##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
 þ
    
    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the quarterly period ended June 30, 2008
 OR
 o
    
    Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the Transition period from to
 Commission file number 000-32935
 ARCADIA RESOURCES, INC.
  NEVADA
(State or other jurisdiction of Incorporation)
    
    88-0331369
(I.R.S. Employer
Identification Number)9229 DELEGATES ROW, SUITE 260INDIANAPOLIS, INDIANA
    
    46240(Address of principal executive offices)
    
    (Zip Code)
  þ o
  Large accelerated filer oAccelerated filer þNon-accelerated filer o(Do not check if a smaller reporting company)Smaller reporting company o o þ




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##### 



Table of Contents
 PageNo.Part I: Financial InformationItem 1. Financial Statements
    
    
    2Condensed Consolidated Balance Sheets as of June 30, 2008 (unaudited) and March 31, 2008
    
    
    2Condensed Consolidated Statements of Operations for the Three Months ended June 30, 2008 and
2007 (unaudited)
    
    
    3Condensed Consolidated Statement of Stockholders Equity for the Three Months ended June 30,
2008 (unaudited)
    
    
    4Condensed Consolidated Statements of Cash Flows for the Three Months ended June 30, 2008 and
2007 (unaudited)
    
    
    5Notes to the Condensed Consolidated Financial Statements (unaudited)
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    23Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    32Item 4. Controls and Procedures
    
    
    32Part II: Other InformationItem 1. Legal Proceedings
    
    
    33Item 1A. Risk Factors
    
    
    33Item 6. Exhibits
    
    
    34Exhibits
    
    
    36Signatures
    
    
    35EX-31.1EX-31.2EX-32.1EX-32.2
    1




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##### Table of Contents



PART I.  FINANCIAL INFORMATION
 
  
 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
 June 30,
    
    March 31,2008
    
    2008(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    2,381
    
    
    $
    6,351Accounts receivable, net of allowance of $4,865 and $5,449, respectively
    
    
    24,705
    
    
    
    24,723Inventories, net
    
    
    1,635
    
    
    
    1,867Prepaid expenses and other current assets
    
    
    1,921
    
    
    
    3,101Total current assets
    
    
    30,642
    
    
    
    36,042Property and equipment, net
    
    
    5,677
    
    
    
    5,991Goodwill
    
    
    33,361
    
    
    
    32,836Acquired intangible assets, net
    
    
    24,250
    
    
    
    24,371Other assets
    
    
    337
    
    
    
    175Total assets
    
    $
    94,267
    
    
    $
    99,415LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Lines of credit, current portion
    
    $
    338
    
    
    $
    250Accounts payable
    
    
    2,461
    
    
    
    2,567Accrued expenses:Compensation and related taxes
    
    
    3,779
    
    
    
    3,676Interest
    
    
    59
    
    
    
    97Other
    
    
    1,662
    
    
    
    1,643Payable to affiliated agencies
    
    
    2,772
    
    
    
    2,255Long-term obligations, current portion
    
    
    341
    
    
    
    545Capital lease obligations, current portion
    
    
    100
    
    
    
    105Deferred revenue
    
    
    20
    
    
    
    29Total current liabilities
    
    
    11,532
    
    
    
    11,167Lines of credit, less current portion
    
    
    18,983
    
    
    
    22,492Long-term obligations, less current portion
    
    
    16,463
    
    
    
    15,851Capital lease obligations, less current portion
    
    
    84
    
    
    
    108Total liabilities
    
    
    47,062
    
    
    
    49,618Commitments and contingenciesSTOCKHOLDERS EQUITYPreferred stock, $.001 par value, 5,000,000 shares authorized, none outstanding
    
    
    
    
    
    
    Common stock, $.001 par value, 200,000,000 shares authorized; 133,376,930
shares and 133,113,440 shares issued, respectively
    
    
    133
    
    
    
    133Additional paid-in capital
    
    
    130,136
    
    
    
    129,442Accumulated deficit
    
    
    (83,064
    )
    
    
    (79,778
    )Total stockholders equity
    
    
    47,205
    
    
    
    49,797Total liabilities and stockholders equity
    
    $
    94,267
    
    
    $
    99,415
 See accompanying notes to these condensed consolidated financial statements.
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(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
 Three Month Period Ended June 30,(Unaudited)2008
    
    2007Revenues, net
    
    $
    37,384
    
    
    $
    38,009Cost of revenues
    
    
    24,461
    
    
    
    25,908Gross profit
    
    
    12,923
    
    
    
    12,101Selling, general and administrative
    
    
    14,043
    
    
    
    13,737Depreciation and amortization
    
    
    756
    
    
    
    848Total operating expenses
    
    
    14,799
    
    
    
    14,585Operating loss
    
    
    (1,876
    )
    
    
    (2,484
    )Other expenses:Interest expense, net
    
    
    956
    
    
    
    1,159Other
    
    
    258
    
    
    
    Total other expenses
    
    
    1,214
    
    
    
    1,159Loss from continuing operations before income taxes
    
    
    (3,090
    )
    
    
    (3,643
    )Current income tax expense
    
    
    196
    
    
    
    16Loss from continuing operations
    
    
    (3,286
    )
    
    
    (3,659
    )Loss from discontinued operations
    
    
    
    
    
    
    (3,769
    )NET LOSS
    
    $
    (3,286
    )
    
    $
    (7,428
    )Weighted average number of common shares outstanding
    
    
    131,688,000
    
    
    
    114,997,000Basic and diluted net loss per share:Loss from continuing operations
    
    
    (0.02
    )
    
    
    (0.03
    )Loss from discontinued operations
    
    
    
    
    
    
    (0.04
    )Net loss per share
    
    $
    (0.02
    )
    
    $
    (0.07
    )
 See accompanying notes to these condensed consolidated financial statements.
 3




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(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
 Additional
    
    
    
    
    
    TotalCommon Stock
    
    Paid-In
    
    Accumulated
    
    StockholdersShares
    
    Amount
    
    Capital
    
    Deficit
    
    EquityBalance, April 1, 2008
    
    
    133,113,440
    
    
    $
    133
    
    
    $
    129,442
    
    
    $
    (79,778
    )
    
    $
    49,797Issuance of warrants
    
    
    
    
    
    
    
    
    
    
    248
    
    
    
    
    
    
    
    248Stock-based compensation expense
    
    
    263,490
    
    
    
    
    
    
    
    446
    
    
    
    
    
    
    
    446Net loss for the period
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,286
    )
    
    
    (3,286
    )Balance, June 30, 2008
    
    
    133,376,930
    
    
    $
    133
    
    
    $
    130,136
    
    
    $
    (83,064
    )
    
    $
    47,205
 See accompanying notes to these condensed consolidated financial statements.
 4




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(IN THOUSANDS)
 Three-Month Period EndedJune 30,(Unaudited)2008
    
    2007Operating activitiesNet loss for the period
    
    $
    (3,286
    )
    
    $
    (7,428
    )Adjustments to reconcile net loss to net cash provided by (used in) operating activities:Provision for doubtful accounts
    
    
    811
    
    
    
    538Depreciation of property and equipment
    
    
    1,012
    
    
    
    1,502Amortization of intangible assets
    
    
    456
    
    
    
    659Impairment of long-lived assets
    
    
    
    
    
    
    1,900Loss on sale of property and equipment
    
    
    10
    
    
    
    Loss
on extinguishment of debt
    
    
    248
    
    
    
    Amortization of deferred financing costs and debt discounts
    
    
    246
    
    
    
    Reduction in expense due to return of common stock previously issued
    
    
    
    
    
    
    (252
    )Stock-based compensation expense
    
    
    401
    
    
    
    500Changes in operating assets and liabilities, net of acquisitions:Accounts receivable
    
    
    (792
    )
    
    
    (898
    )Inventories
    
    
    (228
    )
    
    
    (104
    )Other assets
    
    
    1,176
    
    
    
    130Accounts payable
    
    
    (63
    )
    
    
    (1,047
    )Accrued expenses
    
    
    625
    
    
    
    574Due to affiliated agencies
    
    
    16
    
    
    
    150Deferred revenue
    
    
    (9
    )
    
    
    (186
    )Net cash provided by (used in) operating activities
    
    
    623
    
    
    
    (3,962
    )Investing activitiesBusiness acquisitions, net of cash acquired
    
    
    (363
    )
    
    
    Proceeds from disposals of property and equipment
    
    
    19
    
    
    
    Purchases of property and equipment
    
    
    (264
    )
    
    
    (789
    )Net cash used in investing activities
    
    
    (608
    )
    
    
    (789
    )Financing activitiesProceeds from issuance of common stock, net of fees
    
    
    
    
    
    
    12,457Net payments on lines of credit
    
    
    (3,547
    )
    
    
    (3,562
    )Payments on notes payable and capital lease obligations
    
    
    (438
    )
    
    
    (3,032
    )Net cash provided by (used in) financing activities
    
    
    (3,985
    )
    
    
    5,863Net change in cash and cash equivalents
    
    
    (3,970
    )
    
    
    1,112Cash and cash equivalents, beginning of period
    
    
    6,351
    
    
    
    2,994Cash and cash equivalents, end of period
    
    $
    2,381
    
    
    $
    4,106Supplementary information:Cash paid during the period for:Interest
    
    $
    225
    
    
    $
    568Income taxes
    
    
    83
    
    
    
    16Non-cash investing / financing activities:Payments on note payable with issuance of common stock
    
    
    
    
    
    
    677Prior period liability satisfied with equity
    
    
    45
    
    
    
    Accrued interest converted to notes payable
    
    
    541
    
    
    
    
  5




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Note 1  Description of Company and Significant Accounting Policies
 Description of Company
  Unaudited Interim Financial Information
  Principles of Consolidation
  Use of Estimates
  Cash and Cash Equivalents
  Allowance for Doubtful Accounts and Contractual Allowances
   6




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Inventories
  Property and Equipment
  Goodwill and Acquired Intangible Assets
   Trade name
    
    30 yearsCustomers and referral source relationships (depending on
the type of business purchased)
    
    3 and 25 yearsAcquired technology
    
    2 and 3 yearsNon-competition agreements (length of agreement)
    
    5 years
 Impairment of Long-Lived Assets
  Payables to Affiliated Agencies
  7




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Income Taxes
 Accounting for Income Taxes
 Revenue Recognition and Concentration of Credit Risk
    8




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Business Combinations and Valuation of Intangible Assets
  Earnings (Loss) Per Share
  Stock-Based Compensation
   Fair Value of Financial Instruments
  Advertising Expense
  Reclassifications
  9




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Recent Accounting Pronouncements
 Fair
Value Measurements
 Fair Value Hierarchy.
    The Fair Value Option for Financial Assets and
Financial Liabilities
 Share-Based Payment Share-Based Payment
 , Determination of the Useful Life of Intangible Assets Goodwill and Other Intangible Assets
 The Hierarchy of Generally Accepted Accounting
Principles The
Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles
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Note 2  Discontinued Operations
  Business
    
    Divesture Date
    
    SegmentSears Retail HHE Operations
    
    July 31, 2007
    
    HHEFlorida HHE Operations (Beacon Respiratory Services, Inc.)
    
    September 10, 2007
    
    HHEColorado HHE Operations (Beacon Respiratory Services of
Colorado, Inc.)
    
    September 10, 2007
    
    HHECare Clinic, Inc.
    
    October 2007
    
    Care ClinicWalmart Retail HHE Operations
    
    December 31, 2007
    
    HHEHollywood, Florida Pharmacy
    
    December 31, 2007
    
    Pharmacy
   Three Month PeriodEndedJune 30, 2007Revenues, net:Retail operations
    
    $
    231Care Clinic, Inc.
    
    
    138Pharmacy  Florida
    
    
    977Home Health Equipment
    
    
    3,005$
    4,351Earnings (loss) from operations:Retail operations
    
    
    (280
    )Care Clinic, Inc.
    
    
    (3,911
    )Pharmacy  Florida
    
    
    (85
    )Home Health Equipment
    
    
    507$
    (3,769
    )
 Note 3  Goodwill and Acquired Intangible Assets
  11




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##### Table of Contents



Services
    
    
    HHE
    
    
    Pharmacy
    
    
    TotalGoodwill at April 1, 2008
    
    $
    14,180
    
    
    $
    2,015
    
    
    $
    16,641
    
    
    $
    32,836Acquisitions during the period
    
    
    525
    
    
    
    
    
    
    
    
    
    
    
    525Goodwill at June 30, 2008
    
    $
    14,705
    
    
    $
    2,015
    
    
    $
    16,641
    
    
    $
    33,361
   June 30, 2008
    
    
    March 31, 2008Accumulated
    
    
    
    
    
    
    AccumulatedCost
    
    
    Amortization
    
    
    Cost
    
    
    AmortizationTrade name
    
    $
    8,000
    
    
    $
    676
    
    
    $
    8,000
    
    
    $
    628Customer relationships
    
    
    21,987
    
    
    
    5,367
    
    
    
    21,652
    
    
    
    5,003Non-competition agreements
    
    
    674
    
    
    
    414
    
    
    
    674
    
    
    
    381Acquired technology
    
    
    850
    
    
    
    804
    
    
    
    850
    
    
    
    79331,511
    
    
    $
    7,261
    
    
    
    31,176
    
    
    $
    6,805Less accumulated
amortization
    
    
    (7,261
    )
    
    
    
    
    
    
    (6,805
    )Net acquired intangible
assets
    
    $
    24,250
    
    
    
    
    
    
    $
    24,371
   Remainder of fiscal 2009
    
    $
    1,381Fiscal 2010
    
    
    1,922Fiscal 2011
    
    
    1,691Fiscal 2012
    
    
    1,499Fiscal 2013
    
    
    1,375Thereafter
    
    
    16,382Total
    
    $
    24,250
 Note 4  Lines of Credit
  At June 30, 2008MaximumAvailable
    
    
    
    
    
    
    March 31,Lending Institution
    
    Maturity date
    
    
    Borrowing
    
    
    Balance
    
    
    2008
    
    
    Interest rateComerica Bank
    
    October 1, 2009
    
    $
    13,793
    
    
    $
    11,771
    
    
    $
    15,292
    
    
    PrimeAmerisourceBergen Drug Corporation
    
    September 30, 2010
    
    
    2,425
    
    
    
    2,425
    
    
    
    2,450
    
    
    
    10
    %Jana Master Fund, Ltd.
    
    April 1, 2010
    
    
    5,125
    
    
    
    5,125
    
    
    
    5,000
    
    
    
    10
    %Total lines of credit obligations
    
    
    
    
    
    $
    21,343
    
    
    
    19,321
    
    
    
    22,742Less current portion
    
    
    
    
    
    
    
    
    
    
    (338
    )
    
    
    (250
    )Long-term portion
    
    
    
    
    
    
    
    
    
    $
    18,983
    
    
    $
    22,492
 12




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##### Table of Contents



Comerica Bank
   AmerisourceBergen Drug Corporation
   Debtors Accounting
for a Modification or Exchange of Debt Instruments
 Jana Master Fund, Ltd.
  13




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Note 5  Long-Term Obligations
  14




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June 30,
    
    March 31,2008
    
    2008Note payable to Jana Master Fund, Ltd. originally
dated November 30, 2006 and most recently amended
on March 31, 2008 with unpaid accrued interest and
the principal due in full on October 1, 2009. On
March 31, 2008, the effective interest rate was
10.71%. On April 1, 2008, the interest rate
changed to a fixed rate of 10% and, at the option
of the Company, such amount of unpaid cash
interest that would otherwise be payable on such
quarterly interest payment date may be added to
the principal balance of the note payable or an
additional promissory note equal to such amount
may be issued. A total of approximately $284,000
and $719,000 of unpaid cash interest was added to
the note on June 30, 2008 and March 31, 2008,
respectively, under this agreement. The unsecured
note payable includes various loan covenants, all
of which the Company was in compliance as of June
30, 2008.
    
    $
    11,649
    
    
    $
    11,365Note payable to Vicis Capital Master Fund
(Vicis) in the amount of $5.3 million, dated
March 31, 2008 bearing an effective interest rate
of 10% on June 30, 2008 with unpaid accrued
interest and the principal due in full on December
31, 2009. Unpaid cash interest that would
otherwise be payable on such quarterly interest
payment date may be added to the principal balance
of the note payable or an additional promissory
note equal to such amount may be issued. A total
of approximately $133,000 of unpaid cash interest
was added to the note on June 30, 2008 under this
agreement. The amounts reported are net of
unamortized debt discount of $1.0 million and $1.2
million on June 30, 2008 and March 31, 2008,
respectively (see further discussion below).
    
    
    4,469
    
    
    
    4,136Notes payable, unsecured, to two executives dated
September 10, 2007 bearing interest at 4% per
year. The notes payable were paid in full on April
10, 2008.
    
    
    
    
    
    
    99Purchase price payable to Remedy Therapeutics,
Inc., unsecured, dated January 27, 2006, bearing
simple interest of 8% per year payable in equal
quarterly payments of principal and interest with
the final payment due on January 27, 2009.
    
    
    218
    
    
    
    288Other long-term obligations with interest charged
at various rates ranging from 4% to 8.75% to be
paid over time based on respective terms, due
dates ranging from April 2009 to November 2011,
secured by certain equipment.
    
    
    468
    
    
    
    508Total long-term obligations
    
    
    16,804
    
    
    
    16,396Less current portion of long-term obligations
    
    
    (341
    )
    
    
    (545
    )Long-term obligations, less current portion
    
    $
    16,463
    
    
    $
    15,851
   15




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Remainder of fiscal 2009
    
    $
    341Fiscal 2010
    
    
    17,396Fiscal 2011
    
    
    49Fiscal 2012
    
    
    1817,804Less  unamortized debt discount
    
    
    (1,000
    )Total
    
    $
    16,804
  Note 6  Stockholders Equity
 Stock Price Guarantees
   Warrants
  June 30,
    
    March 31,Description
    
    Exercise Price
    
    Granted
    
    Expiration
    
    2008
    
    2008Class A
    
    $
    0.50
    
    
    May 2004
    
    May 2011
    
    
    5,749,036
    
    
    
    5,749,036Class B-1
    
    $
    0.001
    
    
    September 2005
    
    September 2009
    
    
    8,990,277
    
    
    
    8,990,277Class B-2
    
    $
    1.20
    
    
    September 2005
    
    May 2014
    
    
    3,111,111
    
    
    
    3,111,111Class B-2
    
    $
    2.25
    
    
    September 2005
    
    September 2009
    
    
    1,599,999
    
    
    
    1,599,999May 2007 Private Placement
    
    $
    1.75
    
    
    May 2007
    
    May 2014
    
    
    2,754,726
    
    
    
    2,754,726ABDC issuance
    
    $
    0.75
    
    
    June 2008
    
    June 2015
    
    
    490,000
    
    
    
    Total Warrants Outstanding
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22,695,149
    
    
    
    22,205,149
     16




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Note 7  Contingencies
   Note 8  Stock-Based Compensation
  Stock Options
    Three Month Period EndedJune 30,2008
    
    2007Weighted-average expected volatility
    
    73%
    
    64%Expected dividend yields
    
    0%
    
    0%Expected terms (in years)
    
    4
    
    7Risk-free interest rate
    
    3.19%
    
    4.58%  4.79%
 17




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Weighted-Weighted-
    
    Average
    
    AggregateAverage
    
    Remaining
    
    IntrinsicExercise
    
    Contractual
    
    ValueOptions
    
    Shares
    
    Price
    
    Term (Years)
    
    (thousands)Outstanding at April 1, 2008
    
    
    1,872,989
    
    
    $
    1.09Granted
    
    
    1,737,467
    
    
    
    0.72Outstanding at June 30, 2008
    
    
    3,610,456
    
    
    $
    0.91
    
    
    
    5.6
    
    
    $
    155Exercisable at June 30, 2008
    
    
    2,148,553
    
    
    $
    1.03
    
    
    
    4.7
    
    
    $
    155
  Options Outstanding
    
    
    Options ExercisableWeightedAverage
    
    
    Weighted
    
    
    
    
    
    
    WeightedRemaining
    
    
    Average
    
    
    
    
    
    
    AverageNumber
    
    
    Contractual
    
    
    Exercise
    
    
    Number
    
    
    ExerciseRange of Exercise Prices
    
    Outstanding
    
    
    Life
    
    
    Price
    
    
    Exercisable
    
    
    Price$0.25
    
    
    500,000
    
    
    5.6 years
    
    $
    0.25
    
    
    
    500,000
    
    
    $
    0.25$0.26 - $1.00
    
    
    1,976,876
    
    
    6.8 years
    
    $
    0.74
    
    
    
    559,636
    
    
    $
    0.72$1.01 - $1.50
    
    
    1,015,967
    
    
    5.1 years
    
    $
    1.41
    
    
    
    971,304
    
    
    $
    1.40$1.51 - $2.25
    
    
    43,000
    
    
    4.8 years
    
    $
    2.22
    
    
    
    43,000
    
    
    $
    2.22$2.26 - $2.92
    
    
    74,613
    
    
    5.1 years
    
    $
    2.92
    
    
    
    74,613
    
    
    $
    2.92Outstanding at June 30, 2008
    
    
    3,610,456
    
    
    
    
    
    
    $
    0.91
    
    
    
    2,148,553
    
    
    $
    1.03
     Restricted Stock  Arcadia Resources, Inc.
   18




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Weighted-AverageGrant DateFair ValueShares
    
    per ShareUnvested at April 1, 2008
    
    
    961,801
    
    
    $
    1.47Granted
    
    
    11,750
    
    
    
    0.65Vested
    
    
    (109,792
    )
    
    
    1.50Forfeited
    
    
    (11,250
    )
    
    
    2.40Unvested at June 30, 2008
    
    
    852,509
    
    
    $
    1.44








Note 9  Income Taxes






Accounting for Uncertainty in Income Taxes




Note 10  Related Party Transactions




19



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Note 11  Segment Information
  20




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21




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##### Table of Contents



Three Month Period EndedJune 30,2008
    
    2007Revenue, net:Services
    
    $
    30,225
    
    
    $
    31,214Home Health Equipment
    
    
    5,498
    
    
    
    5,344Pharmacy
    
    
    1,661
    
    
    
    1,451Total revenue
    
    
    37,384
    
    
    
    38,009Operating income (loss):Services
    
    $
    1,579
    
    
    $
    1,068Home Health Equipment
    
    
    199
    
    
    
    (683
    )Pharmacy
    
    
    (798
    )
    
    
    (291
    )Unallocated corporate overhead
    
    
    (2,856
    )
    
    
    (2,578
    )Total operating income (loss)
    
    
    (1,876
    )
    
    
    (2,484
    )Other expenses:Interest expense, net
    
    
    956
    
    
    
    1,159Other
    
    
    258
    
    
    
    Net loss before income tax expense
    
    
    (3,090
    )
    
    
    (3,643
    )Income tax expense
    
    
    196
    
    
    
    16Net loss from continuing operations
    
    $
    (3,286
    )
    
    $
    (3,659
    )Depreciation and amortization (continuing
operations):Services
    
    $
    286
    
    
    $
    333Home Health Equipment  cost of revenue
    
    
    712
    
    
    
    606Home Health Equipment  operating expense
    
    
    275
    
    
    
    333Pharmacy
    
    
    162
    
    
    
    103Corporate
    
    
    33
    
    
    
    79Total depreciation and amortization
    
    $
    1,468
    
    
    $
    1,454June 30,2008
    
    2007Capital expenditures:Services
    
    $
    37
    
    
    $
    24Home Health Equipment
    
    
    23
    
    
    
    232Pharmacy
    
    
    103
    
    
    
    6Care Clinics, Inc. (discontinued in fiscal year 2008)
    
    
    
    
    
    
    518Corporate
    
    
    101
    
    
    
    9Total assets
    
    $
    264
    
    
    $
    789June 30, 2008
    
    March 31, 2008Assets:Services
    
    $
    47,420
    
    
    $
    48,383Home Health Equipment
    
    
    14,729
    
    
    
    16,219Pharmacy
    
    
    29,457
    
    
    
    29,867Unallocated corporate assets
    
    
    2,661
    
    
    
    4,946Total assets
    
    $
    94,267
    
    
    $
    99,415
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ITEM 2. Managements Discussion And Analysis Of Financial Condition And Results Of Operations
 Cautionary Statement Concerning Forward-Looking Statements
     Overview
   Critical Accounting Policies
  23




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##### Table of Contents



Revenue Recognition
  
    
    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.
   Allowance for Doubtful Accounts and Contractual Allowances
    Goodwill and Intangible Assets
  24




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##### Table of Contents



.
   Income Taxes
    25




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##### Table of Contents



Three-Month Period Ended June 30, 2008 Compared to the Three-Month Period Ended June 30, 2007
 Results of Continuing Operations, (in thousands, except share amounts)
 Three-Month PeriodEnded June 30,2008
    
    2007Revenues, net
    
    $
    37,384
    
    
    $
    38,009Cost of revenues
    
    
    24,461
    
    
    
    25,908Gross profit
    
    
    12,923
    
    
    
    12,101Selling, general and administrative expenses
    
    
    14,043
    
    
    
    13,737Depreciation and amortization
    
    
    756
    
    
    
    848Total operating expenses
    
    
    14,799
    
    
    
    14,585Operating loss
    
    
    (1,876
    )
    
    
    (2,484
    )Other expenses
    
    
    1,214
    
    
    
    1,159Net loss before income tax expense
    
    
    (3,090
    )
    
    
    (3,643
    )Income tax expense
    
    
    196
    
    
    
    16Net loss from continuing operations
    
    $
    (3,286
    )
    
    $
    (3,659
    )Weighted average number of shares  basic
and diluted
    
    
    131,688,000
    
    
    
    114,997,000Net loss from continuing operations per share
 basic and diluted
    
    $
    (0.02
    )
    
    $
    (0.03
    )
 Revenues, Cost of Revenues and Gross Profits
  % of Total
    
    
    
    
    
    
    % of Total
    
    
    $Increase/
    
    
    % Increase/2008
    
    
    Revenue
    
    
    2007
    
    
    Revenue
    
    
    (Decrease)
    
    
    (Decrease)Revenues, net:Services
    
    $
    30,225
    
    
    
    80.9
    %
    
    $
    31,214
    
    
    
    82.1
    %
    
    $
    (989
    )
    
    
    -3.2
    %Home Health
Equipment
    
    
    5,498
    
    
    
    14.7
    %
    
    
    5,344
    
    
    
    14.1
    %
    
    
    154
    
    
    
    2.9
    %Pharmacy
    
    
    1,661
    
    
    
    4.4
    %
    
    
    1,451
    
    
    
    3.8
    %
    
    
    210
    
    
    
    14.5
    %37,384
    
    
    
    100.0
    %
    
    
    38,009
    
    
    
    100.0
    %
    
    
    (625
    )
    
    
    -1.6
    %Cost of revenues:Services
    
    $
    21,595
    
    
    
    
    
    
    $
    22,794
    
    
    
    
    
    
    
    (1,199
    )
    
    
    -5.3
    %Home Health
Equipment
    
    
    1,840
    
    
    
    
    
    
    
    1,902
    
    
    
    
    
    
    
    (62
    )
    
    
    -3.3
    %Pharmacy
    
    
    1,026
    
    
    
    
    
    
    
    1,212
    
    
    
    
    
    
    
    (186
    )
    
    
    -15.3
    %24,461
    
    
    
    
    
    
    
    25,908
    
    
    
    
    
    
    
    (1,447
    )
    
    
    -5.6
    %Gross
    
    
    
    
    
    
    GrossMargin %
    
    
    
    
    
    
    Margin %Gross margins:Services
    
    
    8,630
    
    
    
    28.6
    %
    
    
    8,420
    
    
    
    27.0
    %
    
    
    210
    
    
    
    2.5
    %Home Health
Equipment
    
    
    3,658
    
    
    
    66.5
    %
    
    
    3,442
    
    
    
    64.4
    %
    
    
    216
    
    
    
    6.3
    %Pharmacy
    
    
    635
    
    
    
    38.2
    %
    
    
    239
    
    
    
    16.5
    %
    
    
    396
    
    
    
    165.7
    %$
    12,923
    
    
    
    34.6
    %
    
    $
    12,101
    
    
    
    31.8
    %
    
    $
    822
    
    
    
    6.8
    %
 26




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27




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##### Table of Contents



Selling, General and Administrative
  %% of Total
    
    
    
    
    
    % of Total
    
    $ Increase/
    
    Increase/2008
    
    SG&A
    
    2007
    
    SG&A
    
    (Decrease)
    
    (Decrease)Services
    
    $
    6,764
    
    
    
    48.2
    %
    
    $
    7,018
    
    
    
    51.1
    %
    
    $
    (254
    )
    
    
    -3.6
    %Home Health
Equipment
    
    
    3,184
    
    
    
    22.7
    %
    
    
    3,809
    
    
    
    27.7
    %
    
    
    (625
    )
    
    
    -16.4
    %Pharmacy
    
    
    1,272
    
    
    
    9.1
    %
    
    
    594
    
    
    
    4.3
    %
    
    
    678
    
    
    
    114.1
    %Corporate
    
    
    2,823
    
    
    
    20.1
    %
    
    
    2,316
    
    
    
    16.9
    %
    
    
    507
    
    
    
    21.9
    %$
    14,043
    
    
    
    100.0
    %
    
    $
    13,737
    
    
    
    100.0
    %
    
    $
    306
    
    
    
    2.2
    %
      
    
    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. Effective April 1, 2008, the Company began
to more accurately separate and record these corporate functions from the segment specific
functions; and
    
    Severance expense relating to two former executives.
  Depreciation and Amortization
  28




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##### Table of Contents



$ Increase/
    
    % Increase/2008
    
    2007
    
    (Decrease)
    
    (Decrease)Depreciation  cost of revenues
    
    $
    712
    
    
    $
    606
    
    
    $
    106
    
    
    
    17.5
    %Depreciation and amortization of property and equipment
    
    $
    300
    
    
    $
    274
    
    
    
    26
    
    
    
    9.5
    %Amortization of acquired intangible assets
    
    
    456
    
    
    
    574
    
    
    
    (118
    )
    
    
    -20.6
    %Depreciation and amortization  operating expense
    
    $
    756
    
    
    $
    848
    
    
    $
    (92
    )
    
    
    -10.8
    %
   Other Expenses
  $ Increase/
    
    % Increase/2008
    
    2007
    
    (Decrease)
    
    (Decrease)Interest expense
    
    $
    974
    
    
    $
    1,203
    
    
    $
    (229
    )
    
    
    -19.0
    %Interest income
    
    
    (18
    )
    
    
    (44
    )
    
    
    (26
    )
    
    
    -59.1
    %$
    956
    
    
    $
    1,159
    
    
    $
    (203
    )
    
    
    -17.5
    %
   Income Taxes
   29




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##### Table of Contents



Loss from Discontinued Operations
  Liquidity and Capital Resources
   2008
    
    2007Net cash provided by (used in) operating activities
    
    $
    623
    
    
    $
    (3,962
    )Net cash used in investing activities
    
    
    (608
    )
    
    
    (789
    )Net cash provided by (used in) financing activities
    
    
    (3,985
    )
    
    
    5,863Net change in cash and cash equivalents
    
    
    (3,970
    )
    
    
    1,112Cash and cash equivalents, end of period
    
    
    2,381
    
    
    
    4,106Availability under line of credit agreements
    
    $
    2,022
    
    
    $
    
      30




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##### Table of Contents



Medicare
    
    
    8
    %Medicaid/other government
    
    
    19
    %Commercial Insurance
    
    
    7
    %Institution/Facilities
    
    
    51
    %Private Pay
    
    
    15
    %
  Recent Accounting Pronouncements
 Fair
Value Measurements
 Fair Value Hierarchy.
    The Fair Value Option for Financial Assets and
Financial Liabilities
 Share-Based Payment Share-Based Payment
 31




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##### Table of Contents



, Determination of the Useful Life of Intangible Assets Goodwill and Other Intangible Assets
 The Hierarchy of Generally Accepted Accounting
Principles The
Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles
 
 Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk.
  
 Item 4.
    
    Controls and Procedures.
    32




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##### Table of Contents



Item 1.
    
    Legal Proceedings.
  
 Item 1A.
    
    Risk Factors.
  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 Company.
  To the extent we do not generate adequate cash flow from operations, we may need to raise
additional cash through equity or debt financing, both of which may be difficult due to the
Companys current capital structure and stock price.
   33




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##### Table of Contents



Changes in reimbursement for Home Health Equipment products under Medicare could negatively affect
our business and financial condition.
      
 Item 6.
    
    Exhibits.
  34




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##### Table of Contents



SIGNATURES
  August 8, 2008
    By:
    /s/ Marvin R. RichardsonMarvin R. RichardsonChief Executive Officer
(Principal Executive Officer) and DirectorAugust 8, 2008
    By:
    /s/ Matthew R. MiddendorfMatthew R. MiddendorfTreasurer and Chief Financial Officer
(Principal Financial and Accounting Officer) 35




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##### Table of Contents



EXHIBIT INDEX
  ExhibitNo.
    
    Exhibit Description31.1
    
    Certification of the Chief Executive Officer required by rule 13a  14(a) or rule 15d  14(a).31.2
    
    Certification of the Principal Accounting and Financial Officer required by rule 13a  14(a)
or rule 15d  14(a).32.1
    
    Chief Executive Officer Certification Pursuant to 18 U.S.C. §1350, as Adopted Pursuant to §906
of the Sarbanes  Oxley Act of 2002.32.2
    
    Principal Accounting and Financial Officer Certification Pursuant to 18 U.S.C. §1350, as
Adopted Pursuant to §906 of the Sarbanes  Oxley Act of 2002.
 36