##### 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, 2007
 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.
  NEVADA
    
    88-0331369(State of Incorporation)
    
    (I.R.S. Employer I.D. Number)26777 CENTRAL PARK BLVD., SUITE 200SOUTHFIELD, MI
    
    48076(Address of principal executive offices)
    
    (Zip Code)
  þ o
  o þ o
 o þ




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##### 



Table of Contents
  
 PageNo.Part I: Financial InformationItem 1. Unaudited Consolidated Financial Statements
    
    
    2Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    26Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    39Item 4. Controls and Procedures
    
    
    39Part II: Other InformationItem 1. Legal Proceedings
    
    
    40Item 1A. Risk Factors
    
    
    40Item 5. Other Information
    
    
    50Item 6. Exhibits
    
    
    50Signatures
    
    
    51Exhibits
    
    
    52Certification of Chief Executive OfficerCertification of Principal Accounting and Financial OfficerSection 1350 CertificationSection 1350 Certification
  1




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##### Table of Contents



June 30,
    
    March 31,2007
    
    2007(Unaudited)
    
    (Audited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    4,106,451
    
    
    $
    2,994,322Accounts receivable, net of allowance of $7,090,000 and $8,310,000,
respectively
    
    
    33,787,311
    
    
    
    33,427,284Inventories, net
    
    
    2,338,998
    
    
    
    2,732,533Prepaid expenses and other current assets
    
    
    2,729,664
    
    
    
    2,768,231Total current assets
    
    
    42,962,424
    
    
    
    41,922,370Property and equipment, net
    
    
    10,484,716
    
    
    
    12,606,480Goodwill
    
    
    33,314,908
    
    
    
    33,335,921Acquired intangible assets, net
    
    
    28,323,434
    
    
    
    28,982,628Other assets
    
    
    288,948
    
    
    
    380,374$
    115,374,430
    
    
    $
    117,227,773LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Lines of credit, current portion
    
    $
    506,996
    
    
    $
    2,612,996Accounts payable
    
    
    5,793,139
    
    
    
    6,861,262Accrued expenses:Compensation and related taxes
    
    
    4,085,943
    
    
    
    4,462,726Commissions
    
    
    402,660
    
    
    
    359,401Accrued interest
    
    
    1,454,270
    
    
    
    818,655Other
    
    
    1,318,998
    
    
    
    1,049,065Payable to affiliated agencies, current portion
    
    
    1,676,626
    
    
    
    1,548,827Long-term obligations, current portion
    
    
    18,218,642
    
    
    
    21,320,198Capital lease obligations, current portion
    
    
    974,652
    
    
    
    1,020,421Deferred revenue
    
    
    472,917
    
    
    
    659,258Total current liabilities
    
    
    34,904,843
    
    
    
    40,712,809Other liabilities
    
    
    457,161
    
    
    
    457,161Line of credit, less current portion
    
    
    18,886,264
    
    
    
    20,342,796Payable to affiliated agencies, less current portion
    
    
    11,243
    
    
    
    37,848Long-term obligations, less current portion
    
    
    610,182
    
    
    
    896,870Capital lease obligations, less current portion
    
    
    466,428
    
    
    
    696,787Total liabilities
    
    
    55,336,121
    
    
    
    63,144,271Commitments and contingenciesSTOCKHOLDERS EQUITYPreferred stock, $.001 par value, 5,000,000 shares authorized, none outstanding
    
    
    
    
    
    
    Common stock, $.001 par value, 200,000,000 shares and 150,000,000 shares
authorized, respectively; 132,892,409 shares and 121,059,177 shares issued and
outstanding, respectively
    
    
    132,892
    
    
    
    121,059Additional paid-in capital
    
    
    123,713,282
    
    
    
    110,342,704Accumulated deficit
    
    
    (63,807,865
    )
    
    
    (56,380,261
    )Total stockholders equity
    
    
    60,038,309
    
    
    
    54,083,502$
    115,374,430
    
    
    $
    117,227,773
 See accompanying notes to these consolidated financial statements.
 2




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##### Table of Contents



Three Month Period EndedJune 30,2007
    
    2006Revenues, net
    
    $
    42,360,020
    
    
    $
    37,555,123Cost of revenues
    
    
    28,109,588
    
    
    
    24,373,126Gross profit
    
    
    14,250,432
    
    
    
    13,181,997Selling, general and administrative
    
    
    17,225,720
    
    
    
    12,327,114Depreciation and amortization
    
    
    1,376,985
    
    
    
    568,889Impairment of long-lived assets
    
    
    1,900,387
    
    
    
    Total operating expenses
    
    
    20,503,092
    
    
    
    12,896,003Operating income (loss)
    
    
    (6,252,660
    )
    
    
    285,994Other expenses:Interest expense, net
    
    
    1,159,261
    
    
    
    405,127Total other expenses
    
    
    1,159,261
    
    
    
    405,127Net loss before income taxes
    
    
    (7,411,921
    )
    
    
    (119,133
    )Current income tax expense
    
    
    15,683
    
    
    
    38,800NET LOSS
    
    $
    (7,427,604
    )
    
    $
    (157,933
    )Weighted average number of common shares outstanding (in thousands)
    
    
    114,997
    
    
    
    86,837Basic and diluted net loss per share
    
    $
    (0.07
    )
    
    $
    (0.00
    )
 See accompanying notes to these consolidated financial statements.
 3




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Three Month Period EndedJune 30,2007
    
    2006Cash used in operating activities:Net loss for the period
    
    $
    (7,427,604
    )
    
    $
    (157,933
    )Adjustments to reconcile net loss to net cash used in operating
activities:Provision for doubtful accounts
    
    
    538,223
    
    
    
    318,693Amortization and depreciation of property and equipment
    
    
    1,502,449
    
    
    
    625,946Amortization of intangible assets
    
    
    659,197
    
    
    
    395,943Impairment of long-lived assets
    
    
    1,900,387
    
    
    
    Reduction in expense due to return of common stock previously
issued
    
    
    (246,400
    )
    
    
    Stock-based compensation expense
    
    
    499,483
    
    
    
    156,925Changes in operating assets and liabilities, net of acquisitions:Accounts receivable
    
    
    (898,250
    )
    
    
    (2,269,173
    )Inventories
    
    
    (103,989
    )
    
    
    (454,071
    )Other assets
    
    
    129,993
    
    
    
    (678,205
    )Accounts payable
    
    
    (1,047,112
    )
    
    
    (134,539
    )Accrued expenses
    
    
    617,365
    
    
    
    (198,948
    )Due to affiliated agencies
    
    
    101,194
    
    
    
    (244,570
    )Deferred revenue
    
    
    (186,341
    )
    
    
    Net cash used in operating activities
    
    
    (3,961,405
    )
    
    
    (2,639,986
    )Cash provided by (used in) investing activities:Purchases of businesses, net of cash acquired
    
    
    
    
    
    
    90,000Purchases of property and equipment
    
    
    (789,149
    )
    
    
    (380,592
    )Net cash used in investing activities
    
    
    (789,149
    )
    
    
    (290,592
    )Cash provided by (used in) financing activities:Proceeds from issuance of note payable
    
    
    
    
    
    
    15,000,000Proceeds from issuance of common stock, net of fees
    
    
    12,456,872
    
    
    
    Proceeds from exercise of stock options/warrants
    
    
    
    
    
    
    100,000Net payments on line of credit
    
    
    (3,562,532
    )
    
    
    (10,272,975
    )Payments on notes payable and capital lease obligations
    
    
    (3,031,657
    )
    
    
    (493,659
    )Net cash provided by financing activities
    
    
    5,862,683
    
    
    
    4,333,366Net increase in cash and cash equivalents
    
    
    1,112,129
    
    
    
    1,402,788Cash and cash equivalents, beginning of period
    
    
    2,994,322
    
    
    
    530,344Cash and cash equivalents, end of period
    
    $
    4,106,451
    
    
    $
    1,933,132
 See accompanying notes to these consolidated financial statements.
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Three Month Period EndedJune 30,2007
    
    2006Supplementary information:Cash paid during the period for:Interest
    
    $
    567,524
    
    
    $
    268,035Income taxes
    
    
    15,683
    
    
    
    38,800Non-cash investing / financing activities:Payments on note payable with issuance of common stock
    
    $
    677,631
    
    
    $
    151,295
 See accompanying notes to these consolidated financial statements.
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Note 1
 Description of Company and Significant Accounting Policies
 Description of Company
   Unaudited Interim Financial Information
  Principles of Consolidation
  6




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Use of Estimates
  Cash and Cash Equivalents
  Allowance for Doubtful Accounts
  Inventories
  Property and Equipment
  Goodwill and Acquired Intangible Assets
   Trade name
    
    30
    yearsCustomers and referral source relationships (depending on
the type of business purchased)
    
    5 and 20
    yearsAcquired technology
    
    3
    yearsNon-competition agreements (length of agreement)
    
    5
    years
 7




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Impairment of Long-Lived Assets
  Payables to Affiliated Agencies
  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
    Note 2  Managements Plan
     10




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Note 3
 Goodwill and Acquired Intangible Assets
  In-Home
    
    Durable
    
    RetailerHealth
    
    Medical
    
    & EmployerCare Services
    
    Equipment
    
    Services
    
    TotalGoodwill at March 31, 2007
    
    
    13,922,354
    
    
    
    2,771,982
    
    
    
    16,641,585
    
    
    
    33,335,921Purchase price allocation adjustments
    
    
    
    
    
    
    
    
    
    
    (21,013
    )
    
    
    (21,013
    )Goodwill at June 30, 2007
    
    $
    13,922,354
    
    
    $
    2,771,982
    
    
    $
    16,620,572
    
    
    $
    33,314,908
   June 30, 2007
    
    
    March 31, 2007Accumulated
    
    
    
    
    
    
    AccumulatedCost
    
    
    Amortization
    
    
    Cost
    
    
    AmortizationTrade name
    
    $
    8,000,000
    
    
    $
    491,514
    
    
    $
    8,000,000
    
    
    $
    445,987Customer relationships
    
    
    27,941,031
    
    
    
    7,641,061
    
    
    
    27,941,031
    
    
    
    7,098,834Non-competition agreements
    
    
    874,360
    
    
    
    359,382
    
    
    
    874,360
    
    
    
    309,054Acquired technology
    
    
    760,000
    
    
    
    760,000
    
    
    
    760,000
    
    
    
    738,88837,575,391
    
    
    $
    9,251,957
    
    
    
    37,575,391
    
    
    $
    8,592,763Less accumulated amortization
    
    
    (9,251,957
    )
    
    
    
    
    
    
    (8,592,763
    )Net acquired intangible assets
    
    $
    28,323,434
    
    
    
    
    
    
    $
    28,982,628
 11




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Remainder of fiscal 2008
    
    $
    1,882,351Fiscal 2009
    
    
    2,272,964Fiscal 2010
    
    
    2,203,399Fiscal 2011
    
    
    1,888,652Fiscal 2012
    
    
    1,645,069Thereafter
    
    
    18,430,999Total
    
    $
    28,323,434
 Note 4
 Impairment of Long-Lived Assets
  Note 5
 Lines of Credit
    12




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Note 6
 Long-Term Obligations
  June 30,
    
    March 31,2007
    
    2007Note payable to Jana Master Fund, Ltd.
originally dated November 30, 2006 and
amended June 25, 2007 with unpaid accrued
interest and the principal due in full on
June 30, 2008. 50% of the accrued unpaid
interest is payable on the following dates: September 30, 2007, December 31, 2007 and
March 31, 2008. The original interest rate
was the one-year LIBOR rate plus 7.5%.
Starting on February 1, 2007, the interest
rate increased 1.0% on the first day of each
month for five months. On July 1, 2007, the
interest rate changed to the one-year LIBOR
rate plus 8%. When the total amount
outstanding under the note is less than
$8,500,000, the interest rate will be
reduced to the one-year LIBOR rate plus 4%.
At June 30, 2007, the effective interest
rate was 12.74%. The note payable includes
various loan covenants, all of which the
Company was in compliance as of June 30,
2007.
    
    $
    17,000,000
    
    
    $
    17,000,000Note payable to Jana Master Fund, Ltd. dated
March 20, 2007 bearing interest at the one-year LIBOR rate plus 7.5%. The note payable
was paid in full in April 2007.
    
    
    
    
    
    
    2,564,103Purchase price payable to the selling
shareholder of Alliance Oxygen & Medical
Equipment, Inc., dated July 12, 2006,
bearing simple interest of 8% per year
payable in equal quarterly payments of
principal and interest with the final
payment due on July 12, 2007.
    
    
    514,948
    
    
    
    1,019,800Purchase price payable to Remedy
Therapeutics, Inc. 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.
    
    
    464,646
    
    
    
    617,455Other purchase price payables to be paid
over time to the selling shareholders or
selling entities of various acquired
entities, due dates ranging from July 2007
to March 2008.
    
    
    86,460
    
    
    
    187,606Other long-term obligations with interest
charged at various rates ranging from 4% to
18% to be paid over time based on respective
terms, due dates ranging from June 2007 to
November 2011.
    
    
    762,770
    
    
    
    828,104Total long-term obligations
    
    
    18,828,824
    
    
    
    22,217,068Less current portion of long-term obligations
    
    
    (18,218,642
    )
    
    
    (21,320,198
    )Long-term obligations, less current portion
    
    $
    610,182
    
    
    $
    896,870
  Remainder of fiscal 2008:
    
    $
    1,121,154Fiscal 2009:
    
    
    17,462,732Fiscal 2010:
    
    
    133,631Fiscal 2011:
    
    
    80,144Fiscal 2012:
    
    
    31,163Total
    
    $
    18,828,824
  14




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Note 7
 Stockholders Equity
 General
    Escrow Shares
  Common Stock Transactions
    15




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Warrants
  June 30,
    
    March 31,Description
    
    Exercise Price
    
    Granted
    
    Expiration
    
    2007
    
    2007Class A
    
    $
    0.50
    
    
    May 2004
    
    May 2011
    
    
    5,779,036
    
    
    
    5,779,036Class B-1
    
    $
    0.001
    
    
    September 2005
    
    September 2009
    
    
    8,990,277
    
    
    
    8,990,277Class B-2
    
    $
    2.25
    
    
    September 2005
    
    September 2009
    
    
    4,711,110
    
    
    
    4,711,110May 2007 Private Placement
    
    $
    1.75
    
    
    May 2007
    
    May 2014
    
    
    2,754,726
    
    
    
    Total Warrants Outstanding
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22,235,149
    
    
    
    19,480,423
    Note 8  Contingencies
   16




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Note 9
 Stock-Based Compensation
   Stock Options
    Three-Months Ended June 30,2007
    
    2006Weighted-average expected
volatility
    
    
    64
    %
    
    
    45
    %Expected dividend yields
    
    
    0
    %
    
    
    0
    %Expected terms (in years)
    
    
    7
    
    
    
    7Risk-free interest rate
    
    
    4.58%  4.79
    %
    
    
    3.92
    %
 17




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Weighted-Weighted-
    
    AverageAverage
    
    Remaining
    
    AggregateExercise
    
    Contractual
    
    IntrinsicOptions
    
    Shares
    
    Price
    
    Term (Years)
    
    ValueOutstanding at March 31, 2007
    
    
    7,431,653
    
    
    
    0.42Granted
    
    
    23,275
    
    
    
    1.38Exercised
    
    
    
    
    
    
    Forfeited or expired
    
    
    (1,000,000
    )
    
    
    0.25Outstanding at June 30, 2007
    
    
    6,454,928
    
    
    $
    0.45
    
    
    
    4.96
    
    
    $
    5,508,000Exercisable at June 30, 2007
    
    
    4,454,928
    
    
    $
    0.53
    
    
    
    4.96
    
    
    $
    3,508,000
        Restricted Stock  Arcadia Resources, Inc.
  18




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##### Table of Contents



Weighted-AverageGrant DateFair ValueShares
    
    per ShareUnvested at March 31, 2007
    
    
    2,732,542
    
    
    
    2.75Granted
    
    
    100,000
    
    
    
    1.30Vested
    
    
    (601,375
    )
    
    
    2.82Forfeited
    
    
    (612,500
    )
    
    
    2.76Unvested at June 30, 2007
    
    
    1,618,667
    
    
    $
    2.63
    Restricted Stock  Care Clinic, Inc.
  19




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Note
10  Income Taxes
      Note
11  Related Party Transactions
 June 30, 2007.
 20




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Note
12  Segment Information
     21




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Three-Month Period Ended June 30,2007
    
    2006Revenue, net:Services
    
    $
    31,213,564
    
    
    $
    29,917,788Durable Medical Equipment
    
    
    8,060,004
    
    
    
    6,850,984Retailer and Employer Services
    
    
    2,948,652
    
    
    
    786,351Clinics
    
    
    137,800
    
    
    
    Total revenue
    
    $
    42,360,020
    
    
    $
    37,555,123Operating income/(loss):Services
    
    $
    1,068,285
    
    
    $
    1,105,213Durable Medical Equipment
    
    
    (595,207
    )
    
    
    488,273Retailer and Employer Services
    
    
    (359,440
    )
    
    
    (155,639
    )Clinics
    
    
    (3,910,507
    )
    
    
    Unallocated corporate overhead
    
    
    (2,455,791
    )
    
    
    (1,151,853
    )Total operating income/(loss)
    
    
    (6,252,660
    )
    
    
    285,994Interest, net
    
    
    1,159,261
    
    
    
    405,127Net loss before income tax expense
    
    
    (7,411,921
    )
    
    
    (119,133
    )Income tax expense
    
    
    15,683
    
    
    
    38,800Net loss
    
    $
    (7,427,604
    )
    
    $
    (157,933
    )Depreciation and amortization:Services
    
    $
    333,406
    
    
    $
    291,981Durable Medical Equipment  cost of revenue
    
    
    877,778
    
    
    $
    453,000Durable Medical Equipment  operating expense
    
    
    611,225
    
    
    
    258,467Retailer and Employer Services
    
    
    126,978
    
    
    
    9,930Clinics
    
    
    163,253
    
    
    
    Corporate
    
    
    142,123
    
    
    
    8,511Total depreciation and amortization
    
    $
    2,254,763
    
    
    $
    1,021,889
 June 30, 2007
    
    March 31, 2007Assets:Services
    
    $
    49,838,132
    
    
    $
    51,068,493Durable Medical Equipment
    
    
    30,124,256
    
    
    
    30,377,088Retailer and Employer Services
    
    
    31,502,249
    
    
    
    33,217,909Clinics
    
    
    413,460
    
    
    
    Unallocated corporate assets
    
    
    3,496,333
    
    
    
    2,564,283Total assets
    
    $
    115,374,430
    
    
    $
    117,227,773
 22




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Note 13  Restructuring
   Expenses IncurredDuring the Three-Month Period Ended:
    
    Total
    
    RemainingEstimated
    
    March 31,
    
    June 30,
    
    Expenses
    
    EstimatedDescription
    
    Expenses
    
    2007
    
    2007
    
    Incurred
    
    ExpensesDurable Medical Equipment:One-time termination benefits
    
    $
    128,333
    
    
    $
    128,333
    
    
    $
    
    
    
    $
    128,333
    
    
    $
    Lease termination costs
    
    
    184,970
    
    
    
    
    
    
    
    42,335
    
    
    
    42,335
    
    
    
    142,635Other associated costs
    
    
    109,642
    
    
    
    
    
    
    
    26,500
    
    
    
    26,500
    
    
    
    83,142422,945
    
    
    
    128,333
    
    
    
    68,835
    
    
    
    197,168
    
    
    
    225,777Clinics:One-time termination benefits
    
    
    394,670
    
    
    
    394,670
    
    
    
    
    
    
    
    394,670
    
    
    
    Lease termination costs
    
    
    49,688
    
    
    
    
    
    
    
    49,688
    
    
    
    49,688
    
    
    
    Other associated costs
    
    
    10,000
    
    
    
    
    
    
    
    3,200
    
    
    
    3,200
    
    
    
    6,800454,358
    
    
    
    394,670
    
    
    
    52,888
    
    
    
    447,558
    
    
    
    6,800Corporate:One-time termination benefits
    
    
    154,627
    
    
    
    
    
    
    
    43,723
    
    
    
    43,723
    
    
    
    110,904Lease termination costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other associated costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    154,627
    
    
    
    
    
    
    
    43,723
    
    
    
    43,723
    
    
    
    110,904Total
    
    $
    1,031,930
    
    
    $
    523,003
    
    
    $
    165,446
    
    
    $
    688,449
    
    
    $
    343,481
 23




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##### Table of Contents



March 31,
    
    Amounts
    
    Amounts
    
    June 30,Description
    
    2007
    
    Paid
    
    Expensed
    
    2007Durable Medical Equipment:One-time termination benefits
    
    $
    128,333
    
    
    $
    (7,653
    )
    
    $
    
    
    
    $
    120,680Lease termination costs
    
    
    
    
    
    
    
    
    
    
    42,335
    
    
    
    42,335Other associated costs
    
    
    
    
    
    
    (26,500
    )
    
    
    26,500
    
    
    
    128,333
    
    
    
    (34,153
    )
    
    
    68,835
    
    
    
    163,015Clinics:One-time termination benefits
    
    
    394,670
    
    
    
    (131,538
    )
    
    
    
    
    
    
    263,132Lease termination costs
    
    
    
    
    
    
    
    
    
    
    49,688
    
    
    
    49,688Other associated costs
    
    
    
    
    
    
    (3,200
    )
    
    
    3,200
    
    
    
    394,670
    
    
    
    (134,738
    )
    
    
    52,888
    
    
    
    312,820Corporate:One-time termination benefits
    
    
    
    
    
    
    (11,808
    )
    
    
    43,723
    
    
    
    31,915Lease termination costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other associated costs
    
    
    
    
    
    
    
    
    
    
    (11,808
    )
    
    
    43,723
    
    
    
    31,915Total
    
    $
    523,003
    
    
    $
    (180,699
    )
    
    $
    165,446
    
    
    $
    507,750
  Note
14  Subsequent Events
 JASCORP, LLC Acquisition
  Resignation of Chairman
  24




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##### Table of Contents



Care Clinic Contract Termination
    25




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Cautionary Statement Concerning Forward-Looking Statements
    Overview
  26




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##### Table of Contents



Results of Operations Liquidity and Capital
Resources
 Increase (decrease)
    
    Increase (decrease)from prior
    
    from same(in millions)
    
    quarter
    
    quarter prior yearNet sales by quarter:First quarter ended June 30, 2005
    
    $
    30.7
    
    
    
    7.4
    %
    
    
    33.0
    %Second quarter ended September 30, 2005
    
    
    32.7
    
    
    
    6.5
    %
    
    
    28.2
    %Third quarter ended December 31, 2005
    
    
    33.3
    
    
    
    1.8
    %
    
    
    18.5
    %Fourth quarter ended March 31, 2006
    
    
    34.2
    
    
    
    2.7
    %
    
    
    19.6
    %First quarter ended June 30, 2006
    
    
    37.6
    
    
    
    9.9
    %
    
    
    22.5
    %Second quarter ended September 30, 2006
    
    
    41.4
    
    
    
    10.3
    %
    
    
    26.8
    %Third quarter ended December 31, 2006
    
    
    41.0
    
    
    
    (0.9
    )%
    
    
    23.2
    %Fourth quarter ended March 31, 2007
    
    
    38.4
    
    
    
    (6.8
    )%
    
    
    10.9
    %First quarter ended June 30, 2007
    
    
    42.4
    
    
    
    10.4
    %
    
    
    12.8
    %
 Critical Accounting Policies
   Revenue Recognition
  
    
    Evidence of an arrangement exists
    
    Services have been provided or goods have been delivered
    
    The price is fix or determinable
    
    Collection is reasonably assured.
 27




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Allowance for Doubtful Accounts
  Goodwill and Intangible Assets
  .
   28




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##### Table of Contents



Income Taxes
    29




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##### Table of Contents



Results of Operations  Three-Month Period Ended June 30, 2007 Compared to Three-Month Period Ended June 30, 2006
 Three-Month PeriodEnded June 30,2007
    
    2006Revenues, net
    
    $
    42,360,000
    
    
    $
    37,555,000Cost of revenues
    
    
    28,110,000
    
    
    
    24,373,000Gross profit
    
    
    14,250,000
    
    
    
    13,182,000Selling, general and administrative expenses
    
    
    17,226,000
    
    
    
    12,327,000Depreciation and amortization
    
    
    1,377,000
    
    
    
    569,000Impairment of long-lived assets
    
    
    1,900,000
    
    
    
    Total operating expenses
    
    
    20,503,000
    
    
    
    12,896,000Operating loss
    
    
    (6,253,000
    )
    
    
    286,000Interest expense, net
    
    
    1,159,000
    
    
    
    405,0001,159,000
    
    
    
    405,000Net loss before income tax expense
    
    
    (7,412,000
    )
    
    
    (119,000
    )Income tax expense
    
    
    16,000
    
    
    
    39,000Net loss
    
    $
    (7,428,000
    )
    
    $
    (158,000
    )Weighted average number of shares  basic and diluted (in thousands)
    
    
    114,997
    
    
    
    86,837Net loss per share  basic and diluted
    
    $
    (0.07
    )
    
    $
    (0.00
    )
 30




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##### Table of Contents



Revenues, Cost of Revenues and Gross Profits
  % of Total
    
    
    
    
    
    % of Total2007
    
    Revenue
    
    2006
    
    RevenueRevenues, net:In-Home Health Services
    
    $
    31,214,000
    
    
    
    73.7
    %
    
    $
    29,918,000
    
    
    
    79.7
    %Durable
Medical Equipment
    
    
    8,060,000
    
    
    
    19.0
    %
    
    
    6,851,000
    
    
    
    18.2
    %Retailer and Employer Services
    
    
    2,948,000
    
    
    
    7.0
    %
    
    
    786,000
    
    
    
    2.1
    %Clinics
    
    
    138,000
    
    
    
    0.3
    %
    
    
    
    
    
    
    42,360,000
    
    
    
    100.0
    %
    
    
    37,555,000
    
    
    
    100.0
    %Cost of revenues:In-Home Health Services
    
    
    22,791,000
    
    
    
    
    
    
    
    21,952,000Durable
Medical Equipment
    
    
    2,339,000
    
    
    
    
    
    
    
    1,763,000Retailer and Employer Services
    
    
    2,103,000
    
    
    
    
    
    
    
    658,000Clinics
    
    
    877,000
    
    
    
    
    
    
    
    28,110,000
    
    
    
    
    
    
    
    24,373,000Gross
    
    
    
    
    
    GrossMargin %
    
    
    
    
    
    Margin %Gross margins:In-Home Health Services
    
    
    8,423,000
    
    
    
    27.0
    %
    
    
    7,966,000
    
    
    
    26.6
    %Durable
Medical Equipment
    
    
    5,721,000
    
    
    
    71.0
    %
    
    
    5,088,000
    
    
    
    74.3
    %Retailer and Employer Services
    
    
    845,000
    
    
    
    28.7
    %
    
    
    128,000
    
    
    
    16.3
    %Clinics
    
    
    (739,000
    )
    
    
    (535.5
    )%
    
    
    
    
    
    
    $
    14,250,000
    
    
    
    33.6
    %
    
    $
    13,182,000
    
    
    
    35.1
    %
  31




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32




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##### Table of Contents



Selling, General and Administrative
  % of Total
    
    
    
    
    
    % of Total2007
    
    SG&A
    
    2006
    
    SG&AIn-Home Health Services
    
    $
    7,018,000
    
    
    
    40.7
    %
    
    $
    6,569,000
    
    
    
    53.3
    %Durable
Medical Equipment
    
    
    5,705,000
    
    
    
    33.1
    %
    
    
    4,341,000
    
    
    
    35.2
    %Retailer and Employer Services
    
    
    1,078,000
    
    
    
    6.3
    %
    
    
    274,000
    
    
    
    2.2
    %Clinics
    
    
    1,108,000
    
    
    
    6.4
    %
    
    
    
    
    
    
    Corporate
    
    
    2,317,000
    
    
    
    13.5
    %
    
    
    1,143,000
    
    
    
    9.3
    %$
    17,226,000
    
    
    
    100.0
    %
    
    $
    12,327,000
    
    
    
    100.0
    %
  
    
    Within the Durable Medical Equipment segment, expenses incurred subsequent to the
Alliance Oxygen and Medical Equipment, Inc. and Lovell Medical Equipment, Inc.
acquisitions on July 12, 2006 and August 25, 2006, respectively, contributed $1,137,000 in
selling, general and administrative expenses during the three-month period ended June 30,
2007 compared to no expenses in the same period of the prior year. Personnel costs
represent approximately 60% of the additional expenses.
    
    Within the Retailer and Employer Services segment, pharmacy expenses incurred
subsequent to the PrairieStone Pharmacy, LLC and Wellscripts, LLC acquisitions on February
16, 2007 and June 30, 2006, respectively, contributed $958,000 in selling, general and
administrative expenses during the three-month period ended June 30, 2007 compared to no
expenses in the same period of the prior year. Personnel costs represent approximately
66% of the additional expenses.
    
    The expenses relating to the Clinics initiative, which began during fiscal 2007,
resulted in a $1,108,000 increase in selling, general and administrative expenses during
the three-month period ended June 30, 2007 compared to no expenses in the same period of
the prior year. Personnel costs represent approximately 50% of the additional expenses,
and occupancy fees and legal expenses represent an additional 12% and 12% of the
additional expenses, respectively.
    
    Corporate selling, general and administrative expenses increased by $1,174,000 during
the three-month period ended June 30, 2007 compared to the three-month period ended June
30, 2006. This increase was primarily due to an $877,000 increase in professional fees.
The Company expensed its fiscal 2007 audit fees and its fees associated with
Sarbanes-Oxley consulting as the services were provided, and a significant portion of
these services were provided in April, May and June 2007.
 33




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##### Table of Contents



Depreciation and Amortization
  2007
    
    2006Depreciation  cost of revenues
    
    $
    878,000
    
    
    $
    453,000Depreciation and amortization of property and equipment
    
    $
    718,000
    
    
    $
    173,000Amortization of acquired intangible assets
    
    
    659,000
    
    
    
    396,000Depreciation and amortization  operating expense
    
    $
    1,377,000
    
    
    $
    569,000
    Impairment of Long-Lived Assets
  34




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##### Table of Contents



Interest Expense and Income
  2007
    
    2006Interest expense
    
    $
    1,203,000
    
    
    $
    405,000Interest income
    
    
    (44,000
    )
    
    
    $
    1,159,000
    
    
    $
    405,000
  Income Taxes
  Liquidity and Capital Resources
   35




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36




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##### Table of Contents



2007
    
    2006Net loss
    
    $
    (7,428,000
    )
    
    $
    (158,000
    )Net cash used in operating activities
    
    
    (3,961,000
    )
    
    
    (2,640,000
    )Net cash used in investing activities
    
    
    (789,000
    )
    
    
    (291,000
    )Net cash provided by financing activities
    
    
    5,863,000
    
    
    
    4,334,000Net increase in cash and cash equivalents
    
    
    1,112,000
    
    
    
    1,403,000Cash and cash equivalents at the end of the period
    
    $
    4,106,000
    
    
    $
    1,933,000
        37




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##### Table of Contents



Government-funded
    
    
    29
    %Institutions
    
    
    43
    %Commercial Insurance
    
    
    11
    %Private Pay
    
    
    17
    %
   Recent Accounting Pronouncements
    38




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures About Market Risk.
  
 Item 4. Controls and Procedures.
 Disclosure Controls and Procedures.
 Design of Internal Control Over Financial Reporting
  
    
    Pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect transactions and dispositions of our assets;
    
    Provide reasonable assurance that our transactions are recorded as necessary to permit
preparation of financial statements in accordance with U.S. generally accepted accounting
principles;
    
    Provide reasonable assurances that our 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 statements.
 Status of Managements Remedial Action
 
    
    Management did not design and maintain effective controls relating to the month-end
closing and financial reporting process due to lack of evidence of review surrounding various
account reconciliations and properly evidenced journal entries. Additionally, the Company had
insufficient personnel resources and technical accounting and reporting expertise within the
Companys financial closing and reporting functions.
    
    Management did not maintain adequate control relating to the business acquisition process
due to lack of formalized due diligence procedures and evidentiary support of purchase
accounting review.
    
    Management did not design and maintain controls to analyze and record appropriate
adjustments to the accounts receivable reserve and properly monitor review of reductions to
accounts receivable due
 39




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##### Table of Contents



to ineffective controls over contract pricing and the standardization of a contract pricing
system emphasized by changes in payer mix and other contracting licensure issues.
  Changes in Internal Controls.
 
  
 Item 1. Legal Proceedings.
  
 Item 1A. Risk Factors.
  We recently became a public company and have a limited operating history as a public company upon
which you can base an investment decision.
  To finance the numerous acquisitions made as part of our growth strategy, the Company incurred
significant debt which must be repaid. Our debt level could adversely affect our financial health
and affect our ability to run our business.
  o
    
    We may be unable to obtain additional financing for working capital, capital
expenditures, acquisitions and general corporate purposes.
 40




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##### Table of Contents



o
    
    Our ability to adapt to changing market conditions may be hampered. We may be more
vulnerable in a volatile market and at a competitive disadvantage to our competitors that
have less debt.o
    
    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.o
    
    We are subject to the risks that interest rates and our interest expense will increase.o
    
    Our ability to plan for, or react to, changes in our business is more limited.
  Due to our debt level, 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 or acquisitions.
  The terms of our Credit Agreements with Comerica Bank subject us to the risk of foreclosure on
certain property.
  In order to repay our short-term debt obligations, as well as to pursue our growth strategy, we may
seek additional equity financing, which could result in dilution to our security holders.
  41




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##### Table of Contents



The Company has completed 27 acquisitions since the reverse merger in May 2004. The licensure and
credentialing process under the new ownership must be satisfied timely in order to bill and collect
for services rendered to beneficiaries of government-based health care programs and other insurance
carriers. Cash flow related to these transitions can be impaired sufficient to require additional
external financing in the form of debt or equity.
  To the extent we do not raise adequate funds from the equity markets or possible business
divestitures to satisfy short-term debt obligations, we would need to seek debt financing or modify
or abandon our growth strategy or product and service offerings.
  Because the Company is dependent on key management and advisors, the loss of the services or advice
of any of these persons could have a material adverse effect on our business and prospects. We also
face certain risks as a result of the recent changes to our management team.
  A decline in the rate of growth of the staffing and home care industries, or negative growth, could
adversely affect us by reducing sales, thereby resulting in less cash being available for the
payment of operating expenses, debt obligations and to pursue our strategic plans.
  42




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##### Table of Contents



Sales of certain of our services and products are largely dependent upon payments from governmental
programs and private insurance, and cost containment initiatives may reduce our revenues, thereby
harming our performance.
   We could be subject to severe fines and possible exclusion from participation in federal and state
healthcare programs if we fail to comply with the laws and regulations applicable to our business
or if those laws and regulations change.
  The markets in which the Company operates are highly competitive and the Company may be unable to
compete successfully against competitors with greater resources.
  43




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##### Table of Contents



We may not be able to successfully integrate acquired businesses, which could result in our failure
to increase revenues or to avoid duplication of costs among acquired businesses, thereby adversely
affecting our financial results and profitability.
  The failure to implement the Companys business strategy may result in our inability to be
profitable and adversely impact the value of our Common Stock.
  We cannot predict the impact that the registration of the shares may have on the price of the
Companys shares of Common Stock.
  Ownership of our stock is concentrated in a small group of security holders who may exercise
substantial control over our actions to the detriment of our other security holders.
  44




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##### Table of Contents



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.
  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.
  The issuance of our preferred stock could materially impact the price of Common Stock and the
rights of holders of our Common Stock.
  The exercise of common stock warrants may depress our stock price and may result in dilution to our
Common Security holders.
  45




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##### Table of Contents



We have granted stock options to certain management employees and directors as compensation which
may depress our stock price and result in dilution to our common security holders.
   We are dependent on our affiliated agencies and our internal sales force to sell our services and
products, the loss of which could adversely affect our business.
  Our recurring losses from operations have caused us to receive a going concern opinion from our
independent auditors, which could negatively affect our business and results of operation.
  46




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##### Table of Contents



In connection with our evaluation of internal controls over financial reporting as required by
Section 404 under the Sarbanes-Oxley Act of 2002, we identified certain material weaknesses, which
could impact our ability to provide reliable and accurate financial reports and prevent fraud. We
could fail to meet our financial reporting responsibilities in future reporting periods if these
weaknesses are not remediated timely, or if any future failures by us to maintain adequate internal
controls over financial reporting result in additional material weaknesses.
  We may not be able to secure the additional financing to fund operating activities through the end
of fiscal year 2008, which would raise substantial doubt about our ability to continue as a going
concern and would have a material adverse effect on our business and prospects.
  47




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##### Table of Contents



Our financial results could suffer as a result of the goodwill and intangible asset impairment
expense recognized for the year ended March 31, 2007.
  Our financial results could suffer if the goodwill and other intangible assets we acquired in our
acquisition of PrairieStone Pharmacy, LLC become impaired, or as a result of costs associated with
the acquisition.
  We have a history of operating losses and negative cash flow that may continue into the foreseeable
future.
  We may not be able to meet the financial covenants contained in our credit facility, and we may not
be able to obtain a waiver for such violations.
 48




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##### Table of Contents



The disposition of businesses that do not fit with our evolving strategy can be highly uncertain.
  The Centers for Medicare and Medicaid Services (CMS) recently announced a competitive bidding
program related to durable medical equipment. The program will operate within the ten largest
metropolitan areas during 2008 and then be expanded to 70 additional areas in 2009. As a durable
medical equipment vendor, the competitive bidding program could result in loss of revenue due to
over-bidding by the Company and will increase the compliance costs.
  49




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##### Table of Contents



Several anti-takeover measures under Nevada law could delay or prevent a change of our control,
despite such change of control being in the best interest of the holders of our shares of Common
Stock.
  
 Item 5. Other Information.
 
 
 Item 6. Exhibits.
  50




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##### Table of Contents



SIGNATURES
  August 9, 2007
    By:
    /s/ Marvin R. RichardsonMarvin R. RichardsonChief Executive Officer
(Principal Executive Officer) and
Director August 9, 2007
    By:
    /s/ Lynn K. FettermanLynn K. FettermanInterim Chief Financial Officer
(Principal Financial and Accounting
Officer) 51




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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
§206 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 §206 of the Sarbanes  Oxley Act of 2002.
 52