitals and other healthcare facilities and to fill those orders with our temporary healthcare professionals. We do not have long-term agreements or exclusive guaranteed order contracts with our home care, hospital and health care facility clients. We rely on our agencies to establish and maintain positive relationships with these clients. If we, or our agents, fail to maintain positive relationships with our home care, hospital and healthcare facility clients, we may be unable to generate new temporary healthcare professional orders and our business may be adversely affected. In addition, many of these clients may have devised strategies to reduce the expenditures on temporary healthcare workers and to limit overall agency utilization. If current pressures to control agency usage continue and escalate, we will have fewer business opportunities, which could harm our business.
 
Sales and profitability in our Pharmacy segment depends on continued demonstration of the effectiveness of our DailyMed™ business model, which is in its early stages of a broad market roll-out.
 
The success of our Pharmacy segment is dependent on the viability and continued demonstration of the effectiveness of the DailyMed business model, which is in the early stages of market roll-out. As an innovative, first to market pharmacy care model, DailyMed is challenging the approach of traditional community based retail pharmacies and others to providing pharmacy products and services. It is providing a unique opportunity for at-risk payers to substantially reduce health care costs. Market adoption and customer acceptance are key to continued growth in revenues as is payer adoption of DailyMed as part of efforts to reduce overall health care spend. To date, competitive responses to DailyMed have yet to evolve. Our ability to grow revenue and receive compensation for the value-added services we provide are keys to the long-term financial viability of the DailyMed business model.
 
Our Pharmacy segment revenue is highly dependent upon our relationships with key state Medicaid programs, managed care organizations, health plans and other payers.
 
A significant portion of our current Pharmacy segment revenue is generated from programs that we have in place with several key state Medicaid programs, managed care organizations, health plans and other payers, including Indiana Medicaid and WellPoint. The rate of growth in the Pharmacy segment is highly dependent on maintaining our on-going relationships with these parties. While we have contractual arrangements with some of these entities, including WellPoint, at present these agreements may be terminated after a relatively short notice period. As a result, our ability to grow revenue under these arrangements is dependent upon several factors, including the rate of enrollment of their members into the program, the quality of our services and our ability to help at-risk payers achieve health care cost containment and reduction. In addition, our ability to grow revenue under these programs depends upon factors outside of our control, including state appropriations and funding and changes in eligibility requirements. If we provide the service levels and results we anticipate from the DailyMed program, we would expect to be able to enter into longer-term agreements with many of these payers that have the assurance of substantial future revenue to the Company. However, our inability to maintain these relationships, and specifically our agreement with WellPoint, would negatively impact current and future Pharmacy segment revenue. There can be no assurance that the loss of these relationships would be offset by relationships with new or additional payers.
 
Our operations subject us to risk of litigation.
 
Operating in the homecare industry exposes us to an inherent risk of wrongful death, personal injury, professional malpractice and other potential claims or litigation brought by our consumers and employees. These claims may include, for example, allegations that we did not properly treat or care for a consumer or that we failed to follow internal or external procedures that resulted in death or harm to a consumer.
 
In addition, regulatory agencies may initiate administrative proceedings alleging violations of statutes and regulations arising from our services and seek to impose monetary penalties on us. We could be required to pay substantial amounts to respond to regulatory investigations or, if we do not prevail, damages or penalties arising from these legal proceedings. We also are subject to potential lawsuits under the False Claims Act or other federal and state whistleblower statutes designed to combat fraud and abuse in our industry. These lawsuits can involve significant monetary awards or penalties which may not be covered by our insurance. If our third-party insurance coverage and self-insurance reserves are not adequate to cover these claims, it could have a material adverse effect on our business, results of operations and financial condition. Even if we are successful in our defense, civil lawsuits or regulatory proceedings could distract management from running our business or irreparably damage our reputation.
 
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A significant decline in sales in our home care and staffing businesses would adversely impact our revenue, operating income and cash flow and our ability to repay indebtedness and invest in new products and services.
 
Our home care and medical staffing business has traditionally accounted for the majority of our revenue, operating profit and cash flow. Our business strategy is premised upon continued growth in this segment consistent with underlying market trends. While we believe we are well-positioned to increase sales in this segment, there can be no assurance that we will do so. Failure to achieve our sales targets in this market segment would adversely impact our revenue. While operating expense reductions and other actions would be taken in response to a decline in projected sales, such a reduction could adversely affect our projected operating income and cash flow. If this were to occur, we would have less cash available to repay short-term and long-term indebtedness. We may also have to reduce our investment in other segments of the business and modify our business strategy.
 
Sales of certain of our services and products are largely dependent upon payments from governmental programs and private insurance, and cost containment initiatives by these payers may reduce our revenues, thereby harming our performance.
 
In the U.S., healthcare providers and consumers who purchase home care services, prescription drug products and related products and services generally rely on third party payers, such as Medicare and Medicaid, to reimburse all or part of the cost of the healthcare product or service. Our sales and profitability are affected by the efforts of healthcare payers to contain or reduce the cost of healthcare by lowering reimbursement rates, limiting the scope of covered services, and negotiating reduced or capitated pricing arrangements. Any changes which lower reimbursement levels under Medicare, Medicaid or private pay programs, including managed care contracts, could reduce our future revenue. Furthermore, other changes in these reimbursement programs or in related regulations could reduce our future revenue. These changes may include modifications in the timing or processing of payments and other changes intended to limit or decrease the growth of Medicare, Medicaid or third party expenditures. In addition, our profitability may be adversely affected by any efforts of our suppliers to shift healthcare costs by increasing the net prices on the products we obtain from them.
 
The markets in which we operate are highly competitive and we may be unable to compete successfully against competitors with greater resources.
 
We compete in markets that are constantly changing, intensely competitive (given low barriers to entry), highly fragmented and subject to dynamic economic conditions. Increased competition is likely to result in price reductions, reduced gross margins, loss of customers, and loss of market share, any of which could adversely affect our net revenue and results of operations. Many of our competitors and potential competitors have more capital and marketing and technical resources than we do. These competitors and potential competitors include large drugstore chains, pharmacy benefits managers, on-line marketers, national wholesalers, and national and regional distributors. Further, the Company may face a significant competitive challenge from alliances entered into between and among its competitors, major HMO’s or chain drugstores, as well as from larger competitors created through industry consolidation. These potential competitors may be able to respond more quickly than we can to emerging market changes or changes in customer needs. To the extent competitors seek to gain or retain market share by reducing prices or increasing marketing expenditures, we could lose revenues or clients. In addition, relatively few barriers to entry exist in local healthcare markets. As a result, we could encounter increased competition in the future that may increase pricing pressure and limit our ability to maintain or increase our market share for our mail order pharmacy and related businesses.
 
We cannot predict the impact that registration of shares may have on the price of our common stock.
 
We cannot predict the impact, if any, that sales of, or the availability for sale of, shares of our common stock by selling security holders pursuant to a prospectus or otherwise will have on the market price of our securities prevailing from time to time. The possibility that substantial amounts of our common stock might enter the public market could adversely affect the prevailing market price of our common stock and could impair our ability to fund acquisitions or to raise capital in the future through the sales of securities. Sales of substantial amounts of our securities, including shares issued upon the exercise of options or warrants, or the perception that such sales could occur, could adversely affect prevailing market prices for our securities.
 
13
 


The price of our common stock has been, and will likely continue to be, volatile, which could diminish the ability to recoup an investment, or to earn a return on an investment, in our common stock.
 
The market price of our common stock has fluctuated over a wide range, and it is likely that it will continue to do so in the future. Limited demand for our common stock has resulted in limited liquidity, and it may be difficult to dispose of our securities. Due to the volatility of the price of our common stock, an investor may be unable to resell shares of our common stock at or above the price paid for them, thereby exposing an investor to the risk that he may not recoup an investment in our common stock or earn a return on such an investment. In the past, securities class action litigation has been brought against companies following periods of volatility in the market price of their securities. If we are the target of similar litigation in the future, we would be exposed to incurring significant litigation costs. This would also divert management’s attention and resources, all of which could substantially harm our business and results of operations.
 
Resale of our securities by any holder may be limited and affected by state blue-sky laws, which could adversely affect the price of our securities and the holder’s investment in our Company.
 
Under the securities laws of some states, shares of common stock and warrants can be sold in such states only through registered or licensed brokers or dealers. In addition, in some states, warrants and shares of common stock may not be sold unless these shares have been registered or qualified for sale in the state or an exemption from registration or qualification is available and is complied with. The requirement of a seller to comply with the requirements of state blue sky laws may lead to delay or inability of a holder of our securities to dispose of such securities, thereby causing an adverse effect on the resale price of our securities.
 
The issuance of our preferred stock could materially impact the market price of our common stock and the rights of holders of our common stock.
 
We are authorized to issue 5,000,000 shares of serial preferred stock, par value $0.001. Shares of preferred stock may be issued from time to time in one or more series as may be determined by our Board of Directors. Except as otherwise provided in our Restated Articles of Incorporation, the Board of Directors has the authority to fix by resolution adopted before the issuance of any shares of each particular series of preferred stock, the designation, powers, preferences, and relative participating, optional redemption and other rights, and the qualifications, limitations, and restrictions of that series. The issuance of our preferred stock could materially impact the price of our common stock and the rights of holders of our common stock, including voting rights. The issuance of preferred stock could decrease the amount of earnings and assets available for distribution to holders of common stock, and may have the effect of delaying, deferring or preventing a change in control of our company, despite such change of control being in the best interest of the holders of our common stock. The existence of authorized but unissued preferred stock may enable the Board of Directors to render more difficult or to discourage an attempt to obtain control of us by means of a merger, tender offer, proxy contest or otherwise.
 
The exercise of common stock warrants and stock options may depress our stock price and may result in dilution to our common security holders.
 
Warrants to purchase approximately 11.1 million shares of our common stock were issued and outstanding as of March 31, 2010. Options to purchase approximately 8.3 million shares of our common stock were issued and outstanding as of March 31, 2010. The Arcadia Resources, Inc. 2006 Equity Incentive Plan (the “Plan”), as amended on October 14, 2009, allows for the granting of additional incentive stock options, non-qualified stock options, stock appreciation rights and restricted shares up to 15 million shares (5.0% of our authorized shares of common stock as of the date the Plan was approved), of which the Company had available approximately 5.1 million shares as of March 31, 2010 for future grants.
 
If the market price of our common stock is above the exercise price of some of the outstanding warrants or options; the holders of those warrants or options may exercise their warrants or options and sell the common stock they acquire upon exercise in the public market. Sales of a substantial number of shares of our common stock in the public market may depress the prevailing market price for our common stock and could impair our ability to raise capital through the future sale of our equity securities. Additionally, if the holders of outstanding warrants exercise those warrants, our common security holders will suffer dilution in their voting power. The exercise price and the number of shares subject to the warrant or option is subject to adjustment upon stock dividends, splits and combinations, as well as certain anti-dilution adjustments as set forth in the respective common stock warrants.
 
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We depend on our affiliated agencies and our internal sales force to sell our services and products, the loss of which could adversely affect our business.
 
We rely upon our affiliated agencies and our internal sales force to sell our staffing and home care services and our internal sales force to sell our pharmacy products and services. Arcadia Services’ affiliated agencies are owner-operated businesses. The primary responsibilities of Arcadia Services’ affiliated agencies include the recruitment and training of field staff employed by Arcadia Services and generating and maintaining sales to Arcadia Services’ customers. The arrangements with affiliated agencies are formalized through a standard contractual agreement, which states performance requirements of the affiliated agencies. Our employees provide the services to our customers, and the affiliated agents and internal sales force are restricted by non-competition agreements. In the event of loss of our affiliated agents or internal sales force personnel, we would recruit new sales and marketing personnel and/or affiliated agents, which could cause our operating costs to increase and our sales to fall in the interim.
 
Declines in prescription volumes may negatively affect our net revenues and profitability.
 
We dispense significant volumes of brand-name and generic drugs as part of our Pharmacy business, which we expect to be a significant source of our net revenues and profitability. Demand for prescription drugs can be negatively affected by a number of factors, including increased safety risk problems, manufacturing issues, regulatory action, and negative press or media coverage. Certain prescriptions may also be withdrawn by their manufacturer or transition to over-the-counter products. A reduction in the use of prescription drugs may negatively affect our volumes, net revenues, profitability and cash flows.
 
The success of our business depends on maintaining a well-secured pharmacy operation and technology infrastructure and failure to do so could adversely impact our business.
 
We depend on our infrastructure, including our information systems, for many aspects of our business operations, particularly our pharmacy operations. A fundamental requirement for our business is the secure storage and transmission of personal health information and other confidential data and we must maintain our business processes and information systems, and the integrity of our confidential information. Although we have developed systems and processes that are designed to protect information against security breaches, failure to protect such information or mitigate any such breaches may adversely affect our operations. Malfunctions in our business processes, breaches of our information systems or the failure to maintain effective and up-to-date information systems could disrupt our business operations, result in customer and member disputes, damage our reputation, expose us to risk of loss or litigation, result in regulatory violations, increase administrative expenses or lead to other adverse consequences.
 
Any additional impairment of goodwill and other intangible assets could negatively impact our results of operations.
 
During fiscal 2010 and 2009, we wrote off an aggregate of $14.6 million and $23.5 million, respectively, of goodwill and other intangible assets. As of March 31, 2010, we have $2.5 million of goodwill and $7.7 million of other intangible assets remaining on our balance sheet. These intangibles are subject to an impairment test on an annual basis and are also tested whenever events and circumstances indicate possible impairment. Any excess goodwill resulting from the impairment test must be written off in the period of determination. Intangible assets (other than goodwill) are generally amortized over the useful life of such assets. In addition, from time to time, we may acquire or make an investment in a business which will require us to record goodwill based on the purchase price and the value of the acquired assets. We may subsequently experience unforeseen issues with such business which adversely affect the anticipated returns of the business or value of the intangible assets and trigger an evaluation of the recoverability of the recorded goodwill and intangible assets for such business. Future determinations of significant write-offs of goodwill or intangible assets as a result of an impairment test or any accelerated amortization of other intangible assets could have a negative impact on our results of operations and financial condition.
 
Negative publicity or changes in public perception of our services may adversely affect our ability to receive referrals, obtain new agreements and renew existing agreements.
 
Our success in receiving referrals, obtaining new agreements and renewing our existing agreements depends upon maintaining our reputation as a quality service provider among governmental authorities, physicians, hospitals, discharge planning departments, case managers, nursing homes, rehabilitation centers, advocacy groups, consumers and their families, other referral sources and the public. Negative publicity, changes in public perceptions of our services or government investigations of our operations could damage our reputation and hinder our ability to receive referrals, retain agreements or obtain new agreements. Increased government scrutiny may also contribute to an increase in compliance costs and could discourage consumers from using our services. Any of these events could have a negative effect on our business, financial condition and operating results.
 
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Several anti-takeover measures under Nevada law could delay or prevent a change of control, despite such change of control being in the best interest of the holders of our common stock.
 
Several anti-takeover measures under Nevada law could delay or prevent a change of control, despite such change of control being in the best interest of the holders of our common stock. This could make it more difficult or discourage an attempt to obtain control of us by means of a merger, tender offer, proxy contest or otherwise. This could negatively impact the value of an investment in our common stock, by discouraging a potential suitor who may otherwise be willing to offer a premium for shares of our common stock.
 
Delays in reimbursement due to state budget deficits or otherwise have decreased, and may in the future further decrease, our liquidity.
 
There is generally a delay between the time that we provide services and the time that we receive reimbursement or payment for these services. A majority of states are facing budget deficits and other states may in the future delay reimbursement, which would adversely affect our liquidity. From time to time, procedural issues require us to resubmit claims before payment is remitted, which contributes to our aged receivables. Additionally, unanticipated delays in receiving reimbursement from state programs due to changes in their policies or billing or audit procedures may adversely impact our liquidity and working capital. Because we fund our operations primarily through the collection of accounts receivable, any delays in reimbursement would result in the need to increase borrowings under our credit facility.
 
We are subject to extensive government regulation. Changes to the laws and regulations governing our business could negatively impact our profitability and any failure to comply with these regulations could adversely affect our business.
 
The federal government and the states in which we operate regulate our industry extensively. The laws and regulations governing our operations, along with the terms of participation in various government programs, impose certain requirements on the way in which we do business, the services we offer, and our interactions with consumers and the public. These requirements relate to:
  • Licensure and certification;
     
  • Adequacy and quality of health care services;
     
  • qualifications and training of health care and support personnel;
     
  • confidentiality, maintenance and security issues associated with medical records and claims processing;
     
  • relationships with physicians and other referral sources;
     
  • Operating policies and procedures;
     
  • addition of facilities and services; and
     
  • billing for services.
These laws and regulations, and their interpretations, are subject to frequent change. These changes could reduce our profitability by increasing our liability, increasing our administrative and other costs, increasing or decreasing mandated services, forcing us to restructure our relationships with referral sources and providers or requiring us to implement additional or different programs and systems. Failure to comply could lead to the termination of rights to participate in federal and state-sponsored programs, the suspension or revocation of licenses and other civil and criminal penalties and a delay in our ability to bill and collect for services provided.
 
On March 23, 2010, the President signed into law the Health Reform Law. The Health Reform Law is broad, sweeping reform, and is subject to change, including through the adoption of related regulations, the way in which its provisions are interpreted and the manner in which it is enforced. We cannot assure you that such provisions of the Health Reform Law, will not adversely impact our business, results of operations or financial results. We may be unable to mitigate any adverse effects resulting from the Health Reform Act.
 
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The HITECH Act established certain health information security breach notification requirements. A covered entity must notify any individual whose protected health information is breached. While we believe that we protect individuals’ health information, if our information systems are breached, we may experience reputational harm that could adversely affect our business. In addition, failure to comply with the HITECH Act could result in fines and penalties that could have a material adverse effect on us.
 
We are subject to reviews, compliance audits and investigations that could result in adverse findings that negatively affect our net service revenues and profitability.
 
As a result of our participation in Medicaid and other governmental programs, and pursuant to certain of our contractual relationships, we are subject to various reviews, audits and investigations by governmental authorities and other third parties to verify our compliance with these programs and agreements as well as applicable laws, regulations and conditions of participation. If we fail to meet any of the conditions of participation or coverage, we may receive a notice of deficiency from the applicable surveyor or authority. Failure to institute a plan of action to correct the deficiency within the period provided by the surveyor or authority could result in civil or criminal penalties, the imposition of fines or other sanctions, damage to our reputation, cancellation of our agreements, suspension or revocation of our licenses or disqualification from federal and state reimbursement programs. These actions may adversely affect our ability to provide certain services, to receive payments from other payors and to continue to operate. Additionally, actions taken against one of our locations may subject our other locations to adverse consequences. Any termination of one or more of our locations from a government program for failure to satisfy such program’s conditions of participation could adversely affect our net service revenues and profitability.
 
Payments we receive in respect of Medicaid can be retroactively adjusted after a new examination during the claims settlement process or as a result of pre- or post-payment audits. Federal, state and local government payors may disallow our requests for reimbursement based on determinations that certain costs are not reimbursable because proper documentation was not provided or because certain services were not covered or deemed necessary. In addition, other third-party payors may reserve rights to conduct audits and make reimbursement adjustments in connection with or exclusive of audit activities. Significant adjustments as a result of these audits could adversely affect our revenues and profitability.
 
We are exposed to certain risks related to the frequency and rate of the introduction of generic drugs and brand-name prescription products.
 
The profitability of retail and mail order pharmacy businesses are dependent upon the utilization of prescription drug products. Utilization trends are affected by the introduction of new and successful prescription pharmaceuticals as well as lower-priced generic alternatives to existing brand-name products. Accordingly, a slowdown in the introduction of new and successful prescription pharmaceuticals and/or generic alternatives (the sale of which normally yield higher gross profit margins than brand-name equivalents) could adversely affect our business, financial position and results of operations.
 
ITEM 1B. UNRESOLVED STAFF COMMENTS.
 
None.
 
ITEM 2. PROPERTIES
 
Our corporate headquarters and administrative support offices are located in Indianapolis, Indiana and Southfield, Michigan, respectively. We operate on a national basis with a presence in 18 states and approximately 70 locations. All facilities are leased and have lease expiration dates ranging from 2010 to 2017. As of March 31, 2010, we have two material operating leases: our Indianapolis location, which combines our corporate headquarters and one of our pharmacy locations; and the Southfield, Michigan administrative support offices.
 
We do not own any real estate.
 
ITEM 3. LEGAL PROCEEDINGS
 
We are a defendant from time to time in lawsuits incidental to our business in the ordinary course of business. We are not currently subject to, and none of our subsidiaries are subject to, any material legal proceedings.
 
ITEM 4. RESERVED
 
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Part II
 
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
Shares of our common stock are currently quoted on the NYSE Amex Exchange (“NYSE Amex”) under the symbol “KAD.” The following table sets forth the quarterly high and low sale prices for our common stock for the periods indicated.
 
Fiscal Year Ended March 31, 2010
      4th Quarter       3rd Quarter       2nd Quarter       1st Quarter
High $ 0.74 $ 1.09 $ 1.24 $ 0.74
Low $ 0.35 $ 0.38 $ 0.57 $ 0.38
 
Fiscal Year Ended March 31, 2009
4th Quarter 3rd Quarter 2nd Quarter 1st Quarter
High $ 0.50 $ 0.53 $ 0.57 $ 0.77
Low $ 0.23 $ 0.18 $ 0.19 $ 0.56

There is no established market for our warrants to purchase common stock. The Company’s warrants are not quoted by NYSE Amex, nor are they listed on any exchange. We do not expect our warrants to be quoted by the NYSE Amex or listed on any exchange. As a result, an investor may find it difficult to trade, dispose of, or to obtain accurate quotations of the price of our warrants.
 
There are 277 record holders of our common stock as of May 3, 2010. The number of record holders of our common stock excludes an estimate of the number of beneficial owners of common stock held in street name, totaling approximately 146.5 million shares held by approximately 2,000 shareholders. The transfer agent and registrar for our common stock is Computershare, 7530 Lucerne Drive, Ste. 305, Cleveland, Ohio, 44130 (440-239-7361).
 
We have never paid cash dividends on our common shares, and we do not anticipate that we will pay dividends with respect to those securities in the foreseeable future. Our current business plan is to retain any future earnings to finance the expansion and development of our business. Any future determination to pay cash dividends will be at the discretion of our Board of Directors, and will be dependent upon our financial condition, results of operations, capital requirements, debt agreement restrictions and other factors as our Board may deem relevant at that time.
 
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Stock Performance Graph
 
The following graph compares the percentage change in the cumulative total shareholder return on the Company’ Common Stock during the period beginning April 1, 2005 and ending March 31, 2010 with the American Stock Exchange Composite index, a peer group index comprised of the following companies: Almost Family, Inc., Amedisys, Inc., Genitiva Health Services, Inc., LHC Group, Inc., Omnicare, Inc., and Pharmerica Corp. The stock prices shown are historical and do not determine future performance.
 
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Arcadia Resources Inc, The NYSE Amex Composite Index
And A Peer Group
 
 
 
*$100 invested on 3/31/05 in stock or index, including reinvestment of dividends.
Fiscal year ending March 31.

      3/05       3/06       3/07       3/08       3/09       3/10
Arcadia Resources Inc 100.00 161.03 101.54 44.10 22.08 20.36
NYSE Amex Composite 100.00 133.63 152.48 165.33 102.33 150.42
Peer Group 100.00 147.59 123.65 75.52 81.48 113.12

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ITEM 6. SELECTED FINANCIAL DATA
 
The selected consolidated summary financial data is set forth in the table below. You should read the following summary consolidated financial data in conjunction with the audited consolidated financial statements and notes thereto included elsewhere in this Form 10-K.
 
(In thousands, except per share data)
 
Year Ended Year Ended Year Ended Year Ended Year Ended
March 31, March 31, March 31, March 31, March 31,
      2010       2009       2008       2007       2006
Revenues, net $       103,602   $       106,132 $       104,819 $       106,125   $       99,100
Cost of revenues   74,374 74,370   74,230   74,709 69,956
Gross profit 29,228   31,762   30,589 31,416 29,144
Selling, general and administrative expenses 40,279 40,483 37,976 35,645 29,996
Depreciation and amortization 1,850 2,016 1,860 1,673 1,667
Goodwill and intangible asset impairment 14,599 23,511 - - -
Operating loss (27,500 ) (34,248 ) (9,247 ) (5,902 ) (2,519 )
Total other expenses (income) 2,422 8,634 4,446 3,572 2,457
 
Loss from continuing operations before income taxes (29,922 ) (42,882 ) (13,693 ) (9,474 ) (4,976 )
Current income tax expense 29 122 535 138 119
Loss from continuing operations (29,951 ) (43,004 ) (14,228 ) (9,612 ) (5,095 )
 
Discontinued operations:
Income (loss) from discontinued operations (1,692 ) (2,208 ) (6,781 ) (34,160 ) 384
Net gain (loss) on disposal 557 (1,258 ) (2,389 ) - -
(1,135 ) (3,466 ) (9,170 ) (34,160 ) 384
 
NET LOSS $ (31,086 ) $ (46,470 ) $ (23,398 ) $ (43,772 ) $ (4,711 )
 
Basic and diluted loss per share:
Loss from continuing operations $ (0.18 ) $ (0.32 ) $ (0.12 ) $ (0.11 ) $ (0.06 )
Loss from discontinued operations (0.01 ) (0.03 ) (0.07 ) (0.37 ) -
$ (0.19 ) $ (0.35 ) $ (0.19 ) $ (0.48 ) $ (0.06 )
 
Weighted average number of basic and diluted
common shares outstanding 166,840 134,583 122,828 91,433 83,834

As of March 31,
      2010       2009       2008       2007       2006
Balance Sheet Data (excluding assets/liabilities of  
discontinued operations):  
       Total current assets $     20,376 $     19,828 $     25,295 $     24,345 $     22,036
       Working capital 8,390 10,150 18,648 (9,505 ) 13,790
       Total assets 33,196 48,084 76,565 82,985 51,008
 
       Total long-term debt, including current maturities 33,993 38,936 38,735 44,044 14,619
       Total liabilities 44,971 47,522 44,937 54,466 22,529
       Total stockholders’ equity (deficit) (11,775 ) 9,833 49,797 54,084 57,044

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Cautionary Statement Concerning Forward-Looking Statements
 
The MD&A should be read in conjunction with the other sections of this report, including the consolidated financial statements and notes thereto beginning on page F-1 of this report and the subsection captioned “Disclosure Regarding Forward-Looking Statements” above. Historical results set forth in Selected Consolidated Financial Information and the Financial Statements beginning on page F-4 and this section should not be taken as indicative of our future operations.
 
Critical Accounting Policies
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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 financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
 
Identified below are some of the more significant accounting policies followed by the Company in preparing the accompanying consolidated financial statements. For further discussion of our accounting policies see “Note 1 – Description of Company and Significant Accounting Policies” in the notes to the consolidated financial statements.
 
Revenue Recognition
 
In general, the Company recognizes revenue when all revenue recognition criteria are met, which typically is when:
  • Evidence of an arrangement exists;
     
  • Services have been provided or goods have been delivered;
     
  • The price is fixed or determinable; and
     
  • Collection is reasonably assured.
Revenues for services are recorded in the period the services are rendered. Revenues for products are recorded in the period delivered based on sales prices established with the client or its insurer prior to delivery.
 
Allowance for Doubtful Accounts
 
The Company reviews its accounts receivable balances on a periodic basis. Accounts receivable have been reduced by the estimated allowance for doubtful accounts.
 
The provision for doubtful accounts is primarily based on historical analysis of the Company’s records. The analysis is based on patient and institutional client payment histories, the aging of the accounts receivable, and specific review of patient and institutional client records. As actual collection experience changes, revisions to the allowance may be required. Any unanticipated change in customers’ creditworthiness or other matters affecting the collectability of amounts due from customers could have a material effect on the results of operations in the period in which such changes or events occur. After all reasonable attempts to collect a receivable have failed, the receivable is written off against the allowance.
 
Goodwill
 
The Company has acquired several entities resulting in the recording of intangible assets, including goodwill, which represents the excess of the purchase price over the fair value of the net assets of businesses acquired.
 
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The Company has three reporting units included in continuing operations: Services, Pharmacy and Catalog. These reporting units are also the Company’s three reportable business segments. The following table represents goodwill by reporting unit as of March 31:
 
      2010       2009
Services   $     -   $     14,553
Pharmacy 2,500   2,500
Total $ 2,500 $ 17,053
 
The Company conducts its annual goodwill impairment assessment during its fiscal fourth quarter. We test for impairment between annual goodwill impairment assessments if events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Examples of such events or circumstances include, but are not limited to, the following: (i) a significant adverse change in business climate; (ii) an adverse action or assessment by a regulator; (iii) unanticipated competition; or (iv) a decline in the market capitalization below net book value.
 
Goodwill is tested using a two-step process. The first step of the goodwill impairment assessment, used to identify potential impairment, compares the fair value of a reporting unit with its carrying amount, including goodwill (“net book value”). If the fair value of a reporting unit exceeds its net book value, goodwill of the reporting unit is considered not impaired, thus the second step of the impairment test is unnecessary. If net book value of a reporting unit exceeds its fair value, the second step of the goodwill impairment test will be performed to measure the amount of impairment loss, if any. The second step of the goodwill impairment assessment, used to measure the amount of impairment loss, if any, compares the implied fair value of reporting unit goodwill, which is determined in the same manner as the amount of goodwill recognized in a business combination, with the carrying amount of that goodwill. If the carrying amount of reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss islrecognized in an amount equal to that excess.
 
In the first step of the goodwill impairment assessment, the Company uses an income approach to derive a present value of the reporting unit's projected future annual cash flows and the present residual value of the reporting unit. The fair value is calculated as the sum of the projected discounted cash flows of the reporting unit over the next five years and the terminal value at the end of those five years. The Company uses a variety of underlying assumptions to estimate these future cash flows, which vary for each of the reporting units and include (i) future revenue growth rates, (ii) future operating profitability, (iii) the weighted-average cost of capital and (iv) a terminal growth rate. In addition, the Company makes certain judgments about the allocation of corporate overhead costs in order to calculate the fair values of each of the Company’s reporting units. Estimates of future revenue and expenses associated with each reporting unit are the most sensitive of estimates related to the fair value calculations. Other factors considered in the fair value calculations include assumptions as to the business climate, industry and economic conditions. The assumptions are subjective and different estimates could have a significant impact on the results of the impairment analyses. In determining the appropriate assumptions, management considers historic trends as well as current activities and initiatives. If the Company’s estimates and assumptions used in the discounted future cash flows should change at some future date, the Company could incur an impairment charge which could have a material adverse effect on the results of operations for the period in which the impairment occurs.
 
In addition to estimating fair value of the Company’s reporting units using the income approach, the Company also estimates fair value using a market-based approach which relies on values based on market multiples derived from comparable public companies. The Company uses the estimated fair value of the reporting units under the market-based approach to validate the estimated fair value of the reporting units under the income approach.
 
Intangible Assets
 
Acquired finite-lived intangible assets are amortized using the economic benefit method when reliable information regarding future cash flows is available and the straight-line method when this information is unavailable. The estimated useful lives are as follows:
 
Trade name       30 years
Customer relationships (depending on the type of business purchased) 5 to 15 years

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 bases, as well as for tax credit carryforwards. 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.
 
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We consider 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. We record a valuation allowance to reduce our deferred tax assets and review the amount of such allowance periodically. When we determine certain deferred tax assets are more likely than not to be utilized, we will reduce our valuation allowance accordingly. Realization of deferred tax assets is dependent on future earnings, if any, the timing and amount of which are uncertain.
 
Internal Revenue Code Section 382 rules limit the utilization of net operating losses following a change in control of a company. It has been determined that a change in control of the Company took place at the time of the reverse merger in 2004. Therefore, the Company’s ability to utilize certain net operating losses generated by Critical Home Care will be subject to severe limitations in future periods, which could have an effect of eliminating substantially all the future income tax benefits of the respective net operating losses. Tax benefits from the utilization of net operating loss carryforwards will be recorded at such time as they are considered more likely than not to be realized.
 
Fiscal Year Ended March 31, 2010 Compared to the Fiscal Year Ended March 31, 2009
 
Results of Continuing Operations (in thousands, except per share amounts)
 
Years Ended
March 31,
      2010       2009
Revenues, net $      103,602 $      106,132
Cost of revenues 74,374 74,370
Gross profit 29,228 31,762
 
Selling, general and administrative expenses 40,279 40,483
Depreciation and amortization 1,850 2,016
Goodwill and intangible asset impairment 14,599 23,511
Total operating expenses 56,728 66,010
 
Operating loss (27,500 ) (34,248 )
 
Other expenses (income):
Interest expense, net 3,371 4,072
Loss on extinguishment of debt - 4,487
Change in fair value of warrant liability (979 ) -
Other 30 75
Total other expenses (income) 2,422 8,634
 
Net loss before income tax expense (29,922 ) (42,882 )
Income tax expense 29 122
Net loss from continuing operations   $ (29,951 )   $ (43,004 )
Weighted average number of shares — basic and diluted 166,840   134,583  
Net loss from continuing operations per share — basic and diluted $ (0.18 ) $ (0.32 )
 
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Revenues, Cost of Revenues and Gross Profits
 
The following table summarizes revenues, cost of revenues and gross profit by segment for the fiscal years ended March 31, (in thousands):
 
              % of Total             % of Total       $ Increase/       % Increase/
2010 Revenue 2009 Revenue (Decrease) (Decrease)
Revenues, net:
Services $      86,635 83.6 % $      97,537 92.0 % $      (10,902 ) -11.2 %
Pharmacy 15,154 14.6 % 6,019 5.7 % 9,135 151.8 %
Catalog 1,813 1.7 % 2,576 2.4 % (763 ) -29.6 %
103,602 100.0 % 106,132 100.0 % (2,530 ) -2.4 %
 
Cost of revenues:
Services 60,247 67,779 (7,532 ) -11.1 %
Pharmacy 13,032 4,997 8,035 160.8 %
Catalog 1,095 1,594 (499 ) -31.3 %
74,374 74,370 4 0.0 %
 
Gross Gross
Margin % Margin %
Gross margins:
Services 26,388 30.5 % 29,758 30.5 % (3,370 )   -11.3 %
Pharmacy 2,122 14.0 % 1,022 17.0 %   1,100 107.6 %
Catalog   718   39.6 %     982   38.1 % (264 ) -26.9 %
$ 29,228 28.2 % $ 31,762 29.9 %   $ (2,534 ) -8.0 %
 
The following table summarizes the components of the Services segment revenues for the fiscal years ended March 31, (in thousands):
 
% of Total % of Total $ Increase/ % Increase/
        2010       Revenue       2009       Revenue       (Decrease)       (Decrease)
Home care $      68,511 79.2 % $      69,204 71.0 % $      (693 ) -1.0 %
Medical staffing     12,296 14.2 %   18,779   19.2 % (6,483 ) -34.5 %
Travel staffing 5,828   6.6 %   9,554 9.8 %   (3,726 ) -39.0 %
       Total Services $ 86,635 100.0 % $ 97,537 100.0 % $ (10,902 )   -11.2 %
 
Services Segment
 
The Services segment remains the largest source of revenue for the Company. Home care revenue as a percentage of the total segment revenue continues to increase, reaching 79.2% of such revenue during fiscal 2010. Home care revenues fell by $693,000, or 1.0%, from $69,204,000 to $68,511,000 over the prior year. Home care revenues were adversely affected by several factors, including reductions in hours/reimbursement rates by state-sponsored programs in some of the Company’s key markets such as Arizona, North Carolina, Washington and California; high unemployment rates, particularly in the State of Michigan where the Company has substantial operations, resulting in increased availability of family caregivers to provide care in lieu of our services; and the significant reduction in the value of individual retirement savings and investment accounts during 2008 and 2009, resulting in some reduction in the hours of services purchased.
 
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The negative trends in the medical staffing and travel staffing markets continued during fiscal 2010. Medical staffing and travel staffing declined by 34.5% and 39.0%, respectively, as compared with the prior year. Several factors have contributed to the lower level of overall sales. Market conditions for temporary medical staffing are currently not favorable, driven by lower patient censuses in facilities; constraints on facility staffing budgets; the return of part-time staff to full-time status and increases in overtime accepted by permanent staff of our potential customers, largely in response to overall economic conditions; and delays in the construction and opening of new facilities that often drives short-term staffing requirements. In addition to these market conditions, travel staffing revenues have been adversely affected by state budget constraints with a major correctional institution customer.
 
Gross margin in the Home Care and Medical Staffing business was 30.5% for both fiscal 2010 and 2009. While the overall mix of higher margin home care business increased as a percentage of total revenues, this gross margin benefit was offset by several factors. These factors included a reduction in margins on several state-sponsored home care programs, such as Arizona, North Carolina, Washington and California; a reduction in the percentage of business generated in some of the Company’s higher margin offices and markets, including the state of Michigan; and an overall decline in the margins in the medical staffing business due to changes in staffing business mix. In addition, in the fiscal fourth quarter 2010, the Company experienced an increase in state unemployment taxes in many of the states in which it operates.
 
Pharmacy Segment
 
The revenue in the Pharmacy segment increased by $9,135,000, or 151.8%, to $15,154,000 during fiscal 2010 compared to the prior year. This growth was driven by the Company’s DailyMed program. During the second half of fiscal 2009, revenue generated from the DailyMed medication management program began to increase at a rapid pace, and the Company continues to pursue additional opportunities with government entities and managed care organizations. The revenue growth in fiscal 2010 was primarily driven by the Company’s relationship with WellPoint. The Company continues to work with the Indiana Medicaid program and its managed care providers to identify and enroll those patients who will benefit most from participation in the DailyMed program. Additionally, in June 2009, the Company announced the signing of an agreement with WellPoint. Under this agreement, the Company will initiate the DailyMed medication management program to WellPoint’s high-risk Medicaid members in five states where WellPoint companies provide Medicaid managed care benefits. The five states are: California, Virginia, New York, Kansas and South Carolina. The program was launched to WellPoint’s high risk members in Virginia in August 2009, and the Company began recognizing revenue from these patients in September 2009. The program was rolled out to WellPoint’s California patients during fiscal fourth quarter 2010, and it will be rolled out to patients in the remaining three states during the first half of fiscal 2011. The Company anticipates the majority of its Pharmacy revenue growth over the next several quarters to be attributable to the WellPoint arrangement.
 
The costs of revenue in the Pharmacy segment include the cost of medications and packaging for the DailyMed proprietary dispensing system. Gross margins for fiscal 2010 were 14.0% compared to 17.0% for the prior year. In general, the margins have been negatively impacted by shifts in the payer and patient mix as the Pharmacy segment’s revenue grows. The revenue growth during fiscal 2010 was primarily driven by the Indiana Medicaid program and the WellPoint patients in Virginia. The margins associated with these patients are lower due to a combination of lower reimbursement rates and the brand/generic drug mix where generic drugs have lower margins than brand drugs. Management expects margins to improve during fiscal 2011 due to a new prime vendor agreement entered into in April 2010 as well as other on-going operational initiatives, including more aggressive purchasing efforts, and technology improvements. In the future, margins will continue to be impacted by the changing payer and patient mix as the Pharmacy patient and revenue base grows.
 
Catalog Segment
 
Revenue from the Company’s catalog and internet-based home health products business decreased 29.6% to $1,813,000 during fiscal 2010 compared to the prior year. The decrease in revenue is due in part to the reduction in catalog mailing to a more targeted audience, and in part due to economic conditions as virtually all of this business is cash and/or credit business.
 
The gross margin increased to 39.6% during fiscal 2010 compared to 38.1% for the prior year. The increase in gross margin is largely related to the mix of business between our mail order catalog and on-line sales revenue.
 
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Selling, General and Administrative
 
The following table summarizes selling, general and administrative expenses by segment for the fiscal years ended March 31 (in thousands):
 
% of Total   % of Total $ Increase/ % Increase/
2010 SG&A 2009 SG&A (Decrease) (Decrease)
Services       $      21,968       54.5 %       $      25,194       62.2 %       $         (3,226 )       -12.8 %
Pharmacy     8,088   20.1 % 4,522 11.1 % 3,566 78.9 %
Catalog 795   2.0 %     1,130 2.8 %   (335 ) -29.6 %
Corporate 9,428 23.4 % 9,637   23.8 %   (209 )   -2.2 %
$ 40,279 100.0 % $ 40,483 100.0 % $ (204 ) -(0.5 %)
 
SG&A as a % of net revenue 38.9%   38.1%  

Services Segment
 
The Services segment selling, general and administrative expense decreased to $21,968,000 for fiscal 2010 compared to $25,194,000 for fiscal 2009. This $3,226,000, or 12.8%, decrease was primarily due to a $1,346,000 decrease in commissions paid to the affiliates, a $838,000 decrease in bad debt expense and a $674,000 decrease in labor costs. Affiliate commissions are based on the gross margins of the individual affiliates, and the decrease reflects a decrease in revenues and gross margins generated from the affiliate owned locations. The decrease in bad debt expense is due to a combination of higher than normal bad debt expense in the prior year and an increased focus on collection efforts during fiscal 2010. The decrease in labor costs was a direct result of the Company’s efforts to reduce headcount in certain areas.
 
Pharmacy Segment
 
The Pharmacy segment selling, general and administrative expense increased by $3,566,000, or 78.9%, to $8,088,000 during fiscal 2010 compared to fiscal 2009. In general, the increase in Pharmacy expenses was due to the significant growth in revenue in this segment year over year. Specifically, total labor costs increased by $1,635,000 during fiscal 2010 as the Company hired additional pharmacists, pharmacy technicians, and customer service representatives in order to process the increased volume and to support the patient care component of the DailyMed program. With patient enrollment efforts associated with the WellPoint agreement, the Company also incurred $472,000 in costs associated with an external call center during fiscal 2010. Shipping costs and bad debt expense also increased during the period by $393,000 and $147,000, respectively, which was consistent with the revenue growth. The remaining increase during the current year was due to various other administrative expenses, including travel, marketing materials, and various service fees, that increased with the growth in revenue and headcount that has occurred over the last year.
 
The DailyMed program includes a significant level of patient care and value-added services designed to improve compliance, adherence and safety of a patient’s medication regimen. These pharmacy services include consolidation, synchronization and transfer of prescriptions and medication therapy management (MTM) services. The Company makes a significant investment in these services as they are a key part to achieving the patient benefits and health care cost reductions associated with DailyMed. The Company’s business model contemplates that payers will be willing to share some of these cost savings as they are realized either through a “per member per month” fee or some type of cost savings arrangement. To date, the Company has not recognized any revenue for these services. The Company has elected to provide these services to Indiana Medicaid customers without a cost-sharing arrangement as Indiana Medicaid has entered into a research agreement with the Purdue University School of Pharmacy to study DailyMed’s ability to reduce total health care costs.
 
Catalog Segment
 
The Catalog segment selling, general and administrative expense decreased by $335,000, or 29.6%, during fiscal 2010. These decreases were primarily due to a $301,000 decrease in the costs to produce and mail catalogs.
 
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Corporate
 
Corporate selling, general and administrative expense decreased by $209,000, or 2.2%, to $9,428,000 for fiscal 2010 compared to $9,637,000 for the prior year. The slight decrease reflects a general reduction in the Corporate overhead necessary to operate the business subsequent to the various business divestitures during the fiscal first quarter 2010. These reductions were offset by increases in:
  • legal fees as the number of claims and disputes arising during the normal course of business was higher in fiscal 2010 than fiscal 2009; and,
  • equity compensation, which was higher in fiscal 2010 due to a stock option grant to senior management in March 2010 which vested immediately resulting in a $464,000 charge during fiscal fourth quarter 2010.
Depreciation and Amortization
 
The following table summarizes depreciation and amortization expense for the fiscal years ended March 31 (in thousands):
 
$ Increase/ % Increase/
      2010       2009       (Decrease)       (Decrease)
Depreciation and amortization of property and equipment $ 1,215 $ 1,066 149 14.0 %
Amortization of acquired intangible assets     635     950 (315 )   -33.2 %
Depreciation and amortization – operating expense $      1,850 $      2,016   $      (166 ) -8.2 %
 
Depreciation and amortization of property and equipment increased by $149,000 or 14.0%, during fiscal 2010 compared to the prior year. The increase reflects the increase in depreciation associated with Pharmacy equipment acquired during the last year and various software.
 
Amortization of acquired intangible assets decreased by $315,000, or 33.2%, during fiscal 2010 compared to the prior year. The decrease reflects the fact that as of March 31, 2009, the Company recognized certain impairment charges relating to amortizable intangible assets associated with the Pharmacy and Catalog segments, which ultimately reduced 2010 amortization expense.
 
Goodwill and Intangible Asset Impairment
 
As of the end of fiscal year 2010, the Company performed the first step of the goodwill impairment analysis for the two reporting units with remaining goodwill balances at that time: Services and Pharmacy.
 
The Service segment is a mature business that has been in existence for more than 30 years. Over this period of time, the business has experienced periods of growth and decline, similar to other businesses and industries. Over the last two years, the segment as a whole has seen declining revenue, and this decline has been primarily driven by a decline in the medical staffing and travel staffing businesses. Many of the Service’s segments locations provide both home care and medical staffing services. During fiscal 2010, home care accounted for 79% of total segment revenue, and medical staffing and travel staffing, in the aggregate, accounted for the remaining 21% of revenue. The medical staffing and travel staffing business experienced a 46% decline in revenue from fiscal 2008 to fiscal 2010. During this same period, home care revenue increased by 9%, but fiscal 2010 revenue was approximately 1% lower than fiscal 2009. While management believes that the market for temporary medical staffing services will eventually improve, the timing and extent of such improvement is uncertain and there could be further declines before such recovery occurs. In addition, while management believes that its home care business will grow as population demographics drive increased demand, in the near-term, such growth will depend in part on the improvement in the overall U.S. economy and the extent to which state-funded programs experience additional funding cut-backs. Because management’s ability to predict the timing and extent of these factors is subject to some uncertainty, it focused on more recent trends in the annual impairment analysis, which resulted in lower future cash flow projections than in prior years’ analyses. The impairment analysis resulted in a $14,599,000 goodwill impairment charge for fiscal 2010, and subsequent to this charge, there is no remaining goodwill associated with the Services segment.
 
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In conjunction with the fiscal 2009 goodwill impairment analysis (as described below), the Company recognized a $13,217,000 goodwill impairment charge in the Pharmacy reporting unit. Subsequent to the impairment charge, the Pharmacy segment has $2,500,000 of remaining goodwill. As evidenced by the growth in its year-over-year revenue from $6.0 million in fiscal 2009 to $15.2 million in fiscal 2010, the Pharmacy segment continued to advance its DailyMed business during fiscal 2010, but it remains in the early stages of development. Management believes that the DailyMed program will be the primary growth driver for the Company as a whole over the next several years. In performing the goodwill impairment analysis for the Pharmacy reporting unit during the fiscal fourth quarter 2010, management relied on recent trends and future expectations based on these trends and industry experience to project future operating results. The fiscal 2011 revenue estimates were based on payer relationships that existed as of the time of the analysis. The revenue estimates in the future years assume new payer relationships similar to the WellPoint relationship. Additionally, management assumed margin improvement over the next five years due to increased volume, operational improvements and additional revenue from medication adherence services, which are expected to generate higher margins than drug revenue. Management also estimated that SG&A as a percentage of revenue will improve due to software and technological enhancements as well as efficiencies gained through volume and experience. As of March 31, 2010, the Pharmacy reporting unit analysis indicated that its fair value was in excess of it carrying value by approximately 40% so the second step of the analysis was not considered necessary. The primary events that could negatively affect the Pharmacy assumptions would be the inability to: add additional payer relationships; improve margins; and/or reduce the labor costs as much as expected.
 
Fiscal 2009
 
The following summarizes the goodwill and intangible asset impairment expense for fiscal 2009:
 
  Acquired
Intangible
      Goodwill       Assets       Total
Pharmacy   $      13,217   $      9,402 $      22,619
Catalog 811 81   892
Goodwill and intangible asset impairment - total $ 14,028 $ 9,483 $ 23,511
 
As of the end of fiscal 2009, the Company performed the first step of the goodwill impairment analysis for all three of its reporting units: Services, Catalog and Pharmacy.
 
In the impairment analysis of the Services reporting unit performed as of March 31, 2009, management assumed a modest revenue growth rate in future years, which was approximately consistent with the recent trends in the home health care industry. Management also assumed that margins over the next five years would remain consistent and that SG&A would improve in fiscal 2010 and then increase slightly in the years thereafter. As of March 31, 2009, the Services reporting unit analysis indicated that its fair value was in excess of it carrying value by approximately 5% so the second step of the analysis was not considered necessary.
 
The Pharmacy goodwill was originally recognized during the fiscal year ended March 31, 2007 in conjunction with the PrairieStone Pharmacy, LLC acquisition in February 2007. At the time of the acquisition, PrairieStone marketed several pharmacy-related products and services, including the DailyMed medication management system and a license service model whereby it contracted with regional retail chain pharmacies to provide pharmacy expertise and access to a restricted third party network. The various PrairieStone offerings were in the early stages of development, and Company management believed that they could complement the goods and services being offered by Arcadia Resources, Inc. at the time. Subsequent to the acquisition, management began to focus on the DailyMed product because of its perceived potential, and, to date, the Company has not worked to expand the other PrairieStone offerings. As of March 31, 2009, the DailyMed business was in its early stages and lacked meaningful historic financial trends. Additionally, the anticipated growth in the Pharmacy reporting unit had experienced several delays. In performing the goodwill impairment analysis for the Pharmacy unit during fiscal fourth quarter 2009, management acknowledged these issues and the difficulty in projecting the timing and amount of future revenue and cash flow streams, which are the basis for the fair value estimates of the reporting unit. Management was obligated to temper its estimates of future cash flows from the Pharmacy business until such time as those cash flows have started to actually be realized with sustained regularity. The impairment analysis resulted in a $13,217,000 impairment charge for fiscal 2009. Subsequent to the impairment charge, $2,500,000 of goodwill remains in the Pharmacy reporting unit. In conjunction with the goodwill impairment, the Company also recognized an impairment expense relating to the Pharmacy segment’s customer relationships of $9,402,000.
 
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During the fourth quarter fiscal 2009, the Company performed the goodwill impairment analysis for the Catalog reporting unit. The analysis indicated that the carrying value was in excess of the fair value due to the financial performance of this business unit falling short of original projections and the general expectation that the Catalog business may not grow significantly in the near term due to management’s focus on the other lines of business. The Company recorded an impairment charge relating to the Catalog reporting unit of $811,000. Subsequent to the impairment charge, no goodwill remains related to the Catalog reporting unit. The Company also recognized a $81,000 impairment of the Catalog’s customer relationships.
 
Interest Expense and Income
 
The following table summarizes interest expense and income for the fiscal years ended March 31 (in thousands):
 
  $ Increase/ % Increase/
  2010 2009 (Decrease) (Decrease)
Interest expense       $      3,395       $      4,123       $           (728 )       -17.7 %
Interest income (24 )     (51 )   27 -52.9 %
$ 3,371 $ 4,072 $ (701 ) -17.2 %
 
Interest expense for fiscal 2010 decreased by $728,000, or 17.7%, to $3,395,000 as compared to the prior year. Total interest expense includes the amortization of debt discounts and deferred financing costs of $332,000 and $972,000 for fiscal 2010 and 2009, respectively. The average interest bearing liabilities balance (sum of the balances at the end of each quarter divided by the number of quarters) for fiscal 2010 was $35.0 million compared to $37.9 million for fiscal 2009, which represents a reduction of 7.5%. The overall reduction of debt combined with the reduction in the amount of amortization of debt discounts and deferred financing costs resulted in the decrease in interest expense.
 
Loss on Extinguishment of Debt
 
The following table summarizes the components of the loss on extinguishment of debt for the fiscal year ended March 31, 2009 (in thousands):
 
      2009
JANA/Vicis debt refinancing - value of equity $      3,769
Write off of remaining debt discount     470
AmerisourceBergen line of credit amendment 248
Loss on extinguishment of debt - total $ 4,487
 
In conjunction with the March 25, 2009 debt refinancing with JANA and Vicis, the Company recognized $3,769,000 as a loss on extinguishment of debt. The Company issued 6,056,499 shares of common stock valued at $2,059,000 to the lenders as consideration for providing the additional financing and extending the maturity date of the previously existing debt. The Company also exchanged 4,683,111 warrants held by two of the lenders (Vicis and JANA) for 5,616,444 shares of common stock and the incremental fair value was determined to be $1,145,000. Concurrent with the debt refinancing, the holders of the warrants issued in conjunction with the May 2007 private placement transaction agreed to exchange a total of 2,754,726 warrants for 2,754,726 shares of common stock with an incremental fair value of $565,000.
 
On March 31, 2008, the Company entered into a $5,000,000 note payable agreement with Vicis, which had a corresponding debt discount of $1,202,000. In conjunction with the March 25, 2009 debt refinancing with JANA and Vicis, the remaining debt discount of $470,000 was charged to loss on extinguishment of debt.
 
On June 5, 2008, the Company issued AmerisourceBergen 490,000 warrants to purchase common stock at an exercise price of $0.75 per share. The fair value of the warrants was determined to be $248,000 and was recorded as a loss on extinguishment of debt.
 
No similar expense was recognized during fiscal 2010.
 
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Change in Fair Value of Warrant Liability
 
As discussed in Note 9 to the consolidated financial statements, the 7,135,713 warrants issued in November 2009 in conjunction with the equity financing transaction are recorded as a liability at fair value with subsequent changes in fair value recorded in earnings. The fair value of the warrants are determined using the Black-Scholes pricing model and is affected by changes in inputs to that model, including: our stock price, expected stock price volatility, and contractual terms. To the extent that the fair value of the warrant liability increases or decreases, the Company records a loss or gain in the statement of operations. The gain of $979,000 on the change in fair value of the warrant liability during fiscal 2010 was primarily due to the changes in our stock price.
 
Income Taxes
 
Income tax expense was $29,000 for the year ended March 31, 2010 compared to $122,000 for the year ended March 31, 2009, a decrease of $93,000. This income tax reduction is primarily a result of a decrease in the estimated amounts due for Michigan Business Tax and refunds resulting from overpayments of fiscal 2009 state tax returns as filed.
 
Due to the Company’s losses in recent years, it has paid nominal federal income taxes. For federal income tax purposes, the Company had significant permanent and timing differences between book income and taxable income resulting in combined net deferred tax asset balance to be utilized by the Company for which an offsetting valuation allowance has been established for the entire amount. The Company has a net operating loss carryforward for tax purposes totaling $63.3 million that expires at various dates through 2029. Internal Revenue Code Section 382 rules limit the utilization of certain of these net operating loss carryforwards upon a change of control of the Company. It has been determined that a change in control took place at the time of the reverse merger in 2004, and as such, the utilization of $700,000 of the net operating loss carryforwards will be subject to severe limitations in future periods.
 
Earnings (Loss) from Discontinued Operations
 
The following table summarizes the components of the loss from discontinued operations for the fiscal years ended March 31, (in thousands):
 
      2010       2009
Revenues, net:
Services - Industrial Staffing $      1,223   $      15,842
Home Health Equipment 1,423 17,643
Pharmacy - Software / Florida 348 2,133
  $ 2,994   $ 35,618
 
Earnings (loss) from operations:
Services - Industrial Staffing $ (85 ) $ (1,791 )
Home Health Equipment (1,425 ) (352 )
Pharmacy - Software / Florida (182 ) (65 )
$ (1,692 ) $ (2,208 )
 
Gain (loss) on disposal:
Services - Industrial Staffing $ 201   $ -
Home Health Equipment 386 (1,258 )
Pharmacy - Software (30 ) -
$ 557     $ (1,258 )
 
Earnings (loss) from discontinued operations:
Services - Industrial Staffing $ 116   $ (1,791 )
Home Health Equipment   (1,039 )   (1,610 )
Pharmacy - Software (212 ) (65 )
$ (1,135 ) $ (3,466 )
 
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Industrial Staffing Operations
 
On May 29, 2009, the Company finalized the sale of substantially all of the assets of its industrial and non-medical staffing business for cash proceeds of $250,000, which was paid in five equal installments through September 2009. Additionally, the Company is to receive 50% of the future earnings of the business until the total payments equal $1,600,000. During fiscal 2010, the Company received $72,000 in earn out payments and recorded this amount as an additional gain on the transaction. The Company retained all accounts receivable for services provided prior to May 29, 2009.
 
For the year ended March 31, 2010, the net loss for the Industrial Staffing discontinued operations was $85,000, and the Company recognized a $201,000 gain on the disposal of discontinued operations.
 
HHE Operations
 
On May 18, 2009, the Company completed the sale of its ownership interest in Lovell Medical Supply, Inc., Beacon Respiratory Services of Georgia, Inc., and Trinity Healthcare of Winston-Salem, Inc. to Aerocare Holdings, Inc. for total proceeds of $4,750,000, less fees of $150,000. At the time of closing, $475,000 of the purchase price was held by the buyer to cover the Company’s contingent obligations. During fiscal 2010, the buyer released $267,000 of this amount, which was recognized as an additional gain on the sale. In May 2010, the Company received the final payment of $155,000. A total of $53,000 was retained by the buyer to cover certain obligations of the Company. The entities sold represented the Southeast region of the Company’s HHE business.
 
On May 19, 2009, the Company entered into an Asset Purchase Agreement with Braden Partners, L.P. to sell the assets of its Midwest region of the Company’s HHE business. Total proceeds were $4,000,000, less fees of $150,000. $1,000,000 of the purchase price was held by the buyer to cover the Company’s contingent obligations. The Company retained all accounts receivable for services provided prior to May 2009. Subsequent to the transaction date, the buyer made certain claims, and in June 2010, the buyer and the Company agreed to a final settlement to resolve these claims. On June 7, 2010, a final payment relating to this transaction of $500,000 was released to the Company.
 
As of May 2009, the Company had sold all of its HHE operations.
 
For the year ended March 31, 2010, the net loss for the HHE discontinued operations was $1,425,000 and the Company recognized a $386,000 gain on the disposal of discontinued operations.
 
Pharmacy Operations
 
On June 11, 2009, the Company entered into an Asset Purchase Agreement with a leading pharmacy management company to sell substantially all of the assets of JASCORP, LLC (“JASCORP”) for proceeds of $2,200,000, less fees of $185,000. $220,000 of the purchase price is being held back by the buyer until December 2011 in order to cover the Company’s contingent obligations. JASCORP operated the retail pharmacy software business that the Company acquired in July 2007. As part of the divestiture, the Company entered into a License and Services Agreement with the buyer which provides the Company the right to continue to use the software for internal purposes.
 
For the year ended March 31, 2010, the net loss for the Pharmacy discontinued operations was $182,000, and the Company recognized a $30,000 loss on the disposal of discontinued operations.
 
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Fiscal Year Ended March 31, 2009 Compared to the Fiscal Year Ended March 31, 2008
 
Results of Continuing Operations (in thousands, except per share amounts)
 
Years Ended
March 31,
        2009         2008
Revenues, net $      106,132 $      104,819
Cost of revenues 74,370 74,230
Gross profit 31,762 30,589
 
Selling, general and administrative expenses 40,483 37,976
Depreciation and amortization 2,016 1,860
Goodwill and intangible asset impairment 23,511 -
Total operating expenses 66,010 39,836
 
Operating loss (34,248 ) (9,247 )
 
Other expenses:
Interest expense, net 4,072 4,317
Loss on extinguishment of debt 4,487 -
Other 75 129
Total other expenses 8,634 4,446
 
Net loss before income tax expense (42,882 ) (13,693 )
Income tax expense 122 535
Net loss from continuing operations $ (43,004 ) $ (14,228 )
Weighted average number of shares — basic and diluted 134,583 122,828
Net loss from continuing operations per share — basic and diluted $ (0.32 ) $ (0.12 )
 
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Revenues, Cost of Revenues and Gross Profits
 
The following table summarizes revenues, cost of revenues and gross profits by segment for the fiscal years ended March 31, (in thousands):
 
        2009         % of Total
Revenue
        2008         % of Total
Revenue
        $ Increase/
(Decrease)
        % Increase/
(Decrease)
Revenues, net:
Services $     97,537 91.9 % $     96,589 92.2 % $     948 1.0 %
Pharmacy 6,019 5.7 % 5,071 4.8 % 948 18.7 %
Catalog 2,576 2.4 % 3,159 3.0 % (583 ) -18.5 %
  106,132 100.0 % 104,819 100.0 % 1,313 1.3 %
 
Cost of revenues:
Services 67,779 68,395 (616 ) -0.9 %
Pharmacy 4,997 3,905 1,092 28.0 %
Catalog 1,594 1,930 (336 ) -17.4 %
74,370 74,230 140 0.2 %

Gross Gross          
                Margin %                 Margin %        
Gross margins:  
Services 29,758 30.5 % 28,194 29.2 % 1,564   5.5 %
Pharmacy 1,022 17.0 % 1,166 23.0 % (144 )   -12.3 %
Catalog 982 38.1 % 1,229 38.9 % (247 )   -20.1 %
$     31,762 29.9 % $     30,589 29.2 % $     1,173   3.8 %
   
The following table summarizes the components of the Services segment revenues for the fiscal years ended March 31, (in thousands):
 
% of Total % of Total $ Increase/ % Increase/
        2009         Revenue         2008         Revenue         (Decrease)         (Decrease)
Home care $     69,204 71.0 % $     63,050 65.3 % $     6,154 9.8 %
Medical staffing 18,779 19.3 % 21,370 22.1 % (2,591 ) -12.1 %
Travel staffing 9,554 9.7 % 12,169 12.6 % (2,615 ) -21.5 %
       Total Services $ 97,537 100.0 % $ 96,589 100.0 % $ 948 1.0 %
 
Services Segment
 
The Services segment remains the largest source of revenue for the Company. During fiscal 2009, home care revenues increased approximately 10% over the same period in the previous year. A majority of this increase represents organic growth in several of the Company’s main geographic markets. The increase in sales included growth in government programs served, as well as private pay and insurance clients.
 
The growth in home care revenues was approximately offset by significant year-over-year declines in revenue in the medical staffing and travel staffing markets, which declined by approximately 12% and 22%, respectively, as compared with the prior year. Demand for the Company’s per diem and travel medical staffing services declined as compared with the same period a year ago. Several factors have contributed to the lower level of overall demand, including lower patient censuses in facilities; constraints on facility staffing budgets; the return of part-time staff to full-time status and increases in overtime accepted by permanent staff of our potential customers, largely in response to overall economic conditions; and delays in the construction and opening of new facilities that often drives short-term staffing requirements.
 
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Gross margins in the Home Care/Medical Staffing segment increased from 29.2% in fiscal 2008 to 30.5% in fiscal 2009. The cost of revenues in this segment consists primarily of employee costs, including wages, taxes, fringe benefits and workers’ compensation expense. The year-over-year improvement in gross margins was driven primarily by two factors. The first was a reduction in workers’ compensation expense, reflecting the success of the Company’s on-going efforts to control and reduce these costs through improved training, timelier reporting and investigation of claims, and reduced administrative costs. The second factor was the increased mix of home care revenue as a percentage of sales, with margins in this market being significantly higher than gross margins in medical and travel staffing.
 
Pharmacy Segment
 
The revenue in the Pharmacy segment increased by 18.7% during fiscal 2009 compared to fiscal 2008 primarily due to its DailyMed™ programs. During the third and fourth quarters of fiscal 2009, revenue generated from the Company’s DailyMed™ medication management program began to increase at a more rapid pace than in previous quarters. Pharmacy revenue in fiscal 2008 included $641,000 of revenue for retail pharmacy management services. No such revenue was generated in fiscal 2009.
 
The costs of revenue in the Pharmacy segment include the cost of medications sold to clients and packaging costs for the DailyMed™ proprietary dispensing system. The reduction in the gross margin percentage from 23% in fiscal 2008 to 17% in fiscal 2009 was primarily due to the change in revenue mix. Specifically, the pharmacy management services revenue generated in fiscal 2008 had nominal costs of revenue associated with it.
 
Catalog Segment
 
Revenue from the Company’s catalog and internet-based home health products business were previously included as part of the HHE business segment. Catalog business sales decreased from $3,159,000 in fiscal 2008 to $2,576,000 in fiscal 2009. The 18.5% decrease in revenue is consistent the Company’s change in approach, which began in mid-2008, with the goal of becoming more profitable in part by printing and with fewer catalogs to a more targeted audience. The cost of revenue remained relatively consistent at 38.1% in fiscal 2009 compared to 38.9% in fiscal 2008.
 
Selling, General and Administrative
 
The following table summarizes selling, general and administrative expenses by segment for the fiscal years ended March 31 (in thousands):
 
  % of Total   % of Total $ Increase/ % Increase/
        2009         SG&A         2008         SG&A         (Decrease)         (Decrease)
Services $     25,194 62.2 % $     25,061 66.0 % $     133 0.5 %
Pharmacy 4,522 11.2 % 2,379 6.2 % 2,143 90.1 %
Catalog 1,130 2.8 % 1,551 4.1 % (421 ) -27.1 %
Corporate 9,637 23.8 % 8,985 23.7 % 652 7.3 %
$ 40,483 100.0 % $ 37,976 100.0 % $ 2,507 (6.6 %)
 
SG&A as a % of net revenue 38.1 % 36.2 %

Services Segment
 
The Services segment selling, general and administrative expense increased slightly to $25,194,000 for fiscal 2009 compared to $25,061,000 for fiscal 2008. The Carolina Care, LLC acquisition in April 2008 contributed an additional $400,000 of total expenses during fiscal 2009. In addition, the increase reflects an increase in bad debt expense of $749,000 approximately offset by a decrease in the commissions paid to the affiliate agencies of $892,000. Affiliate commissions are based on the gross margins of the individual affiliates, and the decrease reflects a decrease in revenues and gross margins generated from the affiliate owned locations for fiscal 2009 compared to the prior year.
 
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Pharmacy Segment
 
The increase in the Pharmacy segment selling, general and administrative expense from $2,379,000 in fiscal 2008 to $4,522,000 in fiscal 2009 was due to the following:
  • The Company’s investment in the infrastructure and additional employees necessary to support the expected growth in the Pharmacy segment. Management anticipates the Pharmacy SG&A as a percentage of revenue to decrease moving forward as the additional investments in infrastructure decrease.
  • The Company consolidated its Paducah, Kentucky pharmacy operations into its new Indianapolis, Indiana pharmacy during the fiscal quarter ended December 31, 2008. During the transition period, both pharmacies were open for approximately two months. The Company incurred severance costs associated with the ultimate closure of the Paducah location. The Company incurred approximately $500,000 in expenses relating to the wind down of the Paducah pharmacy and the severance costs.
Catalog Segment
 
The Catalog segment selling, general and administrative expense decreased by $421,000, or 27.1%, in fiscal 2009 compared to the prior year. This decrease was due to a decrease in catalog production and mailing costs as the Company changed its approach in an attempt to increase profitability by printing and sending fewer catalogs to a more targeted audience.
 
Corporate
 
The $652,000 increase in Corporate selling, general and administrative expense during fiscal 2009 was due to the following:
  • A change in the classification of certain employees who were previously included in the Services segment to Corporate. Historically, employees in the Southfield, Michigan location supported the Services segment almost exclusively. During fiscal 2008, the Company centralized many of its corporate functions in Southfield, Michigan, and these employees now support the entire organization. Beginning in fiscal 2009, the Company began to more accurately separate and record these corporate functions from the segment specific functions; and
  • Beginning in fiscal 2009, Corporate absorbed all insurance expense in a effort to consolidate and review all policies. During fiscal 2008, insurance expense was charged to the various segments. This resulted in a $936,000 increase in Corporate SG&A expenses. On a consolidated basis, insurance expense increased by approximately $200,000 in fiscal 2009.
These increases were partially offset by the following:
  • In the third quarter of fiscal 2008, the Company hired an in-house legal counsel, and as a result, legal fees decreased significantly during fiscal 2009. Additionally, audit fees and fees relating to Sarbanes-Oxley requirements decreased due to the reduced audit requirements when the Company became a non-accelerated filer in fiscal 2009. In the aggregate, professional fees decreased by approximately $1,033,000 during fiscal 2009.
  • The reduction of equity compensation expense. During the fiscal 2008 second quarter, the Company recognized approximately $700,000 relating to the vesting of certain stock options consistent with the former CEO’s separation agreement executed in July 2007. The expense did not repeat in fiscal 2009.
Depreciation and Amortization
 
The following table summarizes depreciation and amortization expense for the fiscal years ended March 31 (in thousands):
 
   
$ Increase/ % Increase/
        2009         2008         (Decrease)         (Decrease)
Depreciation and amortization of property and equipment $     1,066 $     732 334 45.6 %
Amortization of acquired intangible assets 950 1,128 (178 ) -15.8 %
Depreciation and amortization – operating expense $ 2,016 $ 1,860 $     156 8.4 %
 
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Depreciation and amortization of property and equipment increased by approximately $334,000, or 45.6%, during the year ended March 31, 2009 compared to the prior year. This increase reflects the increase in depreciation associated with various software and computer equipment acquired over the last two years.
 
Amortization of acquired intangible assets decreased by $178,000, or 15.8%, during the year ended March 31, 2009. The decrease reflects the decrease in the amortization associated with customer relationships. The Company primarily uses the economic benefit method of amortizing intangible assets, which attempts to match the amortization expense with the anticipated economic benefit of the asset as determined at the time of the acquisition. The estimated economic benefit typically decreases as more time passes since the acquisition. As such, the corresponding amortization expense also decreases.
 
As discussed below, the Company wrote off $9,483,000 in acquired amortizable intangible assets during the fiscal fourth quarter of 2009. This will significantly reduce the amortization expense in future years.
 
Goodwill and Intangible Asset Impairment
 
No goodwill or intangible asset impairment expense was recognized in continuing operations during fiscal 2008. The following summarizes the goodwill and intangible asset impairment expense for fiscal 2009:
 
  Acquired
Intangible
        Goodwill         Assets         Total
Pharmacy $      13,217 $      9,402 $      22,619
Catalog 811 81 892
Goodwill and intangible asset impairment - total $ 14,028 $ 9,483 $ 23,511
 
In accordance with our policy, as of the end of fiscal year 2009, the Company performed the first step of the goodwill impairment analysis for all three of our reporting units: Services, Catalog and Pharmacy.
 
The Services reporting unit is a mature business so historic trends within this business unit and the industry are the primary consideration in determining appropriate assumptions. Revenue estimates are based on a combination of recent trends and future expectations within the reporting unit and the industry as a whole. Expense estimates are primarily based on internal trends and likely changes to these trends based on known information or current initiatives. In our impairment analysis performed as of March 31, 2009, management assumed revenue growth rates consistent with recent trends in the home health care industry. Management also assumed that margins over the next five years would remain consistent at between 30.0% and 30.5% compared to margins of 30.5% recognized in fiscal 2009. With regards to total selling, general and administrative expenses (“SG&A”) for the Services reporting unit, management assumed that it would decrease by approximately 2% for the year ended March 31, 2010 and then slightly increase in the years thereafter. The decrease in SG&A expenses in the first year of the projections reflects the impact of certain charges taken fiscal 2009 as well as the benefits of various cost reduction initiatives. In the projections, the total SG&A is impacted by the amount of corporate allocation charged to the Services segment. The Company believes that the Pharmacy segment will grow significantly over the next several years, and as this growth occurs, the amount of fixed corporate overhead allocated to the Pharmacy will increase with a corresponding decrease to the Services segment. As of March 31, 2009, the Services reporting unit analysis indicated that its fair value was in excess of it carrying value by approximately 5% so the second step of the analysis was not considered necessary. The primary events that could negatively affect the Services assumptions would be the inability to grow revenue either due to lack of internal execution or to overall economic conditions or a combination thereof.
 
The Pharmacy goodwill was originally recognized during the fiscal year ended March 31, 2007 in conjunction with the PrairieStone Pharmacy, LLC (“PrairieStone”) acquisition in February 2007. At the time of the acquisition, PrairieStone marketed several pharmacy-related products and services, including the DailyMed medication management system and a license service model whereby it contracted with regional retail chain pharmacies to provide pharmacy expertise and access to a restricted third party network. The various PrairieStone offerings were in the early stages of development, and Company management believed that they could complement the goods and services being offered by the Company at the time. Subsequent to the acquisition, management began to focus on the DailyMed product because of its perceived potential, and the Company has not worked to expand the other PrairieStone offerings. The DailyMed business is in its early stages and lacks meaningful historic financial trends. Additionally, the anticipated growth in the Pharmacy reporting unit has experienced several delays to date. In performing the goodwill impairment analysis for the Pharmacy unit during fiscal fourth quarter 2009, management acknowledged these issues and the difficulty in projecting the timing and amount of future revenue and cash flow streams, which are the basis for the fair value estimates of the reporting unit. Management was obligated to temper its estimates of future cash flows from the Pharmacy business until such time as those cash flows have started to actually be realized with sustained regularity. The impairment analysis resulted in a $13,217,000 impairment charge for fiscal 2009. Subsequent to the impairment charge, $2,500,000 of goodwill remains in the Pharmacy reporting unit. Management does not believe that the historic financial performance of the Pharmacy segment is indicative of future results and continues to believe that the Pharmacy business is the primary revenue growth driver for the Company as a whole.
 
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In conjunction with the goodwill impairment, the Company recognized also an impairment expense relating to the Pharmacy segment’s customer relationships of $9,402,000.
 
During the fourth quarter of fiscal 2009, the Company performed the goodwill impairment analysis for the Catalog reporting unit. The analysis indicated that the carrying value was in excess of the fair value due to the financial performance of this business unit falling short of original projections and the general expectation that the Catalog business may not grow significantly in the near term due to management’s focus on the other lines of business. The Company recorded an impairment charge relating to the Catalog reporting unit of $811,000. Subsequent to the impairment charge, no goodwill remains related to the Catalog reporting unit.
 
Interest Expense, Net
 
The following table summarizes net interest expense for the fiscal years ended March 31 (in thousands):
 
    $ Increase/ % Increase/
        2009         2008         (Decrease)         (Decrease)
Interest expense $      4,123 $      4,395 $      (272 ) -6.2 %
Interest income (51 ) (78 ) 27 -34.6 %
$ 4,072 $ 4,317 $ (245 ) -5.7 %
 
The average interest bearing liabilities balance (balance as of each quarter end during the fiscal year and the beginning year balance divided by five) for fiscal 2009 was $37.9 million compared to $39.0 million for fiscal 2008, which represents a reduction of 2.9%. The decrease in interest expense during the current year was due to the reduction in interest-bearing liabilities as well as a reduction in the interest rates on certain borrowings. Interest income for both fiscal 2009 and 2008 was nominal as the Company uses available cash to reduce the outstanding balance on its working capital line of credit.
 
Loss on Extinguishment of Debt
 
The following table summarizes the components of the loss on extinguishment of debt for the fiscal year ended March 31 (in thousands):
 
        2009
JANA/Vicis debt refinancing - value of equity $     3,769
Write off of remaining debt discount 470
AmerisourceBergen line of credit amendment 248
Loss on extinguishment of debt - total $ 4,487
 
In conjunction with the March 25, 2009 debt refinancing with JANA and Vicis, the Company recognized $3,769,000 as a loss on extinguishment of debt. The Company issued 6,056,4999 shares of common stock valued at $2,059,000 to the lenders as consideration for providing the additional financing and extending the maturity date of the previously existing debt. The Company also exchanged 4,683,111 warrants held by two of the lenders (Vicis and JANA) for 5,616,444 shares of common stock and the incremental fair value was determined to be $1,145,000. Concurrent with the debt refinancing, the holders of the warrants issued in conjunction with the May 2007 private placement transaction agreed to exchange a total of 2,754,726 warrants for 2,754,726 shares of common stock with an incremental fair value of $565,000.
 
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On March 31, 2008, the Company entered into a $5,000,000 note payable agreement with Vicis, which had a corresponding debt discount of $1,202,000. In conjunction with the March 25, 2009 debt refinancing with JANA and Vicis, the remaining debt discount of $470,000 was charged to loss on extinguishment of debt.
 
On June 5, 2008, the Company issued AmerisourceBergen 490,000 warrants to purchase common stock at an exercise price of $0.75 per share. The fair value of the warrants was determined to be $248,000 and was recorded as a loss on extinguishment of debt.
 
Income Taxes
 
Income tax expense was $122,000 for the year ended March 31, 2009 compared to $535,000 for the year ended March 31, 2008, a decrease of $413,000. This income tax reduction is primarily the result of adjusting the March 31, 2008 accrued state income tax liabilities for the State of Michigan as a result of a change in the method of taxation for businesses effective January 1, 2008. Previous to this change, the expense related to the Single Business Tax (“SBT”) was primarily a tax on compensation. The cost of revenues for the Services segment is primarily compensation and, as such, the SBT expense was included in the cost of revenues. Effective January 1, 2008, the expenses associated with the new Michigan Business Tax were recorded in the Income Tax line item due to its primary taxation on income as opposed to compensation.
 
Due to the Company’s losses in recent years, it has paid nominal federal income taxes. For federal income tax purposes, the Company had significant permanent and timing differences between book income and taxable income resulting in combined net deferred tax assets of $32 million to be utilized by the Company for which an offsetting valuation allowance has been established for the entire amount. The Company has a net operating loss carryforward for tax purposes totaling $59.2 million that expires at various dates through 2029. Internal Revenue Code Section 382 rules limit the utilization of certain of these net operating loss carryforwards upon a change of control of the Company. It has been determined that a change in control took place at the time of the reverse merger in 2004, and as such, the utilization of $700,000 of the net operating loss carryforwards will be subject to severe limitations in future periods.
 
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Loss from Discontinued Operations
 
The following table summarizes the components of the loss from discontinued operations for the fiscal years ended March 31, (in thousands):
 
        2009         2008
Revenues, net:
Services - Industrial Staffing $      15,842 $      26,119
Home Health Equipment 17,643 22,841
Pharmacy - Software / Florida 2,133 3,313
Retail operations - 377
Care Clinic, Inc. - 202
$ 35,618 $ 52,852
 
Earnings (loss) from operations:
Services - Industrial Staffing $ (1,791 ) $ 1,766
Home Health Equipment (352 ) (1,081 )
Pharmacy - Software / Florida (65 ) (1,207 )
Retail operations - (597 )
Care Clinic, Inc. - (5,662 )
$ (2,208 ) $ (6,781 )
 
Gain (loss) on disposal:
Home Health Equipment $ (1,258 ) $ (1,458 )
Retail operations - (161 )
Care Clinic, Inc. - (770 )
$ (1,258 ) $ (2,389 )
 
Earnings (loss) from discontinued operations:
 
Services - Industrial Staffing $ (1,791 ) $ 1,766
Home Health Equipment (1,610 ) (2,539 )
Pharmacy - Software / Florida (65 ) (1,207 )
Retail operations - (758 )
Care Clinic, Inc. - (6,432 )
$ (3,466 ) $ (9,170 )
 
HHE Operations
 
In October 2008, the Company recognized $696,000 in additional loss on the sale of its ownership interest in Beacon Respiratory Services, Inc. (“Beacon”), which was divested of in September 2007. See Note 9 – “Stockholders’ Equity” for a more detailed discussion of this transaction.
 
On January 5, 2009, the Company entered into an Asset Purchase Agreement with Braden Partners, L.P. to sell the assets of its HHE business in San Fernando, California. Total proceeds were $503,000, less fees of $24,000. $126,000 of the purchase price was originally held by the buyer to cover the Company’s contingent obligations. The Company retained all accounts receivables for services provided prior to January 2009.
 
On May 18, 2009, the Company completed the sale of its ownership interest in Lovell Medical Supply, Inc., Beacon Respiratory Services of Georgia, Inc., and Trinity Healthcare of Winston-Salem, Inc. to Aerocare Holdings, Inc. for total proceeds of $4,750,000, less fees of $150,000. $475,000 of the purchase price was originally held by the buyer to cover the Company’s contingent obligations. The entities sold represented the Southeast region of the Company’s HHE business.
 
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On May 19, 2009, the Company entered into an Asset Purchase Agreement with Braden Partners, L.P. to sell the assets of its Midwest region of the Company’s HHE business. Total proceeds were $4,000,000, less fees of $150,000. $1,000,000 of the purchase price was originally held by the buyer to cover the Company’s contingent obligations. The Company retained all accounts receivable for services provided prior to May 2009.
 
Based on the combined sales price of the HHE business, the Company recorded an impairment charge of $540,000 in the fourth quarter of fiscal 2009.
 
The net loss for the HHE discontinued operations was $352,000, and an additional loss on the disposal of discontinued operations of $1,258,000 was recorded.
 
Pharmacy Operations
 
On June 11, 2009, the Company entered into an Asset Purchase Agreement with a leading pharmacy management company to sell substantially all of the assets of JASCORP, LLC (“JASCORP”) for proceeds of $2,200,000, less estimated fees of $100,000. $220,000 of the purchase price was held back by the buyer until December 2011 in order to cover the Company’s contingent obligations. JASCORP operates the retail pharmacy software business that the Company acquired in September 2007. As part of the divestiture, the Company entered into a License and Services Agreement with the buyer that provides the Company the right to use the software for internal purposes.
 
The net loss for the Pharmacy discontinued operations was $65,000.
 
Industrial Staffing Operations
 
On May 29, 2009, the Company finalized the sale of substantially all of the assets of its industrial and non-medical staffing business for cash proceeds of $250,000, which will be paid in five equal installments through September 2009. Additionally, the Company will receive 50% of the future earnings of the business until the total payments equal $1.6 million. Such payments, if any, will be recorded as additional gains when earned. The Company retained all accounts receivable for services provided prior to May 29, 2009.
 
The net loss for the Industrial Staffing discontinued operations was $1,791,000.
 
Liquidity and Capital Resources
 
During the first quarter 2010, the Company finalized the sale of its HHE, industrial staffing and pharmacy software businesses. Subsequent to these divestitures, the Company narrowed its focus to a single vision of “Keeping People at Home and Healthier Longer” and to improving the performance of its two remaining core business units: Home Care/Medical Staffing (Services) and Pharmacy. Management has been focused on growing revenues and improving the profitability within each segment, implementing cost reductions to better align the Company’s selling, general and administrative (“SG&A”) expenses with current business levels and ensuring the Company has adequate financial resources and liquidity to fund its business plans.
 
Within the Pharmacy segment, revenue increased by more than 150% year-over-year to $15.2 million in fiscal 2010. In June 2009, the Company entered into an agreement with WellPoint whereby the Company will provide its DailyMed medication management program to WellPoint’s high-risk Medicaid members in five states where WellPoint companies provide Medicaid managed care benefits through its State Sponsored Business division. The program was launched to WellPoint’s high-risk members in Virginia in August 2009. The program is being rolled out to WellPoint’s California and South Carolina patients, and enrollment in Kansas and New York is expected to begin the first half of fiscal 2011.
 
The WellPoint agreement, combined with the Company’s relationship with the Indiana Medicaid program and other payers, provides the Company with a significant growth opportunity within its Pharmacy segment. As the Pharmacy business grows, management expects more payers will become aware of and interested in the unique benefits of the DailyMed program. Additionally, the national focus on healthcare has increased awareness of the importance of medication adherence and the need for solutions that reduce costs by enabling people to take medications properly and safely while remaining in their homes. As a result, management believes that the Pharmacy segment will establish additional payer relationships over the next several years, which will drive revenue growth well in excess of that generated from the existing payer relationships.
 
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The long-term success of the Pharmacy business depends heavily on the continued growth in revenue, improvement in margins, the ability to reduce SG&A expenses as a percentage of revenue, and additional revenue from cost sharing agreements. Management believes that the Company’s continued focus on reducing healthcare costs and establishing relationships with payers will ultimately provide the necessary revenue growth to allow the Company to leverage its current SG&A structure. The Pharmacy segment entered into a new prime vendor agreement in April 2010. This new agreement combined with various on-going operational initiatives and software enhancements is expected to improve gross margins during fiscal 2011. SG&A expenses are expected to decline as a percentage of revenue due to operational improvements, investments in new operating systems and technology, and leveraging more fixed expenses over a larger revenue base. The combination of revenue growth, improved margins and lower SG&A expenses is expected to reduce the operating losses and cash needed to fund the Pharmacy business. However, it is expected that the Pharmacy segment will continue to be a net user of cash through most of fiscal 2011.
 
Within the Services segment, the Company has maintained its Home Care revenue despite challenging economic conditions and high levels of unemployment, which both negatively impacted Home Care demand in the short-term. Management continues to explore cost-effective ways to organically grow the Home Care revenue. At the same time, the Company has seen a significant reduction in Medical Staffing revenue consistent with overall staffing industry trends. The Company has reduced the SG&A in this segment over the last 12 months and will continue to look for additional cost-saving opportunities. Management expects these on-going initiatives to improve the Service segment results during fiscal 2011. At current levels of revenue, it is unlikely that the profitability of the Services segment will be sufficient to offset the losses and cash usage in the Pharmacy segment. However, when revenues return to more historic levels as the Home Care business grows and the Medical Staffing market recovers, the Services segment is expected to see an improvement in operating income and cash flow.
 
The Company continues to have a negative cash flow on a monthly basis as the Pharmacy losses and Corporate expenses exceed the cash flows generated by the Services segment. In addition, certain financial covenants exist with lenders that could limit the Company’s flexibility and financing options. While management believes that the Company’s financial performance will improve during fiscal 2011 and move toward profitability and positive cash flow in fiscal 2012, there are many actions that must be successfully implemented by the management team in order to achieve these goals.
 
In November 2009, the Company finalized an equity financing transaction and raised $10,243,000 in net cash proceeds. Consistent with the terms of the debt agreement dated September 10, 2009, the Company used $2,400,000 of the proceeds to pay off the outstanding balance. The remaining $7,815,000 is being used to fund on-going operations.
 
In April 2010, and in conjunction with the Pharmacy’s new prime vendor agreement, the Company executed a $5.0 million Line of Credit and Security Agreement with its new vendor. The interest rate is the greater of 7% and the prime rate plus 3%, and the term of the loan is for three years. The total amount available under this financing arrangement is $5.0 million less amounts due for normal vendor payables and for accrued interest. No interest payments are due during the first 12 months of the agreement. Beginning in April 2011, no additional advances will be made if the Pharmacy segment’s borrowing base does not exceed certain thresholds.
 
Management believes that the additional cash raised over the last six months will provide the Company with the capital necessary to support operating cash requirements in the near term as the financial performance improves. If and when necessary, management believes that it would be able to raise additional capital to support on-going operations and to fund growth opportunities. This capital could be in the form of debt or equity financing.
 
While there are some synergies between the Services and Pharmacy businesses, each could operate as standalone businesses and each could be sold to, or have investment made by, strategic or financial investors to fund operations and other growth opportunities. In addition to the normal financing opportunities as described above, this provides further financing flexibility should there be a need for additional capital to support the growth within one or both segments.
 
The above discussion represents management’s intentions as of June 2010. There can be no assurances that any actions contemplated or available will be successfully undertaken or that management will not change its plans.
 
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The following summarizes the Company’s cash flows for all operations for the fiscal years ended March 31, (in thousands):
 
        2010         2009         2008
Net loss $     (31,086 ) $     (46,470 ) $     (23,398 )
Net cash provided by (used in) operating activities (5,881 ) 778 (7,121 )
Net cash provided by (used in) investing activities 8,143 (1,286 ) 4,000
Net cash provided by (used in) financing activities 1,660 (4,321 ) 6,478
Net change in cash and cash equivalents 3,922 (4,829 ) 3,357
Cash and cash equivalents, end of year 5,444 1,522 6,351
Availability under line of credit agreement $ 389 $ 2,945 $ -

At March 31, 2010, the Company had $5,833,000 in cash and line of credit availability compared to $4,467,000 at March 31, 2009, an increase of $1,366,000. The line of credit balance fluctuates based on working capital needs. The increase in cash plus line of credit availability reflects the net increase in cash provided by investing and financing activities, specifically the cash raised in conjunction with an equity financing transaction in November 2009 as more fully described below. The line of credit availability is based on the eligible accounts receivable within the Services segment.
 
Net cash provided by (used in) operating activities was ($5,881,000) and $778,000 for the years ended March 31, 2010 and 2009, respectively. The decrease in cash flows from operations was primarily driven by the operating losses generated by the Pharmacy segment and the loss of earnings generated from the operations of the businesses disposed of during the fiscal first quarter 2010. These losses were partially offset by the increase in operating assets and liabilities in fiscal 2010 of $3,690,000 compared to a decrease of $656,000 in fiscal 2009. This working capital improvement in fiscal 2010 was primarily driven by the collection of the receivables retained subsequent to the sale of the HHE and Industrial Staffing businesses during fiscal first quarter 2010 and the improved collection efforts of accounts receivable in the Services segment.
 
Cash provided by investing activities for fiscal 2010 of $8,143,000 included $9,498,000 of cash proceeds from the various business disposals in early fiscal 2010. These cash proceeds were offset by $574,000 in capital expenditures, $281,000 in cash paid relating to certain business acquisitions, and $500,000 of cash used to establish a restricted cash account at Comerica Bank used as additional security for the Services segment line of credit. Cash used in investing activities for fiscal 2009 totaled $1,286,000. This amount included $1,281,000 of capital expenditures, primarily relating to the HHE business which was disposed of in May 2009, and $675,000 used for business acquisitions offset by $670,000 of proceeds from business disposals. The $675,000 used for business acquisitions includes $274,000 for fiscal 2009 acquisitions while the remaining $401,000 represents payments associated with acquisitions made in previous periods. Proceeds from business disposals includes the proceeds from the sale of the California HHE operations in January 2009 of $314,000 and a final payment of $356,000 relating to the sale of its Florida HHE operations during fiscal 2008. Cash provided by investing activities for fiscal 2008 included $5,781,000 received upon the sale of the Florida and Colorado HHE operations, offset by $507,000 of cash used for acquisitions, primarily the $384,000 used to purchase JASCORP, LLC in July 2007. Capital expenditures for fiscal 2008 of $1,274,000 were consistent with fiscal 2009 capital expenditures.
 
Net cash provided by financing activities for fiscal 2010 was $1,660,000. In November 2009, the Company raised $10,243,000 in additional equity financing, net of fees paid in cash of $857,000. In September 2009, the Company received $2,142,000 in additional debt financing, net of fees, and this amount was paid in full upon completion of the equity financing in November. During fiscal 2010, the Company made $9,375,000 in debt and capital lease payments. The majority of these payments were made subsequent to the various business divestitures during fiscal first quarter 2010 and consistent with terms in the certain debt agreements. The Company also reduced its outstanding line of credit balance by $1,351,000 during fiscal 2010. Cash used in financing activities for fiscal 2009 consisted of a $6,416,000 reduction in the outstanding line of credit balance and $705,000 in principal payments on outstanding notes payable and capital leases. In March 2009, the Company secured an additional $3,000,000 in debt financing. Net cash provided by financing activities for fiscal 2008 was $6,478,000. In May 2007, The Company raised $12,442,000 in cash through a private placement of its common stock. A significant portion of the proceeds from the private placement and the disposal of the Florida and Colorado HHE locations was used to pay down outstanding debt.
 
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As of March 31, 2010, the Company had total debt obligations of $33,993,000, of which $17,580,000 and $6,505,000 were payable to JANA and Vicis, respectively, and mature in April 2012. Both JANA and Vicis own approximately 15% of the Company’s outstanding common stock. Additionally, the Company had outstanding balances of $7,774,000 due to Comerica Bank and $750,000 due to AmerisourceBergen Drug Corporation. The balance due AmerisourceBergen Drug Corporation was paid in full in April 2010. See Notes 7 and 8 to the Consolidated Financial Statements included in this report for more detail on these debt agreements.
 
On April 23, 2010, the Company executed a Line of Credit and Security Agreement with H.D. Smith Wholesale Drug Co. (“H.D. Smith”), its new primary supplier of pharmaceutical products. Under terms of the agreement, the Company can borrow up to $5,000,000, including amounts payable under normal product purchasing terms. Beginning April 1, 2011, borrowings under the agreement will be limited based upon a borrowing base of the assets of the Pharmacy business. The debt accrues interest at the greater of 7% and the prime rate plus 3%, and it matures on April 23, 2013. Interest during the first 12 months of the agreement will be capitalized and then interest only payments are required from May 2011 through April 2012. Beginning with May 2012, the Company will make monthly payments of $75,000 plus interest. Borrowing may be prepaid at any time without penalty. The agreement includes certain financial covenants beginning in fiscal 2012. In conjunction with the financing, the Company issued H.D. Smith warrants to purchase common stock, and the warrant terms are more fully described in Note 16.
 
The debt agreements with JANA, Vicis and LSP Partners require the lenders’ consent for debt transactions which are senior or pari passu to the debt due them. Additionally, the lenders also require consent for equity transactions. The Company received the lenders consent in conjunction with the equity financing in November 2009 and the H.D. Smith debt financing in April 2010.
 
The Comerica Bank line of credit agreement includes certain financial covenants. These covenants are specific to Arcadia Services, Inc., a wholly-owned subsidiary of the Company, which is the legal entity that operates the Company’s Services segment. As of March 31, 2010, the financial covenants are as follows: tangible effective net worth of $2 million as of June 30, 2009 and gradually increasing on a quarterly basis to $2.8 million by September 2011; minimum quarterly net income of $400,000; and, minimum subordination of indebtedness of Arcadia Resources, Inc. of $15.5 million. In the event of default of any one of the financial covenants, the bank may declare all outstanding indebtedness due and payable, and the bank shall not be obligated to make any further advances to Arcadia Services, Inc. If this were to occur, the Company would need to obtain alternative financing, if possible, and the terms of this alternative financing would presumably be less attractive than those of the current line of credit agreement. Arcadia Services, Inc. was not in compliance with the minimum quarterly net income covenant for the fiscal fourth quarter ending March 31, 2010 due to the goodwill impairment expense recognized during the quarter. In June 2010, the Company entered into an amendment whereby the bank waived the event of default. Based on the Company’s projections for the fiscal year ending March 31, 2011, management does not anticipate that Arcadia Services, Inc. will violate its financial covenants during the fiscal year. These projections include various assumptions about future performance of the Services segment, and actual results may differ materially from these projections. Additionally, Arcadia Services, Inc. ability to meet its minimum subordination of indebtedness covenant could be impacted by the parent company’s available cash necessary to fund the early stage Pharmacy operations.
 
The H.D Smith line of credit agreement includes certain financial covenants specific to PrairieStone Pharmacy, LLC, a wholly-owned subsidiary of the Company, which is the legal entity that operates the Company’s Pharmacy segment. Specifically, the financial covenants are as follows: positive quarterly earnings before income tax, depreciation, and amortization (“EBITDA”) and current assets divided by current liabilities of greater than .75. These financial covenants do not take affect until the fiscal quarter ending March 31, 2012. The Company’s ability to meet these financial covenants in the future will depend on the Pharmacy segment’s ability to improve its financial performance over the next seven fiscal quarters.
 
Net accounts receivable from continuing operations were $12,366,000 at March 31, 2010 compared to $15,679,000 at March 31, 2009. The Services segment account for 89% and 95% at March 31, 2010 and 2009, respectively.
 
The Company has a limited number of customers with individually large amounts due at any given balance sheet date. The Company’s payer mix for the year ended March 31, 2010 was as follows:
 
Medicare <0.5 %
Medicaid/other government 30 %
Commercial insurance 18 %
Institution/facilities 30 %
Private pay 22 %

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Off-Balance Sheet Arrangements
 
The Company has no off-balance sheet arrangements.
 
Contractual Obligations and Commercial Commitments
 
As of March 31, 2010, the Company had contractual obligations, in the form of non-cancelable debt and lease agreements, as follows (in thousands):
 
Payments due by period
  More
  Less than 1     than 5
Total      year      2 - 3 years      4 - 5 years      years
Operating leases $       4,421 $       962 $       1,522 $       1,112 $       825
Capital leases $ 88   69   19 - -
Long-term obligations $ 26,131   939   25,192     - -
Lines of credit (1) $ 7,774 - 7,774 -   -
Interest (2) $ 6,132 3,088 3,044 -   -
       Total $ 44,546 $ 5,058 $ 37,551 $ 1,112 $ 825
 
      
(1)
      
Balance represents the amount due to Comerica Bank at March 31, 2010 under its working capital line of credit agreement. This balance fluctuates on a daily balance depending on working capital needs.
(2)
 
 
Future interest amounts for variable interest obligations are based on the interest rate in effect as of March 31, 2010. The debt agreements with JANA Master Fund, Ltd., Vicis Capital Master Fund, and LSP Partners, LP provide for the Company to elect to either pay the quarterly interest in cash or to add the amount to the principal balance. The future payment schedule assumes that these amounts are paid in cash. The aggregate amounts due to these three lenders in the above schedule are: less than 1 year - $2,615,000 and 2 to 3 years - $2,890,000.
 
Recent Accounting Pronouncements
 
On July 1, 2009, the Financial Accounting Standards Board (“FASB”) issued the FASB Accounting Standards Codification (the “Codification”). The Codification became the single source of authoritative nongovernmental U.S. GAAP, superseding existing accounting pronouncements issued by the FASB, American Institute of Certified Public Accountants (“AICPA”), and the Emerging Issues Task Force (“EITF”). The Codification eliminates the previous U.S. GAAP hierarchy and establishes one level of authoritative GAAP. All other literature is considered non-authoritative. The Codification is effective for interim and annual periods ending after September 15, 2009. The Company adopted the Codification during its fiscal second quarter 2010. There was no impact to the consolidated financial results as this change is disclosure-only in nature.
 
In April 2009, the FASB issued additional requirements regarding interim disclosures about the fair value of financial instruments which were previously only disclosed on an annual basis. Entities are now required to disclose the fair value of financial instruments which are not recorded at fair value in the financial statements in both their interim and annual financial statements. The new requirements were effective for interim and annual periods ending after June 15, 2009 on a prospective basis. The Company adopted these requirements in the fiscal first quarter 2010. The recorded amounts of the Company’s financial instruments at March 31, 2010 approximate fair value.
 
On April 1, 2009, the Company adopted the revised FASB guidance regarding business combinations which was required to be applied to business combinations on a prospective basis. The revised guidance requires that the acquisition method of accounting be applied to a broader set of business combinations, amends the definition of a business combination, provides a definition of a business, requires an acquirer to recognize an acquired business at its fair value at the acquisition date and requires the assets and liabilities assumed in a business combination to be measured and recognized at their fair values as of the acquisition date (with limited exceptions). There was no impact upon adoption and the effects of this guidance will depend on the nature and significance of business combinations occurring after the effective date.
 
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In June 2008, the FASB ratified consensus which addresses how an entity should evaluate whether an instrument is indexed to its own stock. The consensus is effective for fiscal years (and interim periods) beginning after December 15, 2008 and must be applied to outstanding instruments as of the beginning of the fiscal year in which the consensus is adopted and should be treated as a cumulative-effect adjustment to the opening balance of retained earnings. Early adoption was not permitted. As of April 1, 2009, the adoption of this consensus did not have an impact on the Company’s financial statement as of the beginning of the fiscal year. However, as described in Note 9, the Company issued warrants in November 2009 which have been accounted for under this guidance. See Note 9 for a discussion on the impact that the adoption of this guidance had on the Company’s financial statements.
 
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
The majority of our cash balances and cash equivalents are held primarily in highly liquid commercial bank accounts. The Company utilizes a line of credit to fund operational cash needs. The risk associated with fluctuating interest rates is limited to our cash equivalents and our borrowings. We do not believe that a 10% change in interest rates would have a significant effect on our results of operations or cash flows. All revenues since inception have been in the U.S. and in U.S. Dollars; therefore, management has not yet adopted a strategy for foreign currency rate exposure as it is not anticipated that foreign revenues are likely to occur in the near future.
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
The financial statements follow Item 15 beginning at page F-4 and are incorporated by reference in response to this item.
 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
 
None.
 
ITEM 9A. CONTROLS AND PROCEDURES
 
Disclosure Controls and Procedures
 
The Company maintains disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed in its reports filed pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer as appropriate, to allow timely decisions regarding required disclosure. A control system, no matter how well designed and implemented, can provide only reasonable, not absolute, assurance the objectives of the control system are met.
 
As of March 31, 2010, our management, with the participation of our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures as such term is defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2010.
 
Management’s Report on Internal Control over Financial Reporting
 
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Internal control over financial reporting, as defined in Rule 13a-15(f) under the Exchange Act, is a set of processes designed by, or under the supervision of, the Company’s CEO and CFO, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP and includes those policies and procedures that:
  • Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions and dispositions of our assets;
     
  • Provide reasonable assurance our transactions are recorded as necessary to permit preparation of our financial statements in accordance with GAAP, and that receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
     
  • Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statement.
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Because of its inherent limitations, internal control over financial reporting may not prevent or detect all misstatements. It should be noted that any system of internal control, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system will be met. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
Under the supervision and with the participation of the Company’s management, including the Company’s CEO and CFO, the Company conducted an assessment of the effectiveness of its internal control over financial reporting based on criteria established in “Internal Control-Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), as of March 31, 2010.
 
Based on this assessment, we assert that, as of March 31, 2010 and based on the specific criteria, the Company maintained effective internal control over financial reporting, involving the preparation and reporting of the Company’s consolidated financial statements presented in uniformity with U.S. GAAP.
 
The effectiveness of the Company’s internal control over financial reporting as of March 31, 2010 has been audited by BDO Seidman, LLP, an independent registered public accounting firm, as stated in its report which is included under the Report of Independent Registered Public Accounting Firm on Internal Controls Over Financial Reporting” in this Annual Report on Form 10-K.
 
Changes in Internal Control Over Financial Reporting
 
There has been no change in the internal control over financial reporting (as defined in Securities Exchange Act Rule 13a-15(f)) that occurred during the fourth quarter of the fiscal year covered by this annual report that has materially affected, or is reasonably likely to materially affect, the internal control over financial reporting.
 
ITEM 9B. OTHER INFORMATION
 
None.
 
Part III
 
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
 
Information regarding our board of directors, audit committee, and audit committee financial expert is set forth under the caption “Board of Directors and Committees of the Board” and “Governance of the Company” in our definitive Proxy Statement to be filed in connection with our 2010 Annual Meeting of Stockholders and such information is incorporated herein by reference. Information regarding Section 16(a) beneficial ownership compliance is set forth under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” in our definitive Proxy Statement to be filed in connection with our 2010 Annual Meeting of Stockholders and such information is incorporated by reference. A list of our executive officers is included in Part I Item 1 of this Report under the heading “Executive Officers.”
 
We have adopted a Code of Business Conduct and Ethics that applies to each of our directors, officers, employees and principal contractors, including our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. The Code of Business Conduct and Ethics is posted on the Company’s website (www arcadiahealthcare.com). The Company will provide a copy of the Amended and Restated Code of Ethics, without charge, to any person who sends a written request addressed to the Chairman and CEO at Arcadia Resources, Inc. at 9320 Priority Way West Drive, Indianapolis, Indiana 46240. The Company intends to disclose any waivers or amendments to its Amended and Restated Code of Ethics by disclosure on its website (www.arcadiahealthcare.com) rather than in a report on Form 8-K Item 5.05, filing.
 
ITEM 11. EXECUTIVE COMPENSATION
 
The information required by this item is set forth under the captions “Compensation Tables” and “Director Compensation” in our definitive Proxy Statement to be filed in connection with our 2010 Annual Meeting of Stockholders and such information is incorporated herein by reference.
 
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
 
The information required by this item is set forth under the captions “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information” in our definitive Proxy Statement to be filed in connection with our 2010 Annual Meeting of Stockholders and such information is incorporated herein by reference.
 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
 
The information required by this item is set forth under the captions “Certain Relationships and Related Transactions” and “Compensation Committee Interlocks and Insider Participation” in our definitive Proxy Statement to be filed in connection with our 2010 Annual Meeting of Stockholders and such information is incorporated herein by reference.
 
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
 
The information required by this item is set forth under the caption “Fees Paid to Independent Registered Auditors” in our definitive Proxy Statement to be filed in connection with our 2010 Annual Meeting of Stockholders and such information is incorporated herein by reference.
 
PART IV
 
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 
(a) Documents filed as part of this report:
 
       1.        Financial Statements:
   
      Reports of Independent Registered Public Accounting Firm
   
  Consolidated Balance Sheets as of March 31, 2010 and 2009
   
  Consolidated Statements of Operations for the years ended March 31, 2010, 2009 and 2008
   
  Consolidated Statements of Stockholders’ Equity (Deficit) for the years ended March 31, 2010, 2009 and 2008
   
  Consolidated Statements of Cash Flows for the years ended March 31, 2010, 2009 and 2008
   
  Notes to Consolidated Financial Statements
   
2. Financial Statement Schedules:
   
  Schedule I – Consolidated Financial Information of Registrant
   
  Schedule II – Valuation and Qualifying Accounts
   
  All other schedules for which provision is made in Regulation S-X either (i) are not required under the related instructions or are inapplicable and, therefore, have been omitted, or (ii) the information required is included in the Consolidated Financial Statements or the Notes thereto that are a part hereof.
   
3. Exhibits:
   
  The exhibits included as part of this report are listed in the attached Exhibit Index, which is incorporated herein by reference.
 
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ARCADIA RESOURCES, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
 
Reports of Independent Registered Public Accounting Firm F-2
Consolidated Balance Sheets as of March 31, 2010 and 2009 F-4
Consolidated Statements of Operations for the years ended March 31, 2010, 2009 and 2008 F-5
Consolidated Statements of Stockholders’ Equity (Deficit) for the years ended March 31, 2010, 2009 and 2008 F-6
Consolidated Statements of Cash Flows for the years ended March 31, 2010, 2009 and 2008 F-7
Notes to Consolidated Financial Statements F-9
Schedule I – Consolidated Financial Information of Registrant F-40
Schedule II – Valuation and Qualifying Accounts F-44

48
 


SIGNATURES
 
     In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
June 10, 2010 By:  /s/ Marvin R. Richardson
Marvin R. Richardson
  Chief Executive Officer (Principal  
Executive Officer) and a Director  
   
June 10, 2010 By: /s/ Matthew R. Middendorf
Matthew R. Middendorf
Treasurer and Chief Financial Officer
(Principal Financial and Accounting Officer)

     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.
 
June 10 , 2010 By:  /s/ Marvin R. Richardson
Marvin R. Richardson
President, Chief Executive Officer and Director
 
June 10, 2010 By: /s/ John T. Thornton
John T. Thornton  
Director  
 
June 10, 2010 By: /s/ Peter A. Brusca, M.D.  
  Peter A. Brusca, M.D.
Director
 
June 10, 2010 By: /s/ Joseph Mauriello  
Joseph Mauriello
Director
 
June 10 , 2010 By: /s/ Daniel Eisenstadt
Daniel Eisenstadt
Director

49
 


Exhibit Index
 
The following Exhibits are filed herewith and made a part hereof:
 
Exhibit
Number       Description of Exhibit
3.1 Amended and Restated Articles of Incorporation (incorporated by reference to Exhibit 3.1 of Form 8-K filed November 9, 2009)
3.2 Amended and Restated Bylaws of Arcadia Resources, Inc. (Nov. 5, 2008) (incorporated by reference to Exhibit 3.2 of Form 10-Q filed on November 6, 2008)
4.1 Form of Regulation D Class A Common Stock Purchase Warrant (incorporated by reference to Exhibit 4.1 of Form 8-K filed on May 24, 2004)
4.2   Class A Warrant issued to John E. Elliott, II (incorporated by reference to Exhibit 4.2 of Form 8-K filed on May 24, 2004)
4.3 Class A Warrant issued to Lawrence Kuhnert (incorporated by reference to Exhibit 4.3 of Form 8-K filed on May 24, 2004)
4.4 John E. Elliot, II and Lawrence Kuhnert Registration Rights Agreement, dated May 7, 2004 (incorporated by reference to Exhibit 4.6 of Form S-1/A, Amendment No. 1, filed August 27, 2004)
4.5 Form Note Purchase Agreement (incorporated by reference to Exhibit 4.7 of Form S-1/A, Amendment No. 1, filed August 27, 2004)
4.6 Cleveland Overseas Settlement Agreement, dated June 16, 2004 (incorporated by reference to Exhibit 4.11 of Form S-1/A, Amendment No. 1, filed August 27, 2004)
4.7 Cleveland Overseas Warrant for Purchase of 100,000 Shares of Common Stock (incorporated by reference to Exhibit 4.12 of Form S-1/A, Amendment No. 1, filed August 27, 2004)
4.8 Cleveland Overseas Registration Rights Agreement, dated February 28, 2003 (incorporated by reference to Exhibit 4.13 of Form S-1/A, Amendment No. 1, filed August 27, 2004)
4.9 Stephen Garchik Option to Acquire 500,000 Shares, dated February 3, 2004, between Critical Home Care, Inc. and Jana Master Fund, Ltd. (incorporated by reference to Exhibit 4.14 of Form S-1/A, Amendment No. 1, filed August 27, 2004)
4.10 Stephen Garchik Registration Rights Agreement, dated February 3, 2004 (incorporated by reference to Exhibit 4.15 of Form S-1/A, Amendment No. 1, filed August 27, 2004)
4.11 Global Asset Management Settlement Agreement which includes provision regarding registration rights (to be filed by amendment) (incorporated by reference to Exhibit 4.16 of Form S-1/A, Amendment No. 1, filed August 27, 2004)
4.12 Stanley Scholsohn Family Partnership Stock Option Agreement, dated February 22, 2003 (incorporated by reference to Exhibit 4.17 of Form S-1/A, Amendment No. 1, filed August 27, 2004)
4.13 Stanley Scholsohn Family Partnership Registration Rights Agreement, dated February 22, 2004 (incorporated by reference to Exhibit 4.18 of Form S-1/A, Amendment No. 1, filed August 27, 2004)
4.14 Form of Regulation D Registration Rights Agreement (incorporated by reference to Exhibit 4.19 of Form S-1/A, Amendment No. 1, filed August 27, 2004)
4.15 Form of stock purchase agreement (incorporated by reference to Exhibit 4.1 of Form 8-K/A filed on May 2, 2005)
4.16 Warrant Purchase and Registration Rights Agreement dated September 26, 2005 (incorporated by reference to Exhibit 4.1 of Form 8-K filed on September 30, 2005)
4.17 Warrant Purchase and Registration Rights Agreement dated September 28, 2005 (incorporated by reference to Exhibit 4.2 of Form 8-K filed on September 30, 2005)
4.18 Form of B-1 Warrant (incorporated by reference to Exhibit 4.3 of Form 8-K filed on September 30, 2005)
4.19 Form of B-2 Warrant (incorporated by reference to Exhibit 4.4 of Form 8-K filed on September 30, 2005)
4.20 Private Stock Purchase Agreement SICAV 1 dated November 28, 2005 (incorporated by reference to Exhibit 4.1 of Form 10-Q on February 14, 2006)
4.21 Private Stock Purchase Agreement SICAV 2 dated November 28, 2005 (incorporated by reference to Exhibit 4.2 of Form 10-Q on February 14, 2006)
4.22 Master Exchange Agreement among JANA Master Fund, Ltd., Vicis Capital Master Fund, LSP Partners, LP and Arcadia Resources, Inc. dated March 25, 2009 (incorporated by reference to Exhibit 10.1 of Form 8-K filed on March 31, 2009)
4.23 JANA Master Fund, Ltd. Promissory Note dated March 25, 2009 (incorporated by reference to Exhibit 10.2 of Form 8-K filed on March 31, 2009)
4.24 Vicis Capital Master Fund Promissory Note dated March 25, 2009 (incorporated by reference to Exhibit 10.3 of Form 8-K filed on March 31, 2009)

50
 


4.25      LSP Partners, LP Promissory Note dated March 25, 2009 (incorporated by reference to Exhibit 10.4 of Form 8-K filed on March 31, 2009)
4.26 Assignment and Assumption Agreement among JANA Master Fund, Ltd., Vicis Capital Master Fund, LSP Partners, LP and Arcadia Resources, Inc. dated March 25, 2009 (incorporated by reference to Exhibit 10.5 of Form 8-K filed on March 31, 2009)
4.27 Form of Subscription Agreement (incorporated by reference to Exhibit 4.1 of Form 8-K filed on November 9, 2009)
4.28 Form of Warrant to Purchase Common Stock (incorporated by reference to Exhibit 4.2 of Form 8-K filed on November 9, 2009)
4.29 Common Stock Purchase Warrant No. 99 dated April 23, 2010 issued to H. D. Smith Wholesale Drug Co. (incorporated by reference to Exhibit 2.5 of Form 8-K filed on April 23, 2010)
4.30 Common Stock Purchase Warrant No. 100 dated April 23, 2010 issued to H. D. Smith Wholesale Drug Co. (incorporated by reference to Exhibit 2.5 of Form 8-K filed on April 23, 2010)
9.1 Form of Voting Agreement (incorporated by reference to Exhibit 9.1 of Form 8-K filed on May 24, 2004)
10.1 2006 Equity Incentive Plan as Amended (incorporated by reference to Appendix B to the Company’s Proxy Statement on Schedule 14A filed on September 18, 2009)
10.2 Agreement and Plan of Merger dated May 7, 2004 by and among RKDA, Inc., CHC Sub, Inc., Critical Home Care, Inc., John E. Elliott, II, Lawrence Kuhnert and David Bensol (incorporated by reference to Exhibit 2.1 of Form 8-K filed on May 24, 2004)
10.3 Stock Purchase Agreement dated as of May 7, 2004 by and among RKDA, Inc., Arcadia Services, Inc., Addus Healthcare, Inc. and W. Andrew Wright (incorporated by reference to Exhibit 2.3 of Form 8-K filed on May 24, 2004)
10.4 Escrow Agreement made as of May 7, 2004, by and among Critical Home Care, Inc., David Bensol and Nathan Neuman & Nathan P.C. (incorporated by reference to Exhibit 10.6 of Form 8-K filed on May 24, 2004)
10.5 Stock Option Agreement dated May 7, 2004, between Critical Home Care, Inc. and John E. Elliott, II (incorporated by reference to Exhibit 10.7 of Form 8-K filed on May 24, 2004)
10.6 Stock Option Agreement dated May 7, 2004, between Critical Home Care, Inc. and Lawrence Kuhnert (incorporated by reference to Exhibit 10.8 of Form 8-K filed on May 24, 2004)
10.7 Agreement of Modification (without exhibits) dated May 6, 2004, among Critical Home Care, Inc. and David Bensol and All Care Medical Products Corp., Luigi Piccione and S&L Realty, LLC (incorporated by reference to Exhibit 10.9 of Form 8-K filed on May 24, 2004)
10.8 Lease of City Center Office Park—South Building (incorporated by reference to Exhibit 10.38 of Form S-1/A, Amendment No. 1, filed August 27, 2004)
10.9 Critical Home Care, Inc. Common Stock Purchase Warrant to Purchase up to 3,150,000 Shares of the Common Stock of Critical Home Care, Inc., dated September 21, 2004 (incorporated by reference to Exhibit 10.3 of Form 8-K filed on September 27, 2004)
10.10 Investor Rights Agreement by and among Critical Home Care, Inc. and BayStar Capital II, L.P. dated September 21, 2004 (incorporated by reference to Exhibit 10.4 of Form 8-K filed on September 27, 2004)
10.11 Asset Purchase Agreement dated August 30, 2004 by and between Arcadia Health Services, Inc., Second Solutions, Inc., Merit Staffing Resources, Inc. and Harriette Hunter (incorporated by reference to Exhibit 99.1 of Form 8-K filed on September 2, 2004)
10.12 Agreement and Plan of Merger between Critical Home Care, Inc. and Arcadia Resources, Inc. (incorporated by reference to Exhibit 10.1 of Form 8-K filed on November 16, 2004)
10.13 Form Stock Purchase Agreement (incorporated by reference to Exhibit 4.1 of Form 8-K filed on February 8, 2005)
10.14 Stock Option Agreement dated March 22, 2005 (incorporated by reference to Exhibit 10.2 of Form 8-K filed on March 28, 2005)
10.15 Stock Purchase Agreement dated April 29, 2005, by and among Arcadia Health Services of Michigan, Inc., Home Health Professionals, Inc., and the selling shareholders (incorporated by reference to Exhibit 10.1 of Form 8-K/A filed on May 2, 2005)
10.16 Form of Director Compensation Agreement (incorporated by reference to Exhibit 10.62 of Form 10-K filed on June 29, 2006)
10.17 Form of Director Stock Option Agreement (incorporated by reference to Exhibit 10.63 of Form 10-K filed on June 29, 2006)
10.18 Form of Stock Grant Agreement dated June 22, 2006 (incorporated by reference to Exhibit 10.64 of Form 10-K filed on June 29, 2006)
10.19 Amended and Restated Employment Agreement dated August 12, 2009, by and between Arcadia Resources, Inc. and Marvin Richardson (incorporated by reference to Exhibit 10.1 of Form 10-Q filed on August 13, 2009)
10.20 Severance and Release Agreement dated February 21, 2007 by and between Arcadia Resources, Inc. and Lawrence R. Kuhnert (incorporated by reference to Exhibit 10.68 of Form 10-K filed on June 29, 2007)
 
51
 


10.21      Limited Liability Company Ownership Interest Purchase Agreement dated January 28, 2007 by and among Arcadia Resources, Inc., PrairieStone Pharmacy, LLC, and the selling shareholders of PrairieStone Pharmacy, LLC (incorporated by reference to Exhibit 10.1 of Form 10-Q filed on February 14, 2007)
10.22 Registration Rights Agreement dated February 16, 2007 by and among Arcadia Resources, Inc., PrairieStone Pharmacy, LLC, and the selling shareholders of PrairieStone Pharmacy, LLC (incorporated by reference to Exhibit 10.70 of Form 10-K filed on June 29, 2007)
10.23 Form of Securities Purchase Agreement from December 2006 Private Placement (incorporated by reference to Exhibit 10.1 of Form 8-K filed on January 4, 2007)
10.24 Form of Registration Rights Agreement from December 2006 Private Placement (incorporated by reference to Exhibit 10.2 of Form 8-K filed on January 4, 2007)
10.25 Form of Restricted Stock Award Agreement (incorporated by reference to Exhibit 10.1 of the Company’s Registration Statement on Form S-8 on October 4, 2006)
10.26 Form of Stock Option Agreement (incorporated by reference to Exhibit 10.2 of the Company’s Registration Statement on Form S-8 on October 4, 2006)
10.27 Lynn Fetterman Project Agreement (incorporated by reference to Exhibit 10.2 of Form 10-Q filed on February 14, 2007)
10.28 Severance and Release Agreement between Arcadia Resources, Inc. and John E. Elliott, II, dated July 12, 2007 (incorporated by reference to Exhibit 10.1 of Form 8-K filed on July 17, 2007)
10.29 Employment Agreement dated February 15, 2007 between PrairieStone Pharmacy, LLC and John J. Brady (incorporated by reference to Exhibit 10.1 of Form 8-K filed on July 19, 2007)
10.30 Employment Agreement dated November 13, 2006 between Care Clinic, Inc. and Harry Travis (incorporated by reference to Exhibit 10.2 of Form 8-K filed on July 19, 2007)
10.31 Amendment to Severance and Release Agreement between Arcadia Resources, Inc. and Lawrence R. Kuhnert, dated August 29, 2007 (incorporated by reference to Exhibit 10.1 of Form 8-K filed on September 4, 2007)
10.32 Stock Purchase Agreement between Arcadia Products, Inc. and AeroCare Holdings, Inc. dated September 10, 2007 (incorporated by reference to Exhibit 10.1 of Form 8-K filed on September 14, 2007)
10.33 Amended and Restated Employment Agreement between Arcadia Resources, Inc. and Steven L. Zeller dated August 12, 2009 (incorporated by reference to Exhibit 10.3 of Form 10-Q filed on August 13, 2009)
10.34 Employment Agreement between Arcadia Resources, Inc. and Michelle M. Molin dated October 22, 2007 (incorporated by reference to Exhibit 10.2 of Form 10-Q filed on November 9, 2007)
10.35 Escrow Release Agreement relating to the sale of the Florida Durable Medical Equipment Division of Arcadia Resources, Inc. dated July 19, 2007 (incorporated by reference to Exhibit 10.3 of Form 10-Q filed on November 9, 2007)
10.36 Amended and Restated Employment Agreement between Arcadia Resources, Inc. and Matthew R. Middendorf, dated August 12, 2009 (incorporated by reference to Exhibit 10.2 of Form 10-Q filed on August 13, 2009)
10.37 Arcadia Resources, Inc. 2008 Executive Performance Based Compensation Plan (incorporated by reference to Exhibit 10.1 of Form 8-K filed on July 17, 2008)
10.38 Amendment No. One to the Arcadia Resources, Inc. 2008 Executive Performance Based Compensation Plan (incorporated by reference to Exhibit 10.2 of Form 8-K filed on July 17, 2008)
10.39 Stock Purchase Agreement between Arcadia Products, Inc. and Aerocare Holdings, Inc. dated May 16, 2009 (incorporated by reference to Exhibit 10.1 of Form 8-K filed on May 21, 2009)
10.40 Asset Purchase Agreement among Braden Partners, L.P., American Oxygen and Medical Equipment, Inc., Arcadia Home Oxygen and Medical Equipment, Inc., Arcadia Products, Inc., RKDA, Inc. and Arcadia Resources, Inc. dated May 19, 2009 (incorporated by reference to Exhibit 10.2 of Form 8-K filed on May 21, 2009)
10.41 Amended and Restated Credit Agreement by and among Arcadia Services, Inc., Arcadia Health Services, Inc., Grayrose, Inc., Arcadia Health Services of Michigan, Inc., Arcadia Employee Services, Inc. and Comerica Bank dated July 13, 2009 ((incorporated by reference to Exhibit 10.42 of Form 10-K filed on July 14, 2009)
10.42 Comerica Revolving Credit Note dated July 13, 2009 (incorporated by reference to Exhibit 10.43 of Form 10-K filed on July 14, 2009)
10.43 Placement Agent Agreement between Arcadia Resources, Inc. and Burnham Hill Partners dated November 6, 2009 (incorporated by reference to Exhibit 1.1 of Form 8-k filed on November 9, 2009)
10.44 Line of Credit and Security Agreement dated April 23, 2010 by and between PrairieStone Pharmacy, LLC and H.D. Smith Wholesale Drug Co. (incorporated by reference to Exhibit 2.1 of Form 8-K filed on April 28, 2010)
10.46 Line of Credit Note dated April 23, 2010 made in favor of H. D. Smith by PrairieStone Pharmacy, LLC (incorporated by reference to Exhibit 2.2 of Form 8-K filed on April 28, 2010)
 
52
 


10.47       Guaranty Agreement dated April 23, 2010 by Arcadia Resources, Inc. in favor of H. D. Smith Wholesale Drug Co. (incorporated by reference to Exhibit 2.3 on April 28, 2010)
10.48 Pledge Agreement dated April 23, 2010 by and between Arcadia Resources, Inc., and H. D. Smith Wholesale Drug Co. (incorporated by reference to Exhibit 2.4 of Form 8-K filed on April 28, 2010)
14.1 Arcadia Resources, Inc. Code of Ethics and Conduct as Amended and Restated Effective April 1, 2009 (incorporated by reference to Exhibit 14.1 of Form 10-K filed on July 14, 2009)
21.1 Subsidiaries of Arcadia Resources, Inc. (filed herewith)
23.1 Consent of Independent Registered Public Accounting Firm (filed herewith)
31.1 Section 302 CEO Certification (filed herewith)
31.2 Section 302 Principal Financial and Accounting Officer Certification (filed herewith)
32.1 Section 906 CEO Certification (filed herewith)
32.2 Section 906 Principal Financial and Accounting Officer Certification (filed herewith)
 
53
 


ARCADIA RESOURCES, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
 
Reports of Independent Registered Public Accounting Firm F-2
Consolidated Balance Sheets as of March 31, 2010 and 2009 F-4
Consolidated Statements of Operations for the years ended March 31, 2010, 2009 and 2008 F-5
Consolidated Statements of Stockholders’ Equity (Deficit) for the years ended March 31, 2010, 2009 and 2008 F-6
Consolidated Statements of Cash Flows for the years ended March 31, 2010, 2009 and 2008 F-7
Notes to Consolidated Financial Statements F-9
Schedule I – Consolidated Financial Information of Registrant F-40
Schedule II – Valuation and Qualifying Accounts F-44

F-1
 


Report of Independent Registered Public Accounting Firm
 
Board of Directors and Shareholders
Arcadia Resources, Inc.
Indianapolis, Indiana
 
We have audited the accompanying consolidated balance sheets of Arcadia Resources, Inc. as of March 31, 2010 and 2009 and the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for each of the three years in the period ended March 31, 2010. In connection with our audits of the financial statements, we have also audited the financial statement schedules listed in the accompanying index. These financial statements and schedules are the responsibility of Arcadia Resources, Inc.’s management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and schedules are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements and schedules. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Arcadia Resources, Inc. at March 31, 2010 and 2009, and the results of its operations and its cash flows for each of the three years in the period ended March 31, 2010, in conformity with accounting principles generally accepted in the United States of America.
 
Also, in our opinion, the financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Arcadia Resources, Inc.’s internal control over financial reporting as of March 31, 2010, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated June 10, 2010 expressed an unqualified opinion thereon.
 
/s/BDO Seidman, LLP
 
Troy, Michigan
June 10, 2010
 
F-2
 


Report of Independent Registered Public Accounting Firm on Internal Controls Over Financial Reporting
 
Board of Directors and Shareholders
Arcadia Resources, Inc.
Indianapolis, Indiana
 
We have audited Arcadia Resources Inc.’s internal control over financial reporting as of March 31, 2010, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Arcadia Resources Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying “Item 9A – Controls and Procedures.” Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.
 
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
 
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
In our opinion, Arcadia Resources, Inc. maintained, in all material respects, effective internal control over financial reporting as of March 31, 2010, based on the COSO criteria.
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Arcadia Resources, Inc. as of March 31, 2010 and 2009, and the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for each of the three years in the period ended March 31, 2010 and our report dated June 10, 2010 expressed an unqualified opinion thereon.
 
/s/BDO Seidman, LLP
 
Troy, Michigan
June 10, 2010
 
F-3
 


ARCADIA RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS)
 
March 31,
2010       2009
ASSETS
Current assets:
       Cash and cash equivalents $ 5,444 $ 1,522  
              Accounts receivable, net of allowance of $2,623 and $3,386, respectively 12,366 15,679
              Inventories, net 934 863
              Prepaid expenses and other current assets 1,632 1,764
              Current assets of discontinued operations - 5,458
                     Total current assets 20,376 25,286
Property and equipment, net 1,738 2,308
Goodwill 2,500 17,053
Acquired intangible assets, net 7,670 8,305
Other assets 412 590
Restricted cash 500 -
Assets of discontinued operations - 5,850
                     Total assets $ 33,196 $ 59,392
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
       Lines of credit, current portion $ - $ 437
       Accounts payable 3,159 2,765
       Accrued expenses:  
              Compensation and related taxes 3,191 2,986
              Interest 82 89
              Health insurance 463 545
              Other 1,508 917
       Fair value of warrant liability 1,499   -
       Payable to affiliated agencies 1,076 1,284
       Long-term obligations, current portion 939 596
       Capital lease obligations, current portion 69 59
       Liabilities of discontinued operations - 2,037
                     Total current liabilities 11,986 11,715
Lines of credit, less current portion 7,774 10,889
Long-term obligations, less current portion 25,192 26,918
Capital lease obligations, less current portion 19 37
                     Total liabilities 44,971 49,559
 
Commitments and contingencies
 
STOCKHOLDERS’ EQUITY (DEFICIT)
Preferred stock, $.001 par value, 5,000,000 shares authorized, none outstanding - -
Common stock, $.001 par value, 300,000,000 shares authorized; 177,918,044 shares
and 161,249,529 shares issued, respectively   178 161
Additional paid-in capital 145,381 135,920
Accumulated deficit      (157,334 )      (126,248 )
                     Total stockholders’ equity (deficit) (11,775 ) 9,833
                     Total liabilities and stockholders’ equity (deficit) $ 33,196 $ 59,392
 
See accompanying notes to these consolidated financial statements.
 
F-4
 


ARCADIA RESOURCES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
 
Year Ended March 31,
2010      2009      2008
Revenues, net $ 103,602 $ 106,132 $ 104,819
Cost of revenues 74,374 74,370 74,230
                     Gross profit 29,228 31,762 30,589
 
Selling, general and administrative 40,279 40,483 37,976
Depreciation and amortization 1,850 2,016 1,860
Goodwill and intangibile asset impairment 14,599 23,511 -
       Total operating expenses 56,728 66,010 39,836
 
                     Operating loss (27,500 ) (34,248 ) (9,247 )
 
Other expenses (income):
              Interest expense, net 3,371 4,072 4,317
              Loss on extinguishment of debt - 4,487 -
              Change in fair value of warrant liability (979 ) - -
              Other 30 75 129
                     Total other expenses (income) 2,422 8,634 4,446
 
       Loss from continuing operations before income taxes (29,922 ) (42,882 ) (13,693 )
 
Current income tax expense 29 122 535
                     Loss from continuing operations (29,951 ) (43,004 ) (14,228 )
 
Discontinued operations:
       Loss from discontinued operations (1,692 ) (2,208 ) (6,781 )
       Net gain (loss) on disposal 557 (1,258 ) (2,389 )
  (1,135 ) (3,466 ) (9,170 )
 
NET LOSS $ (31,086 ) $      (46,470 ) $      (23,398 )
 
Weighted average number of common shares outstanding      166,840 134,583 122,828
 
Basic and diluted net loss per share:
Loss from continuing operations $ (0.18 ) $ (0.32 ) $ (0.12 )
Loss from discontinued operations (0.01 ) (0.03 ) (0.07 )
Net loss per share $ (0.19 ) $ (0.35 ) $ (0.19 )
 
See accompanying notes to these consolidated financial statements.
 
F-5
 


ARCADIA RESOURCES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
 
Additional Total
Common Stock Paid-In Accumulated Stockholders’
Shares      Amount      Capital      Deficit      Equity (Deficit)
Balance, April 1, 2007 121,059,177 $      121 $      110,343 $ (56,380 ) $ 54,084
Sale of common stock, net of $670 in fees 11,018,905 11 12,431 - 12,442
Stock issued for current year acquisition 1,814,883 2 1,798 - 1,800
Fees for services related to disposal of business - - 876 - 876
Return of stock as consideration for an asset sale (200,000 ) - (252 ) - (252 )
Conversion of debt 1,129,555 1 1,451 - 1,452
Stock-based compensation expense 1,590,056 1 3,013 - 3,014
Escrowed shares cancelled (9,600,000 ) (10 ) 10 - -
Warrants repriced in conjunction with debt - - 1,202 - 1,202
       Contingent consideration relating to prior year acquisitions 2,793,509 3 (1,426 ) - (1,423 )
Cashless exercise of stock options 3,507,355 4 (4 ) - -
Net loss for the year - -   - (23,398 ) (23,398 )
Balance, March 31, 2008 133,113,440 133 129,442 (79,778 ) 49,797
Issuance of warrants - - 248 - 248
Stock-based compensation expense 1,159,694   1   1,653     - 1,654
Contingent consideration relating to prior year acquisitions 3,316,893 3 692 - 695
       Cashless exercise of warrants 8,545,833   9 (9 ) - -
       Equity issued in conjunction with debt refinancing 15,113,669 15 3,894     3,909
Net loss for the year - - - (46,470 ) (46,470 )
Balance, March 31, 2009 161,249,529 161 135,920 (126,248 ) 9,833
Sale of common stock and warrants, net of $902 in fees 15,857,141 16 7,704 - 7,720
Stock-based compensation expense 323,125 - 1,758 - 1,758
       Cashless exercise of warrants 488,249 1 (1 ) - -
Net loss for the year - - - (31,086 ) (31,086 )
Balance, March 31, 2010 177,918,044 $ 178 $ 145,381 $      (157,334 ) $           (11,775 )
 
See accompanying notes to consolidated financial statements.
 
F-6
 


ARCADIA RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
 
Year Ended March 31,
2010      2009      2008
Operating activities
Net loss for the year $      (31,086 ) $      (46,470 ) $      (23,398 )
 
Adjustments to reconcile net loss to net cash used in operating activities:
       Provision for doubtful accounts 1,736 4,433 3,309
       Depreciation and amortization of property and equipment 1,507 4,505 4,569
       Amortization of intangible assets 722 1,850 2,519
       Goodwill and intangible asset impairment 14,599 26,455 1,900
       Loss on extinguishment of debt - 4,487 -
       Non-cash interest expense 2,397 2,215 218
       (Gain) loss on business disposals (557 ) 1,258 2,389
       Loss on disposal of property and equipment - 75 128
       Gain on settlement of debt with common stock - - (121 )
       Reduction in expense due to return of common stock previously issued - - (252 )
       Amortization and write off of debt discount and deferred financing costs 332 972 -
       Change in fair value of warrant liability (979 ) - -
       Stock-based compensation expense 1,758   1,654 3,014
Changes in operating assets and liabilities, net of acquisitions:  
       Accounts receivable 3,895 (856 )   6,188
       Inventories   546 (1,652 ) (1,269 )
       Other assets 558 515   (536 )
       Accounts payable (596 ) 1,278 (5,189 )
       Accrued expenses (694 ) 7 (32 )
       Due to affiliated agencies (19 ) 81 175
       Deferred revenue - (29 ) (733 )
Net cash provided by (used in) operating activities (5,881 ) 778 (7,121 )
 
Investing activities
Business acquisitions, net of cash acquired (281 ) (675 ) (507 )
Proceeds from business disposals 9,498 670 5,781
Increase in restricted cash (500 ) - -
Purchases of property and equipment (574 ) (1,281 ) (1,274 )
Net cash provided by (used in) investing activities 8,143 (1,286 ) 4,000
 
Financing activities
Proceeds from notes payables, net of fees 2,142 2,800 -
Net payments on lines of credit (3,550 ) (6,416 ) (214 )
Payments on notes payable and capital lease obligations (7,175 ) (705 ) (5,750 )
Proceeds from equity financing, net cash fess of $857 in fiscal 2010 and $670      
in fiscal 2008 10,243 - 12,442
Net cash provided by (used in) financing activities 1,660 (4,321 ) 6,478
 
Net change in cash and cash equivalents 3,922 (4,829 ) 3,357
Cash and cash equivalents, beginning of year 1,522 6,351 2,994
Cash and cash equivalents, end of year $ 5,444 $ 1,522 $ 6,351  
 

F-7
 


2010       2009       2008
Supplementary information:
Cash paid during the period for:
Interest $ 623 $ 904 $      3,842
Income taxes 35 49 354
 
Non-cash investing / financing activities:
Accounts payable converted to notes payable 750 - -
Line of credit converted to note payable in conjunction with refinancing - 5,000 -
Accrued interest converted to debt      2,397      2,215 -
Conversion of debt into common stock - -   1,452
Common stock issued in conjunction with purchase of businesses - - 1,800
Non-cash equity financing fee 45 - -
Fee for service related to disposal of business paid in common stock -   - 876
Contingent consideration relating to prior year acquisition settled with issuance of
common stock   - 695 1,452
Stock price guarantee relating to prior year acquisition settled with issuance of
notes payable - - 715
Financing of equipment with notes payable / capital lease obligations 70 - -
Equity issued in conjunction with debt financing - 3,909 -

See accompanying notes to these consolidated financial statements.
 
F-8
 


ARCADIA RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Note 1 – Description of Company and Significant Accounting Policies
 
Description of Company
 
Arcadia Resources, Inc., a Nevada corporation, together with its wholly-owned subsidiaries (the “Company”), is a national provider of home care, medical staffing, home health products and pharmacy services operating under the service mark Arcadia HealthCare. In May and June 2009, the Company disposed of its Home Health Equipment (“HHE”), retail pharmacy software and industrial staffing businesses. Subsequent to these divestitures, the Company operates in three reportable business segments: Home Care/Medical Staffing Services (“Services”), Pharmacy and Catalog. The Company’s corporate headquarters are located in Indianapolis, Indiana. The Company conducts its business from approximately 70 facilities located in 18 states. The Company operates pharmacies in Indiana, California and Minnesota and has customer service centers in Michigan and Indiana.
 
Principles of Consolidation
 
The consolidated financial statements include the accounts of Arcadia Resources, Inc. and its wholly-owned subsidiaries. The earnings of the subsidiaries are included from the dates of acquisition. All intercompany accounts 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 (“U.S. GAAP”) require 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. Changes in these estimates and assumptions may have a material impact on the financial statements and accompanying notes.
 
Cash and Cash Equivalents
 
The Company considers cash in banks and all highly liquid investments with terms to maturity at acquisition of three months or less to be cash and cash equivalents.
 
Affiliated Agencies
 
The Services segment operates independently and through a network of affiliated agencies throughout the United States. These affiliated agencies are independently-owned, 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 affiliated agencies 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 the Company and the related employee costs are included in cost of revenues. The Company maintains the relationship with the customer and the payer and, as such, recognizes the revenue. The affiliated agency’s commission is based on a percentage of gross profit. The Company provides sales and marketing support to the affiliated agencies and develops and maintains policies and procedures related to certain aspects of the affiliate’s business. The contractual agreements require a specific, timed, calculable flow of funds and expenses between the affiliated agencies and the Company. The payments to affiliated agencies are considered a selling expense and are classified as selling, general and administrative expenses on the Company’s Statements of Operations. The agreements may be terminated by the affiliate upon advance notice to the Company. The Company may terminate the agreement only under specified conditions. The agreements provide the Company with the first right of refusal to purchase the affiliates’ contractual rights and interests.
 
Revenue generated through the affiliate agencies represented approximately 57%, 63%, and 71% of total revenue from continuing operations during the years ended March 31, 2010, 2009 and 2008, respectively. Related commission expense was $10,973,000, $12,313,000, and $13,057,000 during the years ended March 31, 2010, 2009 and 2008, respectively.
 
F-9
 


Allowance for Doubtful Accou