##### 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, 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.
  NEVADA
    
    88-0331369(State or other jurisdiction of Incorporation)
    
    (I.R.S. EmployerIdentification Number)
 9320 PRIORITY WAY WEST DRIVEINDIANAPOLIS, INDIANA
    
    46240(Address of principal executive offices)
    
    (Zip Code)
  þ o
  Large accelerated filer o
Accelerated filer þ
Non-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 StatementsCondensed Consolidated Balance Sheets as of June 30, 2010 (unaudited) and March 31, 2010
    
    
    2Condensed Consolidated Statements of Operations for the Three Months ended June 30, 2010 and 2009 (unaudited)
    
    
    3Condensed Consolidated Statement of Stockholders Deficit for the Three Months ended June 30, 2010 (unaudited)
    
    
    4Condensed Consolidated Statements of Cash Flows for the Three Months ended June 30, 2010 and 2009 (unaudited)
    
    
    5Notes to the Condensed Consolidated Financial Statements (unaudited)
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    20Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    32Item 4.
    
    Controls and Procedures
    
    
    32Item 5.
    
    Other Information
    
    
    32Part II: Other InformationItem 1.
    
    Legal Proceedings
    
    
    33Item 1A.
    
    Risk Factors
    
    
    33Item 6.
    
    Exhibits
    
    
    42ExhibitsSignaturesCertification of the Chief Executive Officer required by rule 13a - 14(a) or rule 15d - 14(a).Certification of the Principal Accounting and Financial Officer required by rule 13a - 14(a) or rule 15d - 14(a).Chief Executive Officer Certification Pursuant to 18 U.S.C. '1350, as Adopted Pursuant to '906 of the Sarbanes - Oxley Act of 2002.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.
   1




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##### Table of Contents



(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
 June 30,
    
    
    March 31,2010
    
    
    2010(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    4,737
    
    
    $
    5,444Accounts receivable, net of allowance of $2,627 and $2,623, respectively
    
    
    11,957
    
    
    
    12,366Inventories, net
    
    
    1,496
    
    
    
    934Prepaid expenses and other current assets
    
    
    1,900
    
    
    
    1,632Total current assets
    
    
    20,090
    
    
    
    20,376Property and equipment, net
    
    
    1,808
    
    
    
    1,738Goodwill
    
    
    2,500
    
    
    
    2,500Acquired intangible assets, net
    
    
    7,527
    
    
    
    7,670Other assets
    
    
    404
    
    
    
    412Restricted cash
    
    
    500
    
    
    
    500Total assets
    
    $
    32,829
    
    
    $
    33,196LIABILITIES AND STOCKHOLDERS DEFICITCurrent liabilities:Accounts payable
    
    $
    2,621
    
    
    $
    3,159Accrued expenses:Compensation and related taxes
    
    
    2,700
    
    
    
    3,191Interest
    
    
    39
    
    
    
    82Health insurance
    
    
    267
    
    
    
    463Other
    
    
    1,534
    
    
    
    1,508Fair value of warrant liability
    
    
    2,414
    
    
    
    1,499Payable to affiliated agencies
    
    
    692
    
    
    
    1,076Long-term obligations, current portion
    
    
    189
    
    
    
    939Capital lease obligations, current portion
    
    
    54
    
    
    
    69Total current liabilities
    
    
    10,510
    
    
    
    11,986Lines of credit
    
    
    11,673
    
    
    
    7,774Long-term obligations, less current portion
    
    
    25,820
    
    
    
    25,192Capital lease obligations, less current portion
    
    
    18
    
    
    
    19Total liabilities
    
    
    48,021
    
    
    
    44,971Commitments and contingenciesSTOCKHOLDERS DEFICITPreferred stock, $.001 par value, 5,000,000 shares authorized, none outstanding
    
    
    
    
    
    
    Common
stock, $.001 par value, 300,000,000 shares authorized; 177,974,919 shares and 177,918,044 shares issued, respectively
    
    
    178
    
    
    
    178Additional paid-in capital
    
    
    146,006
    
    
    
    145,381Accumulated deficit
    
    
    (161,376
    )
    
    
    (157,334
    )Total stockholders deficit
    
    
    (15,192
    )
    
    
    (11,775
    )Total liabilities and stockholders deficit
    
    $
    32,829
    
    
    $
    33,196
 See accompanying notes to these consolidated financial statements.
  2




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(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
 Three Month Period Ended June 30,(Unaudited)2010
    
    
    2009Services
    
    $
    20,365
    
    
    $
    22,680Pharmacy
    
    
    5,054
    
    
    
    3,218Catalog
    
    
    336
    
    
    
    511Revenues, net
    
    
    25,755
    
    
    
    26,409Cost of revenues
    
    
    18,849
    
    
    
    18,961Gross profit
    
    
    6,906
    
    
    
    7,448Selling, general and administrative
    
    
    9,908
    
    
    
    9,666Depreciation and amortization
    
    
    308
    
    
    
    411Total operating expenses
    
    
    10,216
    
    
    
    10,077Operating loss
    
    
    (3,310
    )
    
    
    (2,629
    )Other expenses:Interest expense, net
    
    
    844
    
    
    
    838Change in fair value of warrant liability
    
    
    642
    
    
    
    Other
    
    
    
    
    
    
    36Total other expenses
    
    
    1,486
    
    
    
    874Loss from continuing operations before income taxes
    
    
    (4,796
    )
    
    
    (3,503
    )Income tax expense
    
    
    33
    
    
    
    93Loss from continuing operations
    
    
    (4,829
    )
    
    
    (3,596
    )Discontinued operations:Loss from discontinued operations
    
    
    
    
    
    
    (1,193
    )Net gain on disposal
    
    
    787
    
    
    
    216787
    
    
    
    (977
    )NET LOSS
    
    $
    (4,042
    )
    
    $
    (4,573
    )Weighted average number of common shares outstanding
    
    
    177,239
    
    
    
    160,552Basic and diluted net income (loss) per share:Loss from continuing operations
    
    $
    (0.03
    )
    
    $
    (0.02
    )Income (loss) from discontinued operations
    
    
    0.01
    
    
    
    (0.01
    )Net loss per share
    
    $
    (0.02
    )
    
    $
    (0.03
    )
 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
    
    
    DeficitBalance, April 1, 2010
    
    
    177,918,044
    
    
    $
    178
    
    
    $
    145,381
    
    
    $
    (157,334
    )
    
    $
    (11,775
    )Stock-based compensation expense
    
    
    53,125
    
    
    
    
    
    
    
    364
    
    
    
    
    
    
    
    364Issuance of warrants in conjunction with debt financing
    
    
    
    
    
    
    
    
    
    
    260
    
    
    
    
    
    
    
    260Exercise of stock options
    
    
    3,750
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    1Net loss for the period
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,042
    )
    
    
    (4,042
    )Balance, June 30, 2010
    
    
    177,974,919
    
    
    $
    178
    
    
    $
    146,006
    
    
    $
    (161,376
    )
    
    $
    (15,192
    )
 See accompanying notes to these condensed consolidated financial statements.
  4




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(IN THOUSANDS)
 Three-Month PeriodEnded June 30,(Unaudited)2010
    
    
    2009Operating activitiesNet loss for the period
    
    $
    (4,042
    )
    
    $
    (4,573
    )Adjustments to reconcile net loss to net cash used in operating activities:Provision for doubtful accounts
    
    
    310
    
    
    
    873Depreciation of property and equipment
    
    
    165
    
    
    
    531Amortization of intangible assets
    
    
    143
    
    
    
    246Gain on business disposals
    
    
    (787
    )
    
    
    (216
    )Non-cash interest expense
    
    
    661
    
    
    
    584Amortization of deferred financing costs and debt discounts
    
    
    69
    
    
    
    52Stock-based compensation expense
    
    
    364
    
    
    
    285Change in fair value of warrant liability
    
    
    642
    
    
    
    Changes in operating assets and liabilities, net of acquisitions:Accounts receivable
    
    
    81
    
    
    
    1,750Inventories
    
    
    (561
    )
    
    
    639Other assets
    
    
    (281
    )
    
    
    233Accounts payable
    
    
    (535
    )
    
    
    (547
    )Accrued expenses
    
    
    (723
    )
    
    
    (1,146
    )Due to affiliated agencies
    
    
    (388
    )
    
    
    (327
    )Net cash used in operating activities
    
    
    (4,882
    )
    
    
    (1,616
    )Investing activitiesBusiness acquisitions, net of cash acquired
    
    
    (21
    )
    
    
    (190
    )Proceeds from business disposal
    
    
    787
    
    
    
    9,157Increase in restricted cash
    
    
    
    
    
    
    (500
    )Purchases of property and equipment
    
    
    (235
    )
    
    
    (75
    )Net cash provided by investing activities
    
    
    531
    
    
    
    8,392Financing activitiesLines of credit, net activity
    
    
    4,409
    
    
    
    (3,577
    )Payments on notes payable and capital lease obligations
    
    
    (766
    )
    
    
    (4,204
    )Proceeds from exercise of stock options
    
    
    1
    
    
    
    Net cash provided by (used in) financing activities
    
    
    3,644
    
    
    
    (7,781
    )Net change in cash and cash equivalents
    
    
    (707
    )
    
    
    (1,005
    )Cash and cash equivalents, beginning of period
    
    
    5,444
    
    
    
    1,522Cash and cash equivalents, end of period
    
    $
    4,737
    
    
    $
    517Supplementary information:Cash paid during the period for:Interest
    
    $
    116
    
    
    $
    209Income taxes
    
    
    96
    
    
    
    14Non-cash investing / financing activities:Capital lease
    
    
    
    
    
    
    70Accounts payable converted to notes payable
    
    
    
    
    
    
    750Accrued interest converted to notes payable
    
    
    661
    
    
    
    628
 See accompanying notes to these consolidated financial statements.
  5




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Note 1  Description of Company and Significant Accounting Policies
 Description of Company
  Unaudited Interim Financial Information
  Reclassifications
  Recent Accounting Pronouncements
     6




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Note 2  Discontinued Operations
 HHE Operations
    Pharmacy Operations
  Industrial Staffing Operations
   7




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##### Table of Contents



Three Month Period EndedJune 30,2010
    
    
    2009Revenues, net:Services  Industrial Staffing
    
    $
    
    
    
    $
    1,223Home Health Equipment
    
    
    
    
    
    
    1,423Pharmacy  Software
    
    
    
    
    
    
    356$
    
    
    
    $
    3,002Loss from operations:Services  Industrial Staffing
    
    $
    
    
    
    $
    (37
    )Home Health Equipment
    
    
    
    
    
    
    (1,061
    )Pharmacy  Software
    
    
    
    
    
    
    (95
    )$
    
    
    
    $
    (1,193
    )Gain (loss) on disposal:Services  Industrial Staffing
    
    $
    132
    
    
    $
    126Home Health Equipment
    
    
    655
    
    
    
    120Pharmacy  Software
    
    
    
    
    
    
    (30
    )$
    787
    
    
    $
    216Earnings (loss) from discontinued operations:Services  Industrial Staffing
    
    $
    132
    
    
    $
    89Home Health Equipment
    
    
    655
    
    
    
    (941
    )Pharmacy  Software
    
    
    
    
    
    
    (125
    )$
    787
    
    
    $
    (977
    )
 Note 3  Fair Value
   8




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##### Table of Contents



Fair ValueMeasurementsUsing SignificantUnobservableInputs (Level 3)Warrant LiabilityBalance at April 1, 2009
    
    $
    Warrants issued
    
    
    2,478Decrease in market value
    
    
    (979
    )Balance at March 31, 2010
    
    
    1,499Warrants issued
    
    
    273Increase in market value
    
    
    642Balance at June 30, 2010
    
    $
    2,414
 Note 4  Goodwill and Acquired Intangible Assets
  Services
    
    
    Pharmacy
    
    
    TotalGoodwill at March 31, 2009
    
    $
    14,553
    
    
    $
    2,500
    
    
    $
    17,053Acquisitions during the year
    
    
    46
    
    
    
    
    
    
    
    46Impairment expense
    
    
    (14,599
    )
    
    
    
    
    
    
    (14,599
    )Goodwill at June 30 and March 31, 2010
    
    $
    
    
    
    $
    2,500
    
    
    $
    2,500
    June 30, 2010
    
    
    March 31, 2010Accumulated
    
    
    
    
    
    
    AccumulatedCost
    
    
    Amortization
    
    
    Cost
    
    
    AmortizationTrade name
    
    $
    6,664
    
    
    $
    889
    
    
    $
    6,664
    
    
    $
    847Customer relationships
    
    
    4,720
    
    
    
    2,968
    
    
    
    4,720
    
    
    
    2,86711,384
    
    
    $
    3,857
    
    
    
    11,384
    
    
    $
    3,714Less accumulated amortization
    
    
    (3,857
    )
    
    
    
    
    
    
    (3,714
    )Net acquired intangible assets
    
    $
    7,527
    
    
    
    
    
    
    $
    7,670
  9




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Remainder of fiscal 2011
    
    $
    428Fiscal 2012
    
    
    518Fiscal 2013
    
    
    476Fiscal 2014
    
    
    382Fiscal 2015
    
    
    350Thereafter
    
    
    5,373Total
    
    $
    7,527
 Impairment Expense
      10




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##### Table of Contents



Note 5  Lines of Credit
  At June 30, 2010MaximumAvailable
    
    
    
    
    
    
    March 31,Lending Institution
    
    Maturity date
    
    
    Borrowing
    
    
    Balance
    
    
    2010
    
    
    Interest rateComerica Bank
    
    August 1, 2011
    
    $
    8,472
    
    
    $
    7,683
    
    
    $
    7,774
    
    
    Prime plus 2.75%H.D. Smith
    
    April 23, 2013
    
    
    4,533
    
    
    
    4,533
    
    
    
    
    
    
    
    7
    %Total lines of credit obligations
    
    
    
    
    
    $
    13,005
    
    
    
    12,216
    
    
    
    7,774H.D. Smith debt discount
    
    
    
    
    
    
    
    
    
    
    (543
    )
    
    
    $
    11,673
    
    
    $
    7,774
 Comerica Bank
    11




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##### Table of Contents



H.D. Smith Wholesale Drug Co.
    12




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##### Table of Contents



Note 6  Long-Term Obligations
  June 30,
    
    
    March 31,2010
    
    
    2010Note payable to JANA Master Fund, Ltd.
(JANA) in the original amount of $18.0
million, dated March 25, 2009 bearing an
effective interest rate of 10% with unpaid
accrued interest and principal due in full on
April 1, 2012. Cash interest that would
otherwise be payable on such quarterly
interest payment dates may be added to the
principal balance of the note payable at the
Companys option. The note payable is
unsecured.
    
    $
    18,019
    
    
    $
    17,581Note payable to Vicis Capital Master Fund
(Vicis) in the original amount of $7.8
million, dated March 25, 2009 bearing an
effective interest rate of 10% with unpaid
accrued interest and principal due in full on
April 1, 2012. Cash interest that would
otherwise be payable on such quarterly
interest payment dates may be added to the
principal balance of the note payable at the
Companys option. The note payable is
unsecured.
    
    
    6,668
    
    
    
    6,505Note payable to LSP Partners, LP (LSP) in
the amount of $1.0 million, dated March 25,
2009 bearing an effective interest rate of 10%
with unpaid accrued interest and principal
due in full on April 1, 2012. Cash interest
that would otherwise be payable on such
quarterly interest payment dates may be added
to the principal balance of the note payable
at the Companys option. The note payable is
unsecured.
    
    
    1,133
    
    
    
    1,106Payable due to AmerisourceBergen Drug
Corporation consistent with the terms of an
amendment to a line of credit agreement dated
June 10, 2009 bearing an effective interest
rate of 8.0%. The unpaid accrued interest and
principal was paid in full in April 2010. The
debt was secured by the assets of the Pharmacy
segment.
    
    
    
    
    
    
    750Other
    
    
    189
    
    
    
    189Total long-term obligations
    
    
    26,009
    
    
    
    26,131Less current portion of long-term obligations
    
    
    (189
    )
    
    
    (939
    )Long-term obligations, less current portion
    
    $
    25,820
    
    
    $
    25,192
   Remainder of fiscal 2011
    
    $
    189Fiscal 2012
    
    
    Fiscal 2013
    
    
    25,820Total
    
    $
    26,009
   13




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Note 7  Stockholders Deficit
 General
  Warrants
  June 30,
    
    
    March 31,Exercise Price
    
    
    Granted
    
    Expiration
    
    
    2010
    
    
    2010$
    0.40
    
    
    April 2010
    
    April 2015
    
    
    500,000
    
    
    
    $
    0.41
    
    
    April 2009
    
    April 2014
    
    
    52,800
    
    
    
    52,800$
    0.50
    
    
    various
    
    May 2011
    
    
    2,301,774
    
    
    
    2,301,774$
    0.50
    
    
    May 2004
    
    March 2014
    
    
    1,070,796
    
    
    
    1,070,796$
    0.75
    
    
    June 2008
    
    June 2015
    
    
    490,000
    
    
    
    490,000$
    0.95
    
    
    November 2009
    
    May 2015
    
    
    7,135,713
    
    
    
    7,135,713$
    2.25
    
    
    September 2005
    
    September 2010
    
    
    44,444
    
    
    
    44,44411,595,527
    
    
    
    11,095,527
     Weighted-average
    
    November 17, 2009
    
    
    June 30, 2010Expected volatility
    
    
    86
    %
    
    
    87
    %Expected dividend yields
    
    
    0
    %
    
    
    0
    %Expected terms (in years)
    
    
    5.5
    
    
    
    4.9Risk-free interest rate
    
    
    2.19
    %
    
    
    1.79
    %
   14




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Note 8  Contingencies
   Note 9  Stock-Based Compensation
     15




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Three-Month PeriodEnded June 30,Weighted-average
    
    2010
    
    
    2009Expected volatility
    
    
    96
    %
    
    
    N/AExpected dividend yields
    
    
    0
    %
    
    
    N/AExpected terms (in years)
    
    
    4
    
    
    
    N/ARisk-free interest rate
    
    
    2.15
    %
    
    
    N/A
  Weighted-Weighted-
    
    
    Average
    
    
    AggregateAverage
    
    
    Remaining
    
    
    IntrinsicExercise
    
    
    Contractual
    
    
    ValueOptions
    
    Shares
    
    
    Price
    
    
    Term (Years)
    
    
    (thousands)Outstanding at April 1, 2010
    
    
    8,336,184
    
    
    
    0.65Granted
    
    
    45,000
    
    
    
    0.42Exercised
    
    
    (3,750
    )
    
    
    0.38Forfeited or expired
    
    
    (40,604
    )
    
    
    0.46Outstanding at June 30, 2010
    
    
    8,336,830
    
    
    $
    0.65
    
    
    
    5.4
    
    
    $
    500Exercisable at June 30, 2010
    
    
    6,475,854
    
    
    $
    0.66
    
    
    
    5.3
    
    
    $
    435
  Options OutstandingWeighted
    
    
    
    
    
    
    Options ExercisableAverage
    
    
    Weighted
    
    
    
    
    
    
    WeightedRemaining
    
    
    Average
    
    
    
    
    
    
    AverageNumber
    
    
    Contractual
    
    
    Exercise
    
    
    Number
    
    
    ExerciseRange of Exercise Prices
    
    Outstanding
    
    
    Life
    
    
    Price
    
    
    Exercisable
    
    
    Price$0.18 -$0.42
    
    
    3,357,269
    
    
    
    6.3
    
    
    $
    0.38
    
    
    
    2,806,269
    
    
    $
    0.38$0.43 - $0.72
    
    
    3,629,334
    
    
    
    5.2
    
    
    $
    0.72
    
    
    
    2,473,667
    
    
    $
    0.72$0.73 - $1.07
    
    
    781,647
    
    
    
    5.5
    
    
    $
    0.79
    
    
    
    627,338
    
    
    $
    0.79$1.01 - $1.50
    
    
    450,967
    
    
    
    2.7
    
    
    $
    1.34
    
    
    
    450,967
    
    
    $
    1.34$1.51 - $2.25
    
    
    43,000
    
    
    
    3.0
    
    
    $
    2.22
    
    
    
    43,000
    
    
    $
    2.22$2.92
    
    
    74,613
    
    
    
    3.1
    
    
    $
    2.92
    
    
    
    74,613
    
    
    $
    2.92Outstanding at June 30, 2010
    
    
    8,336,830
    
    
    
    
    
    
    $
    0.65
    
    
    
    6,475,854
    
    
    $
    0.66
     16




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##### Table of Contents



Restricted Stock
   Weighted-AverageGrant DateFair ValueShares
    
    
    per ShareUnvested at April 1, 2010
    
    
    332,967
    
    
    $
    1.10Vested
    
    
    (53,125
    )
    
    
    1.50Unvested at June 30, 2010
    
    
    279,842
    
    
    $
    1.10
    Note 10  Income Taxes
   Note 11  Related Party Transactions
    17




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##### Table of Contents



Note 12  Segment Information
       18




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##### Table of Contents



Three-Month Period Ended June 30,2010
    
    
    2009Revenue, net:Services
    
    $
    20,365
    
    
    $
    22,680Pharmacy
    
    
    5,054
    
    
    
    3,218Catalog
    
    
    336
    
    
    
    511Total revenue
    
    $
    25,755
    
    
    $
    26,409Operating income (loss):Services
    
    $
    901
    
    
    $
    1,207Pharmacy
    
    
    (1,804
    )
    
    
    (1,313
    )Catalog
    
    
    (32
    )
    
    
    (38
    )Unallocated corporate overhead
    
    
    (2,375
    )
    
    
    (2,485
    )Total operating loss
    
    
    (3,310
    )
    
    
    (2,629
    )Other expenses:Interest expense, net
    
    
    844
    
    
    
    838Change in fair value of warrant liability
    
    
    642
    
    
    
    Other
    
    
    
    
    
    
    36Net loss before income tax expense
    
    
    (4,796
    )
    
    
    (3,503
    )Income tax expense
    
    
    33
    
    
    
    93Net loss from continuing operations
    
    $
    (4,829
    )
    
    $
    (3,596
    )Depreciation and amortization:Services
    
    $
    164
    
    
    $
    193Pharmacy
    
    
    62
    
    
    
    87Corporate
    
    
    82
    
    
    
    131Total depreciation and amortization
    
    $
    308
    
    
    $
    4112010
    
    
    2009Capital expenditures:Services
    
    $
    40
    
    
    $
    15Pharmacy
    
    
    86
    
    
    
    58Corporate
    
    
    109
    
    
    
    2Total capital expenditures
    
    $
    235
    
    
    $
    75June 30,
    
    
    March 31,2010
    
    
    2010Assets:Services
    
    $
    24,527
    
    
    $
    25,007Pharmacy
    
    
    6,785
    
    
    
    6,107Catalog
    
    
    260
    
    
    
    201Unallocated
corporate assets
    
    
    1,257
    
    
    
    1,881Total assets
    
    $
    32,829
    
    
    $
    33,196
  19




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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
      20




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##### Table of Contents



Overview
  Critical Accounting Policies
   21




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##### Table of Contents



Three-Month Period Ended June 30, 2010 Compared to the Three-Month Period Ended June 30, 2009
 Results of Continuing Operations (in thousands, except per share amounts)
 Three-Month PeriodEnded June 30,2010
    
    
    2009Revenues, net
    
    $
    25,755
    
    
    $
    26,409Cost of revenues
    
    
    18,849
    
    
    
    18,961Gross profit
    
    
    6,906
    
    
    
    7,448Selling, general and administrative
    
    
    9,908
    
    
    
    9,666Depreciation and amortization
    
    
    308
    
    
    
    411Total operating expenses
    
    
    10,216
    
    
    
    10,077Operating loss
    
    
    (3,310
    )
    
    
    (2,629
    )Other expenses:Interest expense, net
    
    
    844
    
    
    
    838Change in fair value of warrant liability
    
    
    642
    
    
    
    Other
    
    
    
    
    
    
    36Total other expenses
    
    
    1,486
    
    
    
    874Net loss before income tax expense
    
    
    (4,796
    )
    
    
    (3,503
    )Income tax expense
    
    
    33
    
    
    
    93Net loss from continuing operations
    
    $
    (4,829
    )
    
    $
    (3,596
    )Weighted average number of shares  basic and diluted
    
    
    177,239
    
    
    
    160,552Net loss from continuing operations per share  basic and diluted
    
    $
    (0.03
    )
    
    $
    (0.02
    )
  22




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Revenues, Cost of Revenues and Gross Profits
  % of Total
    
    
    
    
    
    
    % of Total
    
    
    $ Increase/
    
    
    % Increase/2010
    
    
    Revenue
    
    
    2009
    
    
    Revenue
    
    
    (Decrease)
    
    
    (Decrease)Revenues, net:Services
    
    $
    20,365
    
    
    
    79.1
    %
    
    $
    22,680
    
    
    
    86.0
    %
    
    $
    (2,315
    )
    
    
    -10.2
    %Pharmacy
    
    
    5,054
    
    
    
    19.6
    %
    
    
    3,218
    
    
    
    12.2
    %
    
    
    1,836
    
    
    
    57.1
    %Catalog
    
    
    336
    
    
    
    1.3
    %
    
    
    511
    
    
    
    1.8
    %
    
    
    (175
    )
    
    
    -34.2
    %25,755
    
    
    
    100.0
    %
    
    
    26,409
    
    
    
    100.0
    %
    
    
    (654
    )
    
    
    -2.5
    %Cost of revenues:Services
    
    
    14,262
    
    
    
    
    
    
    
    15,764
    
    
    
    
    
    
    
    (1,502
    )
    
    
    -9.5
    %Pharmacy
    
    
    4,393
    
    
    
    
    
    
    
    2,863
    
    
    
    
    
    
    
    1,530
    
    
    
    53.4
    %Catalog
    
    
    194
    
    
    
    
    
    
    
    334
    
    
    
    
    
    
    
    (140
    )
    
    
    -41.9
    %18,849
    
    
    
    
    
    
    
    18,961
    
    
    
    
    
    
    
    (112
    )
    
    
    -0.6
    %Gross
    
    
    
    
    
    
    GrossMargin %
    
    
    
    
    
    
    Margin %Gross margins:Services
    
    
    6,103
    
    
    
    30.0
    %
    
    
    6,916
    
    
    
    30.5
    %
    
    
    (813
    )
    
    
    -11.8
    %Pharmacy
    
    
    661
    
    
    
    13.1
    %
    
    
    355
    
    
    
    11.0
    %
    
    
    306
    
    
    
    86.2
    %Catalog
    
    
    142
    
    
    
    42.3
    %
    
    
    177
    
    
    
    34.6
    %
    
    
    (35
    )
    
    
    -19.8
    %$
    6,906
    
    
    
    26.8
    %
    
    $
    7,448
    
    
    
    28.2
    %
    
    $
    (542
    )
    
    
    -7.3
    %
 Services Segment
  % of Total
    
    
    
    
    
    
    % of Total
    
    
    $ Increase/
    
    
    % Increase/2010
    
    
    Revenue
    
    
    2009
    
    
    Revenue
    
    
    (Decrease)
    
    
    (Decrease)Home care
    
    $
    16,431
    
    
    
    80.7
    %
    
    $
    17,688
    
    
    
    78.0
    %
    
    $
    (1,257
    )
    
    
    -7.1
    %Medical staffing
    
    
    2,595
    
    
    
    12.7
    %
    
    
    3,574
    
    
    
    15.8
    %
    
    
    (979
    )
    
    
    -27.4
    %Travel staffing
    
    
    1,339
    
    
    
    6.6
    %
    
    
    1,418
    
    
    
    6.2
    %
    
    
    (79
    )
    
    
    -5.6
    %Total Services
    
    $
    20,365
    
    
    
    100.0
    %
    
    $
    22,680
    
    
    
    100.0
    %
    
    $
    (2,315
    )
    
    
    -10.2
    %
    23




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##### Table of Contents



Pharmacy Segment
    24




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##### Table of Contents



Catalog Segment
   Selling, General and Administrative
  % of Total
    
    
    
    
    
    
    % of Total
    
    
    $ Increase/
    
    
    % Increase/2010
    
    
    SG&A
    
    
    2009
    
    
    SG&A
    
    
    (Decrease)
    
    
    (Decrease)Services
    
    $
    5,036
    
    
    
    50.8
    %
    
    $
    5,515
    
    
    
    57.1
    %
    
    $
    (479
    )
    
    
    -8.7
    %Pharmacy
    
    
    2,403
    
    
    
    24.3
    %
    
    
    1,581
    
    
    
    16.3
    %
    
    
    822
    
    
    
    52.0
    %Catalog
    
    
    174
    
    
    
    1.8
    %
    
    
    215
    
    
    
    2.2
    %
    
    
    (41
    )
    
    
    -19.1
    %Corporate
    
    
    2,295
    
    
    
    23.1
    %
    
    
    2,355
    
    
    
    24.4
    %
    
    
    (60
    )
    
    
    -2.5
    %$
    9,908
    
    
    
    100.0
    %
    
    $
    9,666
    
    
    
    100.0
    %
    
    $
    242
    
    
    
    (2.5
    %)SG&A as
a % of
net
revenue
    
    
    38.5
    %
    
    
    
    
    
    
    36.6
    %
 Services Segment
  Pharmacy Segment
    25




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##### Table of Contents



Catalog Segment
  Corporate
  Depreciation and Amortization
  $ Increase/
    
    
    % Increase/2010
    
    
    2009
    
    
    (Decrease)
    
    
    (Decrease)Depreciation and amortization of property and equipment
    
    $
    165
    
    
    $
    252
    
    
    
    (87
    )
    
    
    -34.5
    %Amortization of acquired intangible assets
    
    
    143
    
    
    
    159
    
    
    
    (16
    )
    
    
    -10.1
    %Depreciation and amortization
    
    $
    308
    
    
    $
    411
    
    
    $
    (103
    )
    
    
    -25.1
    %
   Goodwill and Intangible Asset Impairment
    26




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##### Table of Contents



Interest Expense and Income
  $ Increase/
    
    
    % Increase/2010
    
    
    2009
    
    
    (Decrease)
    
    
    (Decrease)Interest expense
    
    $
    846
    
    
    $
    845
    
    
    $
    1
    
    
    
    0.1
    %Interest income
    
    
    (3
    )
    
    
    (7
    )
    
    
    4
    
    
    
    -57.1
    %$
    843
    
    
    $
    838
    
    
    $
    5
    
    
    
    0.6
    %
    27




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##### Table of Contents



Change in Fair Value of Warrant Liability
  Income Taxes
   Earnings (Loss) from Discontinued Operations
  2010
    
    
    2009Revenues, net:Services  Industrial Staffing
    
    $
    
    
    
    $
    1,223Home Health Equipment
    
    
    
    
    
    
    1,423Pharmacy  Software
    
    
    
    
    
    
    356
    
    
    
    3,002Loss from operations:Services  Industrial Staffing
    
    
    
    
    
    
    (37
    )Home Health Equipment
    
    
    
    
    
    
    (1,061
    )Pharmacy  Software
    
    
    
    
    
    
    (95
    )
    
    
    
    (1,193
    )Gain (loss) on disposal:Services  Industrial Staffing
    
    
    131
    
    
    
    126Home Health Equipment
    
    
    656
    
    
    
    120Pharmacy  Software
    
    
    
    
    
    
    (30
    )787
    
    
    
    216Earnings (loss) from discontinued operations:Services  Industrial Staffing
    
    
    131
    
    
    
    89Home Health Equipment
    
    
    656
    
    
    
    (941
    )Pharmacy  Software
    
    
    
    
    
    
    (125
    )$
    787
    
    
    $
    (977
    )
  28




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##### Table of Contents



HHE Operations
    Pharmacy Operations
  Industrial Staffing Operations
   29




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##### Table of Contents



Liquidity and Capital Resources
  2010
    
    
    2009Net cash used in operating activities
    
    $
    (4,882
    )
    
    $
    (1,616
    )Net cash provided by investing activities
    
    
    531
    
    
    
    8,392Net cash provided by (used in) financing activities
    
    
    3,644
    
    
    
    (7,781
    )Net change in cash and cash equivalents
    
    
    (707
    )
    
    
    (1,005
    )Cash and cash equivalents, end of period
    
    
    4,506
    
    
    
    517Availability under line of credit agreements
    
    $
    789
    
    
    $
    2,471
       30




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##### Table of Contents



Medicare
    
    
    0
    %Medicaid/other government
    
    
    30
    %Commercial insurance
    
    
    20
    %Institution/facilities
    
    
    28
    %Private pay
    
    
    22
    %
  31




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##### Table of Contents



Recent Accounting Pronouncements
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk.
  
 Item 4. Controls and Procedures.
    
 Item 5. Other Information
   32




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##### Table of Contents



Item 1. Legal Proceedings.
  
 Item 1A. Risk Factors.
 We have a history of operating losses and negative cash flow that may continue into the
foreseeable future.
  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.
  
    
    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.
  33




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##### Table of Contents



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.
  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.
   The terms of our credit agreements with various lenders subject us to the risk of foreclosure on
certain property.
  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.
   34




---



##### Table of Contents



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.
  Due to our operating losses during recent fiscal years, our stock could be at risk of being
delisted by the NYSE Amex Equities Exchange.
  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 are required to comply with laws governing the transmission of privacy of health information.
   35




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##### Table of Contents



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.
  We do not have long-term agreements or exclusive guaranteed order contracts with our home care,
hospital and healthcare facility clients.
  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.
     
 Our Pharmacy segment revenue is highly dependent upon our relationships with key state Medicaid
programs, managed care organizations, health plans and other payers.
 
  36




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##### Table of Contents



Our operations subject us to risk of litigation.
   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.
  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.
  The markets in which we operate are highly competitive and we may be unable to compete
successfully against competitors with greater resources.
   37




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##### Table of Contents



We cannot predict the impact that registration of shares may have on the price of our common
stock.
  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.
  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 market price of our common stock
and the rights of holders of our common stock.
   38




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##### Table of Contents



The exercise of common stock warrants and stock options may depress our stock price and may
result in dilution to our common security holders.
   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.
  Declines in prescription volumes may negatively affect our net revenues and profitability.
  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.
   39




---



##### Table of Contents



Any additional impairment of goodwill and other intangible assets could negatively impact our
results of operations.
  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.
  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.
  Delays in reimbursement due to state budget deficits or otherwise have decreased, and may in the
future further decrease, our liquidity.
   40




---



##### Table of Contents



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.
  
    
    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.
    We are subject to reviews, compliance audits and investigations that could result in adverse
findings that negatively affect our net service revenues and profitability.
    41




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##### Table of Contents



We are exposed to certain risks related to the frequency and rate of the introduction of generic
drugs and brand-name prescription products.
  Item 4. Submission of Matters to a Vote of Security Holders.
  
 Item 6. Exhibits.
  
 SIGNATURES
  August 6, 2010
    By:
    /s/ Marvin R. RichardsonMarvin R. RichardsonChief Executive Officer
(Principal Executive Officer) and DirectorAugust 6, 2010
    By:
    /s/ Matthew R. MiddendorfMatthew R. MiddendorfTreasurer and Chief Financial
Officer
(Principal Financial and Accounting Officer)  42




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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.
  43