Edgar Filing: ARCADIA RESOURCES, INC

10-Q

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 September 30, 2008


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

For the Transition period from to

Commission file number 000-32935

ARCADIA RESOURCES, INC.

(Exact name of registrant as specified in its charter)


NEVADA (State or other jurisdiction of Incorporation)		88-0331369 (I.R.S. Employer Identification Number)

9229 DELEGATES ROW, SUITE 260
INDIANAPOLIS, INDIANA		46240
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (317) 569-8234

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer o	Accelerated filer o	Non-accelerated filer o	Smaller reporting company þ
		(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

As of October 28, 2008, 136,817,000 shares of common stock, $0.001 par value, of the Registrant were outstanding.

Table of Contents


	Page
	No.
Part I: Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 2008 (unaudited) and March 31, 2008		2
Condensed Consolidated Statements of Operations for the Three and Six Months ended September 30, 2008 and 2007 (unaudited)		3
Condensed Consolidated Statement of Stockholders’ Equity for the Six Months ended September 30, 2008 (unaudited)		4
Condensed Consolidated Statements of Cash Flows for the Six Months ended September 30, 2008 and 2007 (unaudited)		5
Notes to the Condensed Consolidated Financial Statements (unaudited)		6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk		31
Item 4. Controls and Procedures		31

Part II: Other Information

Item 1. Legal Proceedings
Item 1A. Risk Factors		32
Item 4. Submission of Matters to a Vote of Security Holders		32
Item 5. Other Information		34
Item 6. Exhibits		34
		34

Exhibits
Signatures		34
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
EX-3.2
EX-10.1
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I. — FINANCIAL INFORMATION

Item 1. Financial Statements

ARCADIA RESOURCES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT SHARE DATA)


	September 30,			March 31,
	2008			2008
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	2,294		$	6,351
Accounts receivable, net of allowance of $3,543 and $5,449, respectively		26,021			24,723
Inventories, net		1,546			1,867
Prepaid expenses and other current assets		2,058			3,101

Total current assets		31,919			36,042
Property and equipment, net		5,017			5,991
Goodwill		33,386			32,836
Acquired intangible assets, net		23,765			24,371
Other assets		267			175

Total assets	$	94,354		$	99,415


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Lines of credit, current portion	$	375		$	250
Accounts payable		3,414			2,567
Accrued expenses:
Compensation and related taxes		4,148			3,676
Interest		60			97
Other		2,082			1,643
Payable to affiliated agencies		2,789			2,255
Long-term obligations, current portion		462			545
Capital lease obligations, current portion		84			105
Deferred revenue		10			29

Total current liabilities		13,424			11,167
Lines of credit, less current portion		19,665			22,492
Long-term obligations, less current portion		16,880			15,851
Capital lease obligations, less current portion		75			108

Total liabilities		50,044			49,618


Commitments and contingencies

STOCKHOLDERS’ EQUITY
Preferred stock, $.001 par value, 5,000,000 shares authorized, none outstanding		—			—
Common stock, $.001 par value, 200,000,000 shares authorized; 134,985,500 shares and 133,113,440 shares issued, respectively		135			133
Additional paid-in capital		130,474			129,442
Accumulated deficit		(86,299	)		(79,778	)

Total stockholders’ equity		44,310			49,797

Total liabilities and stockholders’ equity	$	94,354		$	99,415

See accompanying notes to these condensed consolidated financial statements.

ARCADIA RESOURCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(IN THOUSANDS, EXCEPT PER SHARE DATA)


	Three-Month Period Ended						Six-Month Period Ended
	September 30,						September 30,
	(Unaudited)						(Unaudited)
	2008			2007			2008			2007
Revenues, net	$	36,923		$	37,984		$	74,308		$	75,993
Cost of revenues		23,938			25,992			48,399			51,900

Gross profit		12,985			11,992			25,909			24,093

Selling, general and administrative		13,871			14,342			27,913			28,079
Depreciation and amortization		1,053			936			1,810			1,784

Total operating expenses		14,924			15,278			29,723			29,863

Operating loss		(1,939	)		(3,286	)		(3,814	)		(5,770	)
Other expenses:
Interest expense, net		1,054			949			2,010			2,108
Other		44			14			303			14

Total other expenses		1,098			963			2,313			2,122


Loss from continuing operations before income taxes		(3,037	)		(4,249	)		(6,127	)		(7,892	)

Current income tax expense		198			7			394			23

Loss from continuing operations		(3,235	)		(4,256	)		(6,521	)		(7,915	)

Discontinued operations:
Loss from discontinued operations		—			(2,758	)		—			(6,527	)
Net loss on disposal		—			(2,160	)		—			(2,160	)

		—			(4,918	)		—			(8,687	)


NET LOSS	$	(3,235	)	$	(9,174	)	$	(6,521	)	$	(16,602	)


Weighted average number of common shares outstanding		133,019,000			123,456,000			132,357,000			119,250,000

Basic and diluted net loss per share:
Loss from continuing operations		(0.02	)		(0.03	)		(0.05	)		(0.07	)
Loss from discontinued operations		—			(0.04	)		—			(0.07	)

Net loss per share	$	(0.02	)	$	(0.07	)	$	(0.05	)	$	(0.14	)

See accompanying notes to these condensed consolidated financial statements.

ARCADIA RESOURCES, INC.

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

(Unaudited)


					Additional						Total
	Common Stock				Paid-In			Accumulated			Stockholders’
	Shares		Amount		Capital			Deficit			Equity

Balance, April 1, 2008		133,113,440	$	133	$	129,442		$	(79,778	)	$	49,797
Issuance of warrants		—		—		248			—			248
Stock-based compensation expense		359,657		—		786			—			786
Contingent consideration relating to prior year acquisition		1,512,403		2		(2	)		—			—
Net loss for the period		—		—		—			(6,521	)		(6,521	)

Balance, September 30, 2008		134,985,500	$	135	$	130,474		$	(86,299	)	$	44,310

See accompanying notes to these condensed consolidated financial statements.

ARCADIA RESOURCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)


	Six-Month Period Ended
	September 30,
	(Unaudited)
	2008			2007

Operating activities
Net loss for the period	$	(6,521	)	$	(16,602	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Provision for doubtful accounts		1,654			1,272
Depreciation of property and equipment		2,297			2,733
Amortization of intangible assets		943			1,485
Impairment of long-lived assets		—			1,900
Loss on sale of property and equipment		55			—
Loss on sale of business disposal		—			2,160
(Gain)/loss on extinguishment of debt		248			(121	)
Amortization of deferred financing costs and debt discounts		492			—
Non-cash interest expense		1,102			—
Reduction in expense due to return of common stock previously issued		—			(246	)
Stock-based compensation expense		741			2,132
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable		(2,952	)		1,096
Inventories		(611	)		(362	)
Other assets		689			(43	)
Accounts payable		908			(3,703	)
Accrued expenses		781			399
Due to affiliated agencies		166			328
Deferred revenue		(19	)		(438	)

Net cash used in operating activities		(27	)		(8,010	)


Investing activities
Business acquisitions, net of cash acquired		(429	)		(384	)
Proceeds from prior year business disposal		356			—
Proceeds from disposals of property and equipment		19			5,751
Purchases of property and equipment		(462	)		(1,079	)

Net cash provided by (used in) investing activities		(516	)		4,288


Financing activities
Proceeds from issuance of common stock, net of fees		—			12,442
Net payments on lines of credit		(2,956	)		(4,878	)
Payments on notes payable and capital lease obligations		(558	)		(5,088	)

Net cash provided by (used in) financing activities		(3,514	)		2,476


Net change in cash and cash equivalents		(4,057	)		(1,246	)
Cash and cash equivalents, beginning of period		6,351			2,994

Cash and cash equivalents, end of period	$	2,294		$	1,748


Supplementary information:
Cash paid during the period for:
Interest	$	485		$	2,282
Income taxes		97			24
Non-cash investing / financing activities:
Payments on note payable with issuance of common stock		—			1,281
Common stock issued in conjunction with JASCORP, LLC acquisition		—			1,800
HHE cost of disposal paid in common stock		—			876
Stock price guarantee relating to prior year acquisition settled with issuance of notes payable		—			715
Prior period liability satisfied with equity		45			—
Accrued interest converted to notes payable		1,102			—

See accompanying notes to these condensed consolidated financial statements.

ARCADIA RESOURCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 1 — Description of Company and Significant Accounting Policies

Description of Company

Arcadia Resources, Inc., a Nevada corporation, together with its wholly-owned subsidiaries (the “Company”), is a national provider of home health services and products, medical and non-medical staffing services and specialty pharmacy products and services operating under the service mark Arcadia HealthCare. The Company operates in two complementary business groups: Home Health Care/Staffing and Pharmacy/Medication Management. These two business groups operate in three reportable business segments: In-Home Health Care Services and Staffing (“Services”), Home Health Equipment (“HHE”) and Pharmacy. Within the health care markets, the Company has a broad business mix and receives payment from a diverse group of payment sources. The Company’s corporate headquarters are located in Indianapolis, Indiana. The Company conducts its business from 98 facilities located in 21 states. The Company operates pharmacies in Indiana, Kentucky and Minnesota and has customer service centers in Michigan and Indiana.

Unaudited Interim Financial Information

The accompanying consolidated balance sheet as of September 30, 2008, the consolidated statements of operations for the three-month and six-month periods ended September 30, 2008 and 2007, the consolidated statements of cash flows for the six-month periods ended September 30, 2008 and 2007 and the consolidated statement of stockholders’ equity for the six-month period ended September 30, 2008 are unaudited but include all adjustments (consisting of normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of the Company’s financial position at such dates and the results of operations and cash flows for the periods then ended, in conformity with accounting principles generally accepted in the United States (“GAAP”). The consolidated balance sheet as of March 31, 2008 has been derived from the audited consolidated financial statements at that date but, in accordance with the rules and regulations of the United States Securities and Exchange Commission (“SEC”), does not include all of the information and notes required by GAAP for complete financial statements. Operating results for the three-month and six-month periods ended September 30, 2008 are not necessarily indicative of results that may be expected for the entire fiscal year. The financial statements should be read in conjunction with the financial statements and notes for the fiscal year ended March 31, 2008 included in the Company’s Form 10-K filed with the SEC on June 16, 2008.

Principles of Consolidation

The consolidated financial statements include the accounts of Arcadia Resources, Inc. and its wholly-owned subsidiaries. The earnings of the subsidiaries are included from the dates of acquisition. All intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements and revenue and expenses during the reporting period. Changes in these estimates and assumptions may have a material impact on the financial statements and accompanying notes.

Allowance for Doubtful Accounts and Contractual Allowances

The Company reviews its accounts receivable balances on a periodic basis. Accounts receivable have been reduced by the reserves for estimated contractual allowances and doubtful accounts as described below.

The provision for contractual allowances is the difference between the amount billed and the amount expected to be paid by the applicable third-party payor. The Company records the provision for contractual adjustments based on a percentage of accounts receivable using historical data. Due to the complexity of many third-party billing arrangements, the amount billed, which represents the estimated net realizable amount when the services are provided, is sometimes adjusted at the time of cash remittance or claim denial.

The provision for doubtful accounts is primarily based on historical analysis of the Company’s records. The analysis is based on patient and institutional client payment histories, the aging of the accounts receivable, and specific review of patient and institutional client records. As actual collection experience changes, revisions to the allowance may be required. Any unanticipated change in customers’ creditworthiness or other matters affecting the collectability of amounts due from customers could have a material effect on the results of operations in the period in which such changes or events occur. After all reasonable attempts to collect a receivable have failed, the receivable is written off against the allowance.

Property and Equipment

Property and equipment is stated at cost and is depreciated on a straight-line basis over the estimated useful lives of the assets. The majority of the Company’s property and equipment includes equipment held for rental to patients in the home for which the related depreciation expense is included in cost of revenue. Depreciation expense included in cost of revenues included in continuing operations was $719,000 and $584,000 for the three-month periods ended September 30, 2008 and 2007, respectively, and $1.4 million and $1.2 million for the six-month periods ended September 30, 2008 and 2007, respectively.

Goodwill and Acquired Intangible Assets

The Company has acquired several businesses resulting in the recording of intangible assets, including goodwill, which represents the excess of the purchase price over the fair value of the net assets of businesses acquired. The Company follows Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets”. Goodwill is tested for impairment annually in the fourth quarter and between annual tests in certain circumstances, by comparing the estimated fair value of each reporting unit to its carrying value.

Acquired intangible assets are amortized using the economic benefit method when reliable information regarding future cash flows is available and the straight-line method when this information is unavailable. The estimated useful lives are as follows:


Trade name		30 years
Customers and referral source relationships (depending on the type of business purchased)		3 and 25 years
Acquired technology		2 and 3 years
Non-competition agreements (length of agreement)		5 years

Payables to Affiliated Agencies

The Services segment operates independently and through a network of affiliated agencies throughout the United States. These affiliated agencies are independently-owned, owner-managed businesses, which have been contracted by the Company to sell services under the Arcadia name. The arrangements with affiliated agencies are formalized through a standard contractual agreement. The affiliated agencies operate in particular regions and are responsible for recruiting and training field service employees and marketing their services to potential customers within the region. The field service employees are employees of the Company and the related employee costs are included in cost of revenues. The Company maintains the relationship with the customer and the payer and, as such, recognizes the revenue. The affiliated agency’s commission is based on a percentage of gross profit. The Company provides sales and marketing support to the affiliated agencies and develops and maintains policies and procedures related to certain aspects of the affiliate’s business. The contractual agreements require a specific, timed, calculable flow of funds and expenses between the affiliated agencies and the Company. The payments to affiliated agencies are considered a selling expense and are classified as selling, general and administrative expenses on the Company’s Statements of Operations. The agreements may be terminated by the affiliate upon advance notice to the Company. The Company may terminate the agreement only under specified conditions. In some circumstances, the Company may be obligated to pay the affiliate to acquire the affiliate’s interest in the agreement.

Revenue generated through the affiliate agencies represented approximately 45% and 50% of total revenue from continuing operations during the three-month periods ended September 30, 2008 and 2007, respectively, and 46% and 51% during the six-month periods ended September 30, 2008 and 2007, respectively.

Revenue Recognition and Concentration of Credit Risk

Revenues for services are recorded in the period the services are rendered. Revenues for products are recorded in the period delivered based on rental or sales prices established with the client or its insurer prior to delivery.

Net patient service revenues are recorded at net realizable amounts estimated to be paid by the customers and third-party payers. A contractual adjustment is recorded as a reduction to net patient services revenues and consists of (a) the difference between the payer’s allowable amount and the customary billing rate; and (b) services for which payment is denied by governmental or third-party payors or otherwise deemed non-billable.

Revenues recognized under arrangements with Medicare, Medicaid and other governmental-funded organizations were approximately 25% and 20% for the three-month periods ended September 30, 2008 and 2007, respectively, and 24% and 27% during the six-month periods ended September 30, 2008 and 2007, respectively. No customer represents more than 10% of the Company’s revenues for the periods presented.

Business Combinations and Valuation of Intangible Assets

The Company accounts for business combinations in accordance with SFAS No. 141, “Business Combinations” (“SFAS No. 141”). SFAS No. 141 requires business combinations to be accounted for using the purchase method of accounting and includes specific criteria for recording intangible assets separate from goodwill. Results of operations of acquired businesses are included in the financial statements of the Company from the date of acquisition. Net assets of the acquired company are recorded at their estimated fair value at the date of acquisition.

Earnings (Loss) Per Share

Basic earnings per share is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities, or other contracts to issue common stock, were exercised or converted into shares of common stock. Shares held in escrow that are contingently issuable upon a future outcome are not included in earnings per share until they are released. Outstanding stock options, unvested restricted stock, warrants to acquire common shares and escrowed shares have not been considered in the computation of dilutive losses per share since their effect would be anti-dilutive for all applicable periods shown. As of September 30, 2008 and 2007, there were approximately 27,291,000 and 30,179,000 potentially dilutive shares outstanding, respectively.

Stock-Based Compensation

Effective April 1, 2005, the Company adopted SFAS No. 123R, “Share-Based Payment” (“SFAS No. 123R”), which replaced SFAS No. 123 and superseded APB 25, using the modified prospective transition method. Under the modified prospective transition method, fair value accounting and recognition provisions of SFAS No. 123R are applied to stock-based awards granted or modified subsequent to the date of adoption. In addition, for awards granted prior to the effective date, the unvested portion of the awards are recognized in periods subsequent to the effective date based on the grant date fair value determined for pro forma disclosure purposes under SFAS No. 123.

The expected life of employee stock options represents the calculation using the “simplified” method for “plain vanilla” options applied consistently to all “plain vanilla” options, consistent with the guidance in Staff Accounting Bulletin (“SAB”) SAB 107. In December 2007, the Securities and Exchange Commission (SEC) issued SAB110 to amend the SEC’s views discussed in SAB 107 regarding the use of the simplified method in developing an estimate of expected life of share options in accordance with SFAS 123R. Due to a lack of adequate historical experience to provide a reasonable estimate, the Company will continue to use the simplified method until it has the historical data necessary to provide a reasonable estimate of expected life in accordance with SAB 107, as amended by SAB 110. For the expected option life, the Company has what SAB 107 defines as “plain-vanilla” stock options, and therefore use a simple average of the vesting period and the contractual term for options as permitted by SAB 107.

Reclassifications

Certain amounts presented in prior periods have been reclassified to conform to current period presentations including the reflection of discontinued operations separately from continuing operations.

Recent Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, Fair Value Measurements, which defines fair value and establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosure requirements about fair value measurements. In February 2008, the FASB issued Staff Position SFAS No. 157-2 (“FSP”) which delays the effective date of SFAS No. 157 for one year for non financial assets and non financial liabilities, except items that are recognized or disclosed at fair value in the financial statements on a recurring basis. The FSP defers the effective date of SFAS No. 157 to fiscal years beginning after November 15, 2008 (our Fiscal 2010), and for interim periods within those fiscal years. The Company adopted SFAS No. 157 for financial assets and liabilities on April 1, 2008. It did not have any impact on its results of operations or financial position and did not result in any additional disclosures. The Company is in the process of evaluating the effect, if any, the adoption of FSP No. 157-2 will have on its consolidated financial statements.

Fair Value Hierarchy. SFAS No. 157 defines the inputs used to measure fair value into the following hierarchy:

Level 1: Quoted market prices in active markets for identical assets or liabilities.

Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data.

Level 3: Unobservable inputs reflecting the reporting entity’s own assumptions.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, which permits companies to make a one-time election to carry eligible types of financial assets and liabilities at fair value, even if measurement is not required by GAAP. The statement is effective for fiscal years beginning after November 15, 2007. The Company adopted SFAS No. 159 on April 1, 2008, resulting in no impact on its consolidated financial statements.

In April 2008, FASB issued FSP No. 142-3, Determination of the Useful Life of Intangible Assets, which amends the factors that must be considered in developing renewal or extension assumptions used to determine the useful life over which to amortize the cost of a recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets. FSP No. 142-3 requires an entity to consider its own assumptions about renewal or extension of the term of the arrangement, consistent with its expected use of the asset. FSP No. 142-3 also requires the disclosure of the weighted-average period prior to the next renewal or extension for each major intangible asset class, the accounting policy for the treatment of costs incurred to renew or extend the term of a recognized intangible assets and for intangible assets renewed or extended during the period, if renewal or extension costs are capitalized, the costs incurred to renew or extend the asset and the weighted-average period prior to the next renewal or extension for each major intangible asset class. FSP No. 142-3 is effective for financial statements for fiscal years beginning after December 15, 2008. The Company is currently evaluating the impact of adopting FSP No. 142-3 on its consolidated financial statements.

Note 2 — Management’s Plan

Since its reverse merger in May 2004, the Company has incurred operating losses and has accumulated a significant amount of debt. For the year ended March 31, 2008, the Company incurred net losses of $23.4 million, of which $13.1 million represents losses from continuing operations. For the six month period ended September 30, 2008, the Company incurred a net loss of $6.5 million. At September 30, 2008, the Company had total outstanding debt of approximately $37.5 million, of which $30 million is due on October 1, 2009 and an additional $5 million is due on December 31, 2009. Additionally, certain of the Company’s debt agreements include subjective acceleration clauses and other provisions that allow lenders, in their sole discretion, to determine that the Company has experienced a material adverse change, which, in turn, would be an event of default.

A new executive management team, including a new Chief Executive Officer, Chief Financial Officer, General Counsel and Executive Vice Presidents of Operations and Sales and Marketing, was assembled during fiscal 2008. This team created a new vision for the Company, “Keeping People at Home and Healthier Longer”, focusing management efforts in the Home Health Care and Pharmacy marketplaces. During the first six months of fiscal 2008, the Company sold or ceased operations of certain locations and lines of business that were under performing or did not complement the Company’s vision. Over the last four quarters, management has worked to improve the results of the home care, medical staffing and home health equipment businesses, while at the same time, growing the early-stage pharmacy business. During this period of time, significant progress has been made in improving margins, reducing selling, general and administrative expenses and creating a more unified and disciplined culture within the Company.

During the six month period ended September 30, 2008, the Company decreased its loss from continuing operations by $1.4 million compared to the prior year. This improvement was made in a difficult market environment, which has resulted in lower revenues in some segments. In addition, this improvement was made while the Company increased expenditures in the pharmacy business infrastructure in anticipation of a significant ramp up in pharmacy revenue.

The Company continues its efforts to reduce selling, general and administrative expenses and anticipates additional savings during the last six months of fiscal 2009, primarily within its employee-related expenses. Additionally, the Company anticipates margins to continue to be stronger than prior years. Finally, management expects the pharmacy revenue to increase significantly over the next several quarters.

Cash used in operations was approximately neutral for the six months ended September 30, 2008. Total cash decreased by approximately $4.1 million during this period, of which $3.5 million was used to reduce outstanding debt balances. The Company has implemented a disciplined approach to cash management. Management believes that its cash and line of credit availability are sufficient to fund on-going operations in the current business environment.

As of September 30, 2008, the Company had approximately $12.5 million outstanding under its Comerica Bank line of credit, which is secured by eligible receivables of the Services segment. The line of credit expires on October 1, 2009. The Company believes that it will be able to renew this line of credit with Comerica or, if necessary, replace it with a similar secured line of credit with another lender. The Company had an additional $22 million of debt owed to its two largest equity holders, which matures during the third quarter of fiscal 2010. Senior management is in on-going dialogue with these two entities and is exploring various alternatives for reducing and/or restructuring its outstanding debt. Management believes that it will be able to restructure its debt before maturity, but this may require the sale of additional assets. The Company continues to explore the possible sale of non-core assets, and the proceeds of such a sale would be used, in part, to reduce outstanding debt.

Note 3 — Discontinued Operations

As discussed in Form 10-K for the fiscal year ended March 31, 2008, the Company sold or closed several underperforming businesses during the fiscal year 2008, including the exit of the retail HHE locations, the

non-emergency care clinic segment and the Colorado and Florida HHE business units. The following table summarizes the divestures:


Business	Divesture Date	Segment

Sears Retail HHE Operations	July 31, 2007	HHE
Florida HHE Operations (Beacon Respiratory Services, Inc.)	September 10, 2007	HHE
Colorado HHE Operations (Beacon Respiratory Services of Colorado, Inc.)	September 10, 2007	HHE
Care Clinic, Inc.	October 2007	Care Clinic
Walmart Retail HHE Operations	December 31, 2007	HHE
Hollywood, Florida Pharmacy	December 31, 2007	Pharmacy

The results of the above are reported in discontinued operations through the dates of disposition in the accompanying consolidated statements of operations, and the prior period consolidated statements of operations have been recast to conform to this presentation. The segment results in Note 12 also reflect the reclassification of the discontinued operations. The discontinued operations do not reflect the costs of certain services provided to these operations by the Company. Such costs, which were not allocated by the Company to the various operations, included legal fees, insurance, external audit fees, payroll processing, human resources services and information technology support. The Company uses a centralized approach to cash management and financing of its operations, and, accordingly, debt and the related interest expense were also not allocated specifically to these operations. The consolidated statements of cash flows do not separately report the cash flows of the discontinued operations.

The components of the loss from discontinued operations are presented below (in thousands):


	Three-Month Period			Six-Month Period
	Ended			Ended
	September 30, 2007
Revenues, net:
Retail operations	$	117		$	348
Care Clinic, Inc.		64			202
Pharmacy — Florida		581			1,558
Home Health Equipment		1,162			4,167

	$	1,924			6,275


Loss from operations:
Retail operations		(159	)		(439	)
Care Clinic, Inc.		(1,733	)		(5,644	)
Pharmacy — Florida		(136	)		(221	)
Home Health Equipment		(730	)		(223	)

		(2,758	)		(6,527	)


Loss on disposal:
Retail operations		(13	)		(13	)
Care Clinic, Inc.		(770	)		(770	)
Pharmacy — Florida		(1	)		(1	)
Home Health Equipment		(1,376	)		(1,376	)

		(2,160	)		(2,160	)


Loss from discontinued operations:
Retail operations		(172	)		(452	)
Care Clinic, Inc.		(2,503	)		(6,414	)
Pharmacy — Florida		(137	)		(222	)
Home Health Equipment		(2,106	)		(1,599	)

	$	(4,918	)	$	(8,687	)

Note 4 — Goodwill and Acquired Intangible Assets

The following table presents the detail of the changes in goodwill by segment for the six-month period ended September 30, 2008 (in thousands):


	Services		HHE		Pharmacy		Total

Goodwill at April 1, 2008	$	14,180	$	2,015	$	16,641	$	32,836
Acquisitions during the period		550		—		—		550

Goodwill at September 30, 2008	$	14,730	$	2,015	$	16,641	$	33,386

Goodwill of approximately $20.4 million is amortizable over 15 years for tax purposes while the remainder of the Company’s goodwill is not amortizable for tax purposes as the acquisitions related to the purchase of common stock rather than of assets or net assets.

Acquired intangible assets consist of the following (in thousands):


	September 30, 2008					March 31, 2008
				Accumulated					Accumulated
	Cost			Amortization		Cost			Amortization

Trade name	$	8,000		$	724	$	8,000		$	628
Customer relationships		21,987			5,761		21,652			5,003
Non-competition agreements		660			433		674			381
Acquired technology		90			54		850			793

		30,737		$	6,972		31,176		$	6,805

Less accumulated amortization		(6,972	)				(6,805	)

Net acquired intangible assets	$	23,765				$	24,371

Amortization expense for acquired intangible assets included in continuing operations was $487,000 and $614,000 for the three-month periods ended September 30, 2008 and 2007, respectively, and $943,000 and $1.2 million for the six-month periods ended September 30, 2008 and 2007, respectively.

The estimated amortization expense related to acquired intangible assets in existence as of September 30, 2008 is as follows (in thousands):


Remainder of fiscal 2009	$	917
Fiscal 2010		1,918
Fiscal 2011		1,688
Fiscal 2012		1,496
Fiscal 2013		1,373
Thereafter		16,373

Total	$	23,765

Note 5 — Lines of Credit

The following table summarizes the lines of credit for the Company (in thousands):


		At September 30, 2008
		Maximum
		Available					March 31,
Lending Institution	Maturity date	Borrowing		Balance			2008			Interest rate

Comerica Bank	October 1, 2009	$	14,254	$	12,436		$	15,292		Prime
AmerisourceBergen Drug Corporation	September 30, 2010		2,350		2,350			2,450			10	%
Jana Master Fund, Ltd.	October 1, 2009		5,254		5,254			5,000			10	%

Total lines of credit obligations		$	21,858		20,040			22,742

Less current portion					(375	)		(250	)

Long-term portion				$	19,665		$	22,492

Comerica Bank

The Comerica Bank line of credit agreement includes certain financial covenants specifically relating to Arcadia Services, Inc. (“ASI”), a wholly-owned subsidiary of the Company. ASI was not in compliance with the leverage ratio financial covenant as of March 31, 2008. In October 2008, the Company entered into an amendment to the original credit agreement with Comerica. In conjunction with the amendment, the bank waived the event of default relating to the March 31, 2008 covenant violation. Additionally, the amendment included an increase in the interest rate to prime plus 1% per annum.

The effective interest rate at September 30, 2008 was 5.0%.

As of September 30, 2008, the Company was in compliance with all financial covenants.

AmerisourceBergen Drug Corporation (“ABDC”)

There have been no changes to the Company’s line of credit agreement with ABDC as discussed in Form 10-Q for the period ended June 30, 2008 filed with the Securities and Exchange Commission (SEC) on August 11, 2008.

Jana Master Fund, Ltd. (“JANA”)

There have been no changes to the Company’s line of credit agreement with JANA as discussed in Form 10-Q filed with SEC on August 11, 2008, other than the Company elected to add an additional $129,000 to the line of credit for unpaid cash interest on September 30, 2008.

The prime rate was 5.0% at September 30, 2008. The weighted average interest rate of borrowings under line of credit agreements as of September 30, 2008 and March 31, 2008 was 6.9% and 6.5%, respectively.

Note 6 — Long-Term Obligations

Long-term obligations consist of the following (in thousands):


	September 30,			March 31,
	2008			2008
Note payable to Jana Master Fund, Ltd. amended on March 31, 2008 with principal due in full on October 1, 2009 bearing an effective interest rate of 10% on September 30, 2008. A total of approximately $577,000 of unpaid cash interest was added to the note during fiscal 2009 as of September 30, 2008 and approximately $719,000 for the year ended March 31, 2008 under this agreement. The unsecured note payable includes various loan covenants, all of which the Company was in compliance as of September 30, 2008.	$	11,942		$	11,365

Note payable to Vicis Capital Master Fund (“Vicis”) dated March 31, 2008 bearing an effective interest rate of 10% on September 30, 2008 with the principal due in full on December 31, 2009. A total of approximately $271,000 of unpaid cash interest was added to the note during fiscal 2009 as of September 30, 2008 under this agreement. The amounts reported are net of unamortized debt discount of $801,000 and $1.2 million on September 30, 2008 and March 31, 2008, respectively.		4,808			4,136

Notes payable, unsecured, to two executives dated September 10, 2007 bearing interest at 4% per year. The notes payable were paid in full on April 10, 2008.		—			99

Purchase price payable to Remedy Therapeutics, Inc., unsecured, dated January 27, 2006, bearing simple interest of 8% per year payable in equal quarterly payments of principal and interest with the final payment due on January 27, 2009.		147			288

Other long-term obligations with interest charged at various rates ranging from 4% to 8.75% to be paid over time based on respective terms, due dates ranging from April 2009 to March 2012, secured by certain equipment.		445			508

Total long-term obligations		17,342			16,396
Less current portion of long-term obligations		(462	)		(545	)

Long-term obligations, less current portion	$	16,880		$	15,851

As of September 30, 2008, future maturities of long-term obligations are as follows (in thousands):


Remainder of fiscal 2009	$	419
Fiscal 2010		17,639
Fiscal 2011		59
Fiscal 2012		26

		18,143
Less — unamortized debt discount		(801	)

Total	$	17,342

The weighted average interest rate of outstanding long-term obligations as of September 30, 2008 and March 31, 2008 was 9.9% and 10.5%, respectively.

Note 7 — Stockholders’ Equity

Stock Price Guarantees

In July 2007, the Company acquired 100% of the membership interest of JASCORP, LLC (“JASCORP”). As partial consideration, the Company issued 1,814,883 shares of common stock. The Company guaranteed the share price of $0.99 per share at the one-year anniversary date of the acquisition. In July 2008, the Company issued 1,512,403 shares of common stock to the former owner of JASCORP in order to satisfy the guaranteed stock price obligation.

In September 2007 and simultaneous with the Company’s sale of its Florida and Colorado home health equipment businesses, the Company released 1,068,140 shares of common stock to the former owners of Alliance Oxygen & Medical Equipment, Inc. (“Alliance”), an entity acquired by the Company in July 2006. The release of the shares was consistent with the terms of an Escrow Release Agreement entered into on July 19, 2007. In the agreement, the Company guaranteed the share price of $0.70 per share. In October 2008, the Company issued 1,804,491 shares of common stock to the former owners of Alliance in order to satisfy the guaranteed stock price obligation.

Subsequent to the issuance of the shares of common stock to Alliance in October, the Company has satisfied all of its guaranteed stock price obligations.

Warrants

The following table represents warrants outstanding:


					September 30,		March 31,
Description	Exercise Price		Granted	Expiration	2008		2008

Class A	$	0.50	May 2004	May 2011		5,749,036		5,749,036
Class B-1	$	0.001	September 2005	September 2009		8,990,277		8,990,277
Class B-2	$	1.20	September 2005	May 2014		3,111,111		3,111,111
Class B-2	$	2.25	September 2005	September 2009		1,599,999		1,599,999
May 2007 Private Placement	$	1.75	May 2007	May 2014		2,754,726		2,754,726
ABDC issuance	$	0.75	June 2008	June 2015		490,000		—

Total Warrants Outstanding						22,695,149		22,205,149

The outstanding warrants have no voting rights and provide the holder with the right to convert one warrant for one share of the Company’s common stock at the stated exercise price. The majority of the outstanding warrants have a cashless exercise feature.

No warrants were exercised during either of the six-month periods ended September 30, 2008 and 2007.

Note 8 — Contingencies

As a health care provider, the Company is subject to extensive federal and state government regulation, including numerous laws directed at preventing fraud and abuse and laws regulating reimbursement under various government programs. The marketing, billing, documenting and other practices of health care companies are all subject to government scrutiny. To ensure compliance with Medicare and other regulations, audits may be conducted, with requests for patient records and other documents to support claims submitted for payment of services rendered to customers, beneficiaries of the government programs. Violations of federal and state regulations can result in severe criminal, civil and administrative penalties and sanctions, including disqualification from Medicare and other reimbursement programs.

The Company is subject to various legal proceedings and claims which arise in the ordinary course of business. The Company does not believe that the resolution of such actions will materially affect the Company’s business, results of operations or financial condition.

Note 9 — Stock-Based Compensation

On August 18, 2006, the Board of Directors unanimously approved the Arcadia Resources, Inc. 2006 Equity Incentive Plan (the “2006 Plan”), which was subsequently approved by the stockholders on September 26, 2006. The 2006 Plan provides for grants of incentive stock options, non-qualified stock options, stock appreciation rights and restricted shares (collectively “Awards”). The 2006 Plan will terminate and no more Awards will be granted after August 2, 2016, unless terminated by the Board of Directors sooner. The termination of the 2006 Plan will not affect previously granted Awards. The total number of shares of common stock that may be issued pursuant to Awards under the 2006 Plan may not exceed an aggregate of 2.5% of the Company’s authorized and unissued shares of common stock as of the

date the Plan was approved by the shareholders or 5,000,000 shares. All non-employee directors, executive officers and employees of the Company and its subsidiaries are eligible to receive Awards under the 2006 Plan. As of September 30, 2008, 633,447 shares were available for grant under the 2006 Plan.

Stock Options

Prior to the adoption of the 2006 Plan, stock options were granted to certain members of management and the Board of Directors. The terms of these options varied depending on the nature and timing of the grant. The maximum contractual term for the options granted to date is seven years.

The fair value of each stock option award is estimated on the date of the grant using a Black-Scholes option valuation model that uses the assumptions noted in the following table. The Company estimated the expected term of outstanding stock options by taking the average of the vesting term and the contractual term of the option, as illustrated in SAB 107. The Company currently uses the “simplified” method to estimate the expected term for employee stock option grants as adequate historical experience is not available to provide a reasonable estimate. The Company estimated the volatility of its common stock by using historical stock price volatility. The Company based the risk-free interest rate that it uses in the option pricing model on U.S. Treasury constant maturity issues having remaining terms similar to the expected terms of the options. The Company does not anticipate paying any cash dividends in the foreseeable future and therefore used an expected dividend yield of zero in the option pricing model. All share-based payment awards are amortized on a straight-line basis over the requisite service periods, which is generally the vesting period.

Following are the specific valuation assumptions used for each respective period:


	Three-Month Period Ended					Six-Month period Ended
	September 30,					September 30,
	2008		2007			2008			2007

Weighted-average expected volatility		N/A		64	%		74	%		64	%
Expected dividend yields		N/A		0	%		0	%		0	%
Expected terms (in years)		N/A		7			4			7
Risk-free interest rate		N/A		4.67	%		3.23	%		4.67	%

Stock option activity for the six-month period ended September 30, 2008 is summarized below:



						Weighted-
				Weighted-		Average		Aggregate
				Average		Remaining		Intrinsic
				Exercise		Contractual		Value
Options	Shares			Price		Term (Years)		(thousands)

Outstanding at April 1, 2008		1,872,989		$	1.09
Granted		1,737,467			0.72
Forfeited or expired		(384,250	)		1.41

Outstanding at September 30, 2008		3,226,206		$	0.85		5.6		—

Exercisable at September 30, 2008		2,266,397		$	0.91		5.2		—

The following table summarizes information about stock options outstanding at September 30, 2008:


	Options Outstanding					Options Exercisable
			Weighted
			Average	Weighted				Weighted
			Remaining	Average				Average
	Number		Contractual	Exercise		Number		Exercise
Range of Exercise Prices	Outstanding		Life	Price		Exercisable		Price

$0.25		500,000	5.4 years	$	0.25		500,000	$	0.25
$0.26 - $1.00		1,957,626	6.4 years	$	0.73		997,817	$	0.73
$1.01 - $1.50		650,967	4.4 years	$	1.37		650,967	$	1.37
$1.51 - $2.25		43,000	4.6 years	$	2.22		43,000	$	2.22
$2.92		74,613	4.8 years	$	2.92		74,613	$	2.92

Outstanding at September 30, 2008		3,226,206		$	1.09		2,266,397	$	1.11

The weighted-average grant-date fair value of options granted during the six-month periods ended September 30, 2008 and 2007 was $0.85 and $0.92, respectively.

No stock options were exercised during either of the six-month periods ended September 30, 2008 and 2007.

The Company recognized $222,000 and $739,000 in stock-based compensation expense relating to stock options during the three-month periods ended September 30, 2008 and 2007, respectively, and $428,000 and $767,000 in stock-based compensation expense relating to stock options during the six-month periods ended September 30, 2008 and 2007, respectively.

As of September 30, 2008, total unrecognized stock-based compensation expense related to stock options was $409,000, which is expected to be expensed through June 2011.

Restricted Stock — Arcadia Resources, Inc.

Restricted stock is measured at fair value on the date of the grant, based on the number of shares granted and the quoted price of the Company’s common stock. The value is recognized as compensation expense ratably over the corresponding employee’s specified service period. Restricted stock vests upon the employees’ fulfillment of specified performance and service-based conditions.

The following table summarizes the activity for restricted stock awards during the six-month period ended September 30, 2008:


				Weighted-
				Average
				Grant Date
				Fair Value
	Shares			per Share

Unvested at April 1, 2008		961,801		$	1.47
Granted		31,750			0.60
Vested		(205,959	)		1.54
Forfeited		(18,250	)		1.79

Unvested at September 30, 2008		769,342		$	1.39

During the three-month periods ended September 30, 2008 and 2007, the Company recognized $117,000 and $669,000, respectively, of stock-based compensation expense from continuing operations related to restricted stock. During the six-month periods ended September 30, 2008 and 2007, the Company recognized $245,000 and $1.3 million, respectively, of stock-based compensation expense from continuing operations related to restricted stock.

During the six-month periods ended September 30, 2008 and 2007, the total fair value of restricted stock vested was $318,000 and $2.1 million, respectively.

As of September 30, 2008, total unrecognized stock-based compensation expense related to unvested restricted stock awards was $1.0 million, which is expected to be expensed over a weighted-average period of 2.4 years.

Note 10 — Income Taxes

The Company incurred state and local tax expense of $198,000 and $7,000 during the three-month periods ended September 30, 2008 and 2007, respectively, and $394,000 and $23,000 during the six-month periods ended September 30, 2008 and 2007, respectively.

SFAS No. 109 requires that a valuation allowance be established when it is more likely than not that all or a portion of deferred income tax assets will not be realized. A review of all available positive and negative evidence needs to be considered, including a company’s performance, the market environment in which the company operates, the length of carryback and carryforward periods, and expectation of future profits. SFAS No. 109 further states that forming a conclusion that a valuation allowance is not needed is difficult when there is negative evidence such as the cumulative losses in recent years. Therefore, cumulative losses weigh heavily in the overall assessment. The Company will provide a full valuation allowance on future tax benefits until it can sustain a level of profitability that demonstrates its ability to utilize the assets, or other significant positive evidence arises that suggests the Company’s ability to utilize such assets.

Effective April 1, 2007, the Company adopted FIN 48, Accounting for Uncertainty in Income Taxes. Upon adoption and the conclusion of the initial evaluation of the Company’s uncertain tax positions (“UTP’s”) under FIN 48, no adjustments were recorded in the accounts. Consistent with past practice, the Company recognizes interest and penalties related to unrecognized tax benefits through interest and operating expenses, respectively. No amounts were accrued as of September 30, 2008. There was no 2009 activity related to unrecognized tax benefits. In the major jurisdictions in which the Company operates, which includes the United States and various individual states therein, returns for various tax years from 2003 forward remain subject to audit. The Company is not currently under examination for federal or state income tax purposes. The Company does not expect a significant increase or decrease in unrecognized tax benefits during the next 12 months.

In July 2007, the State of Michigan enacted a substantial change to its corporate tax structure effective January 1, 2008. The tax law change eliminated of the Single Business Tax (“SBT”) and created an income tax and a modified gross receipts tax. Previous to this change, the expense related to the SBT was primarily a tax on compensation. The cost of revenues for the Services segment is primarily compensation and, as such, the SBT expense was previously included in the cost of revenues. Effective January 1, 2008, the expenses associated with the new Michigan Business Tax were recorded in the Income Tax line item due to its primary taxation on income as opposed to compensation. Management does not anticipate that these new laws will have a material impact on the Company in future periods.

Note 11 — Related Party Transactions

On September 30, 2008, the Company had an outstanding balance of $11,942,000 related to an Amended and Restated Promissory Note and $5,254,000 outstanding on a line of credit agreement, both of which were with JANA dated March 31, 2008. Prior to the Amended and Restated Promissory Note dated March 31, 2008, the Company had a note payable with JANA dated June 25, 2007 for $17.0 million. JANA held greater than 10% of the outstanding shares of Company common stock on September 30, 2008. The Company incurred interest expense relating to the debt in the amounts of $423,000 and $558,000 during the three-month periods ended September 30, 2008 and 2007, respectively, and $831,000 and $1.3 million during the six-month periods ended September 30, 2008 and 2007, respectively. See Notes 5 and 6 above for additional information pertaining to the balances of these debt instruments.

PrairieStone has a line of credit agreement with a former owner of PrairieStone that was issued shares of the Company’s common stock as part of the purchase price consideration. At September 30, 2008, the outstanding balance of the line of credit was $2,350,000. The former owner held approximately 1% of the outstanding shares of Company’s common stock on September 30, 2008. The Company incurred interest expense relating to this line of credit of $61,000 and $63,000 during the three-month periods ended September 30, 2008 and 2007, respectively, and $110,000 and $126,000 during the six-month periods ended September 30, 2008 and 2007, respectively. As noted in Form 10-Q filed with SEC for the period ended June 30, 2008, $248,000 was recognized as “Other” expense during the three-month period ended September 30, 2008 due to the modification of the line of credit agreement for the value of the warrants issued to ABDC on June 5, 2008.

One of the members of the Board of Directors of the Company has minority ownership interests in each of Lunds, Inc. and LFHI Rx, LLC and serves as the Chairman and CEO of Lunds, Inc. These two entities held an ownership interest in PrairieStone prior to its acquisition by the Company. Lunds, Inc. and LFHI Rx, LLC received 2,400,000 shares of Company common stock at the closing of the transaction and an additional 47,437 shares in February 2008 due to a stock price guarantee provision relating to the acquisition. Immediately prior to Company’s acquisition of PrairieStone, PrairieStone closed on the sale of the assets of fifteen retail pharmacies located within grocery stores owned and operated by Lunds, Inc. and Byerly’s, Inc. to Lunds, Inc., which transaction included execution of a five-year Management Services Agreement and a five-year Licensed Services Agreement between Lunds, Inc. and PrairieStone. Under the terms of the Management Services Agreement, PrairieStone will provide such services that are appropriate for the day-to-day management of the pharmacies. In conjunction with these two agreements, the Company recognized $35,000 and $183,000 in revenue during the three-month periods ended September 30, 2008 and 2007, respectively, and $69,000 and $365,000 in revenue during the six-month periods ended September 30, 2008 and 2007, respectively. The Asset Purchase Agreement with Lunds includes a “post-closing risk-share” clause whereby PrairieStone will pay Lunds 50% of the first two years’ losses, if any, up to a cumulative total loss of $914,000. $457,000 was accrued during the fiscal year 2007 and is due in February 2009.

Another member of the Board of Directors of the Company is the Director of Private Equity of CMS Companies. Entities affiliated with CMS Companies purchased 4,201,681 shares of the Company’s common stock for $5,000,000 as part of the May 2007 private placement. In addition, these entities received 1,050,420 warrants to purchase shares of common stock at $1.75 per share for a period of seven years.

On September 24, 2007, the Company hired an Executive Vice President of Operations. This individual has a beneficial ownership interest in an affiliated agency and thereby has an interest in the affiliate’s transactions with the Company, including the payments of commissions to the affiliate based on a specified percentage of gross margin. The affiliate is responsible to pay its selling, general and administrative expenses. Commissions totaled $348,000 and $390,000 for the three-month periods ended September 30, 2008 and 2007, respectively, and $722,000 and $846,000 for the six-month periods ended September 30, 2008 and 2007, respectively. In addition, the Company has an agreement with this affiliate, which is terminable under certain circumstances, to purchase the business under certain events, but in no event later than 2011.

Note 12 — Segment Information

The Company reports net revenue from continuing operations and operating income/(loss) from continuing operations by reportable segment. Reportable segments are components of the Company for which separate financial information is available that is evaluated on a regular basis by the chief operating decision maker in deciding how to allocate resources and in assessing performance.

The Company operates three segments: Services, HHE and Pharmacy. Segments include operations engaged in similar lines of business and in some cases, may utilize common back office support services. Prior period segment information has been reclassified in order to conform to the current year presentation.

The Services segment is a national provider of home care services, including skilled and personal care; medical staffing services (per diem and travel nursing) to numerous types of acute care and sub-acute care medical facilities; and light industrial, clerical and technical staffing services.

The HHE segment markets, rents and sells respiratory and medical equipment throughout the United States. Products and services include oxygen concentrators and other respiratory therapy products, home medical equipment, continuous positive airway pressure equipment (“CPAP”) for patients with sleep disorders and inhalation drugs. In addition, this segment includes a home-health oriented mail-order catalog and related website.

The Pharmacy segment operates a mail order pharmacy, which offers a full line of services and products including the dispensing of pills and other medications, multi-dose strip medication packages, respiratory supplies and medications, diabetic care management, drug interaction monitoring, and special assisted living medication packaging. The Pharmacy segment also provides comprehensive pharmacy management services including oversight, marketing support, third party systems interfaces, pharmacy setup and billing and dispensing software for pharmacies across the United States.

The accounting policies of each of the reportable segments are the same as those described in the Summary of Significant Accounting Policies. Management evaluates performance based on profit or loss from operations, excluding corporate, general and administrative expenses, as follows (in thousands):


	Three-Month Period Ended						Six-Month Period
	September 30,						September 30,
	2008			2007			2008			2007

Revenue, net:
Services	$	29,645		$	31,164		$	59,870		$	62,378
Home Health Equipment		5,536			5,082			11,034			10,426
Pharmacy		1,742			1,738			3,404			3,189

Total revenue		36,923			37,984			74,308			75,993

Operating loss:
Services	$	1,528		$	844		$	3,107		$	1,912
Home Health Equipment		115			(1,006	)		315			(1,689	)
Pharmacy		(1,033	)		(336	)		(1,831	)		(627	)
Unallocated corporate overhead		(2,549	)		(2,788	)		(5,405	)		(5,366	)

Total operating loss		(1,939	)		(3,286	)		(3,814	)		(5,770	)

Other expenses:
Interest expense, net		1,054			949			2,010			2,108
Other		44			14			303			14

Net loss before income tax expense		(3,037	)		(4,249	)		(6,127	)		(7,892	)
Income tax expense		198			7			394			23

Net loss from continuing operations	$	(3,235	)	$	(4,256	)	$	(6,521	)	$	(7,915	)


Depreciation and amortization (continuing operations):
Services	$	282		$	307		$	568		$	640
Home Health Equipment — cost of revenue		719			584			1,430			1,190
Home Health Equipment — operating expense		415			356			690			689
Pharmacy		272			37			434			140
Corporate		84			236			118			315

Total depreciation and amortization	$	1,772		$	1,520		$	3,240		$	2,974


	September 30,
	2008		2007

Capital expenditures:
Services	$	66	$	44
Home Health Equipment		85		440
Pharmacy		196		7
Care Clinics, Inc. (discontinued in fiscal year 2008)		—		557
Corporate		115		31

Total assets	$	462	$	1,079


	September 30, 2008		March 31, 2008

Assets:
Services	$	48,953	$	48,383
Home Health Equipment		12,962		16,219
Pharmacy		29,481		29,867
Unallocated corporate assets		2,958		4,946

Total assets	$	94,354	$	99,415

ITEM 2. Management’s Discussion And Analysis Of Financial Condition And Results Of Operations

The following discussion and analysis provides information we believe is relevant to an assessment and understanding of our results of operations and financial condition for the three and six-month periods ended September 30, 2008. This discussion should be read in conjunction with the condensed consolidated financial statements and notes thereto included herein, the consolidated financial statements and notes and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended March 31, 2008 and Form 10-Q for the period ended June 30, 2008 filed with the SEC on June 16, 2008 and August 11, 2008, respectively, which are incorporated herein by this reference.

Cautionary Statement Concerning Forward-Looking Statements

The MD&A should be read in conjunction with the other sections of this report on Form 10-Q, including the consolidated financial statements and notes thereto beginning on page 2 of this Report. Historical results set forth in the financial statements beginning on page 2 and this section should not be taken as indicative of our future operations.

We caution you that statements contained in this report (including our documents incorporated herein by reference) include forward-looking statements. The Company claims all safe harbor and other legal protections provided to it by law for all of its forward-looking statements. Forward-looking statements involve known and unknown risks, assumptions, uncertainties and other factors about our Company, which could cause actual financial or operating results, performances or achievements expressed or implied by such forward-looking statements not to occur or be realized. Such forward-looking statements generally are based on our reasonable estimates of future results, performances or achievements, predicated upon current conditions and the most recent results of the companies involved and their respective industries. Forward-looking statements are also based on economic and market factors and the industry in which we do business, among other things. Forward-looking statements are not guaranties of future performance. Forward-looking statements may be identified by the use of forward-looking terminology such as “may,” “can,” “will,” “could,” “should,” “project,” “expect,” “plan,” “predict,” “believe,” “estimate,” “aim,” “anticipate,” “intend,” “continue,” “potential,” “opportunity” or similar terms, variations of those terms or the negative of those terms or other variations of those terms or comparable words or expressions.

Unless otherwise provided, “Arcadia,” “we,” “us,” “our,” and the “Company” refer to Arcadia Resources, Inc. and its wholly-owned subsidiaries.

Actual events and results may differ materially from those expressed or forecasted in forward-looking statements due to a number of factors. Important factors that could cause actual results to differ materially include, but are not limited to (1) our ability to compete with our competitors; (2) our ability to obtain additional debt or equity financing, if necessary, and/or to restructure existing indebtedness, which may be difficult due to our history of operating losses and negative cash flows; (3) the ability of our affiliated agencies to effectively market and sell our services and products; (4) our ability to procure product inventory for resale; (5) our ability to recruit and retain temporary workers for placement with our customers; (6) the timely collection of our accounts receivable; (7) our ability to attract and retain key management employees; (8) our ability to timely develop new services and products and enhance existing services and products; (9) our ability to execute and implement our growth strategy; (10) the impact of governmental regulations; (11) marketing risks; (12) our ability to adapt to economic, political and regulatory conditions affecting the health care industry; (13) our ability to successfully integrate acquisitions; (14) the ability of our management team to successfully pursue our business plan; (15) other unforeseen events that may impact our business; and (16) the risks, uncertainties and other factors described in Part II, Item 1A of this Report which are incorporated herein by this reference.

Overview

The Company’s corporate headquarters are located in Indianapolis, Indiana. The Company conducts its business from 98 facilities located in 21 states. The Company operates pharmacies in Indiana, Kentucky and Minnesota and has customer service centers in Michigan and Indiana.

Critical Accounting Policies

See Part II, Item 7 — Critical Accounting Policies, our consolidated financial statements and related notes in Part IV, Item 15 of our Annual Report on Form 10-K for the year ended March 31, 2008 filed with the SEC on June 16, 2008 and Part I, Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations of our 10-Q for the period ended June 30, 2008 filed with the SEC on August 11, 2008 for accounting policies and related estimates we believe are the most critical to understanding our condensed consolidated financial statements, financial condition and results of operations and which require complex management judgment and assumptions, or involve uncertainties.

Three-Month Period Ended September 30, 2008 Compared to the Three-Month Period Ended September 30, 2007

Results of Continuing Operations, (in thousands, except share amounts)


	Three-Month Period
	Ended September 30,
	2008			2007

Revenues, net	$	36,923		$	37,984
Cost of revenues		23,938			25,992

Gross profit		12,985			11,992

Selling, general and administrative expenses		13,871			14,342
Depreciation and amortization		1,053			936

Total operating expenses		14,924			15,278


Operating loss		(1,939	)		(3,286	)
Other expenses		1,098			963

Net loss before income tax expense		(3,037	)		(4,249	)
Income tax expense		198			7

Net loss from continuing operations	$	(3,235	)	$	(4,256	)

Weighted average number of shares — basic and diluted		133,019,000			123,456,000
Net loss from continuing operations per share — basic and diluted	$	(0.02	)	$	(0.03	)

Revenues, Cost of Revenues and Gross Profits

The following summarizes revenues, cost of revenues and gross profits by segment for the three-month periods ended September 30, (in thousands):


														%
			% of Total					% of Total			$ Increase/			Increase/
	2008		Revenue			2007		Revenue			(Decrease)			(Decrease)

Revenues, net:
Services	$	29,645		80.3	%	$	31,164		82.0	%	$	(1,519	)		-4.9	%
Home Health Equipment		5,536		15.0	%		5,082		13.4	%		454			8.9	%
Pharmacy		1,742		4.7	%		1,738		4.6	%		4			0.2	%

		36,923		100.0	%		37,984		100.0	%		(1,061	)		-2.8	%


Cost of revenues:
Services	$	20,954				$	23,063				$	(2,109	)		-9.1	%
Home Health Equipment		1,868					1,801					67			3.7	%
Pharmacy		1,116					1,128					(12	)		-1.1	%

		23,938					25,992					(2,054	)		-7.9	%


			Gross					Gross
			Margin %					Margin %
Gross margins:
Services		8,691		29.3	%		8,101		26.0	%		590	7.3	%
Home Health Equipment		3,668		66.3	%		3,281		64.6	%		387	11.8	%
Pharmacy		626		35.9	%		610		35.1	%		16	2.6	%

	$	12,985		35.2	%	$	11,992		31.6	%	$	993	8.3	%

The Services segment remains the largest source of revenue for the Company. Total revenue in the Services segment during the second quarter of fiscal 2009 was $29.6 million, a 4.9% decline from the same period of the prior year. Home care, medical staffing and industrial staffing revenues represented 52.2%, 29.2% and 18.6%, respectively, of Services revenues during the quarter, compared with 43.1%, 33.9% and 23.0%, respectively, for the second quarter of fiscal 2008.

The Company continues to generate higher sales from its home care business. During the second quarter of fiscal 2009, home care revenues increased approximately 15% over the same period a year ago. Approximately 5% of this increase was attributable to an acquisition of a home care company in April 2008. The remainder represents organic growth in several of the Company’s main geographic markets. The increase in sales included growth in government programs served, as well as private pay and insurance clients.

The growth in home care revenues was more than offset by significant year-over-year declines in revenue in the medical staffing and industrial staffing markets, which declined by approximately 18% and 23%, respectively, as compared with the prior year. Demand for per diem medical and travel nurse staffing services is at lower levels than the same period a year ago, with patient censuses down in many of the markets and facilities serviced by the Company’s offices. Economic conditions have also caused part-time staff in these facilities to increase work hours and full-time staff to accept more overtime hours, thus reducing the demand for temporary staffing. Industrial staffing has declined significantly due to economic conditions in Michigan, the Company’s primary industrial staffing market, offset by growth in the new Mid-Atlantic region now being served by the Company. One customer accounted for a decrease in the industrial staffing revenue of approximately $1.9 million during the second quarter compared with the prior year.

Gross margins in the Services segment increased from 26.0% in the second quarter of fiscal 2008 to 29.3% in the current period. The cost of revenues in this segment primarily consists of employee costs, including wages, taxes, fringe benefits and workers’ compensation expense. The year-over-year improvement in gross margins was driven primarily by two factors. The first was a reduction in workers’ compensation expense, reflecting the success of the Company’s on-going efforts to control and reduce these costs through improved training, timelier reporting and investigation of claims, and reduced administrative costs. The second factor was the increased mix of home care revenue as a percentage of sales, with margins in this market being significantly higher than gross margins in the medical staffing and industrial staffing.

The increase in HHE net sales revenue of $454,000 for the three-month period ended September 30, 2008 compared to the same period a year ago reflects a reduction in the level of contractual adjustments made to gross sales versus the second quarter of fiscal 2008. Management has reviewed historical adjustments, including those related to the fiscal year 2007 Medicare provider number deactivation issues, and has updated its model for classifying both contractual adjustments and bad debt provisions based on a detailed analysis of the HHE segment’s recent billing and collection history.

The costs of revenue in the HHE segment are largely the costs of products that are rented, leased or sold to HHE customers and the costs of supplies and some patient services. Costs of revenue include the depreciation expense for patient rental equipment, as described further in the “Depreciation and Amortization” section that follows.

Recent changes in reimbursement levels under the Medicare program will result in a 9.5% reduction in reimbursement on certain products commencing January 1, 2009. In addition, Medicare has capped the period of time that a provider may be reimbursed for providing oxygen concentrator rental equipment to customers, effective January 1, 2009. Providers will be able to continue to bill these customers for portable oxygen products and will also be permitted to bill for equipment service and maintenance on terms and conditions prescribed by the Centers for Medicare & Medicaid Services (CMS). As a result of these changes to the Medicare program, the Company anticipates a reduction in net revenue and gross margins in the HHE segment starting in the fourth quarter of fiscal 2009. The Company has initiated several cost reduction measures to partially offset the impact of these changes.

The revenue in the Pharmacy segment remained relatively flat compared to the second quarter of fiscal 2008. The Company has launched its DailyMed™ medication management program and is pursuing opportunities with government entities, managed care organizations, assisted living and group home facilities, existing home care and HHE customers and in direct-to-consumer initiatives. Indiana Medicaid is in the process of enrolling approximately 70,000 lives into its Care Select program. The Company is working with the Indiana Medicaid program and its managed care providers to identify those Care Select enrollees who will benefit most from participation in the DailyMed™ program. DailyMed™ revenue increased approximately 10% over the first quarter of fiscal 2009, and revenue will increase as the Indiana Care Select program enrolls more lives.

The costs of revenue in the Pharmacy segment include the cost of medications sold to clients and packaging costs for the DailyMed™ proprietary dispensing system. Costs of revenue also include switching services and other costs associated with the Company’s pharmacy software management products.

Selling, General and Administrative

The following summarizes selling, general and administrative expenses by segment for the three-month periods ended September 30, (in thousands):


				% of						% of						%
				Total						Total			$ Increase/			Increase/
	2008			SG&A			2007			SG&A			(Decrease)			(Decrease)

Services	$	6,881			49.6	%	$	6,950			48.5	%	$	(69	)		-1.0	%
Home Health Equipment		3,137			22.6	%		3,916			27.3	%		(779	)		-19.9	%
Pharmacy		1,388			10.0	%		737			5.1	%		651			88.3	%
Corporate		2,465			17.8	%		2,739			19.1	%		(274	)		-10.0	%

	$	13,871			100.0	%	$	14,342			100.0	%	$	(471	)		-3.3	%


SG&A as % of Net Revenues		37.6	%					37.8	%

The Services segment selling, general and administrative expense decreased primarily due to a decrease in selling expenses, which include commissions paid to the affiliate agencies. These commissions are based on the gross margins of the individual affiliates, and the decrease reflects a decrease in revenues and gross margins for the three-month period ended September 30, 2008 compared to the same period for the prior year. In addition to the reduction in selling expenses, the Services selling, general and administrative

expenses decreased due to a change in the classification of certain functions in the Southfield, Michigan support office to Corporate as more fully discussed below.

The decrease in the HHE segment selling, general and administrative expense was primarily due to the closure of the Orlando, Florida administrative support office in November 2007. The Orlando office housed the HHE accounting, IT and compliance functions. The Company consolidated these HHE support functions with the Services support function located in Southfield, Michigan. This consolidation resulted in decreased employee and location costs in the HHE segment.

The decreases in HHE selling, general and administrative expenses were partially offset by an increase in bad debt expense. The Company updated its model for classifying contractual adjustments and bad debt expense based on a detailed analysis of the HHE segment’s more recent billing and collection history. This resulted in lower adjustments but an increase in the portion classified as bad debt versus contractual adjustments compared to the prior year.

The increase in the Pharmacy segment selling, general and administrative expense highlights the Company’s investment in the infrastructure and additional employees that will be necessary to support the anticipated growth in the Pharmacy segment during fiscal 2009.

The decrease in Corporate selling, general and administrative expense was due to the following:

	•		During fiscal 2008, the Company hired an in-house legal counsel, and since this hiring, the Company’s legal fees have decreased significantly; and

	•		The reduction of equity compensation expense. During the three-month period ended September 30, 2007, the Company recognized approximately $700,000 relating to the vesting of certain stock options consistent with the former CEO’s separation agreement executed in July 2007.

These decreases were partially offset by a change in the classification of certain employees who were previously included in the Services segment to Corporate. Historically, employees in the Southfield, Michigan location supported the Services segment almost exclusively. During fiscal 2008, the Company centralized many of its corporate functions in Southfield, Michigan, and these employees now support the entire organization.

Depreciation and Amortization

The following summarizes depreciation and amortization expense from continuing operations for the three-month periods ended September 30, (in thousands):


					$ Increase/			% Increase/
	2008		2007		(Decrease)			(Decrease)

Depreciation — cost of revenues	$	719	$	584	$	135			23.1	%

Depreciation and amortization of property and equipment	$	566	$	322	$	244			75.8	%
Amortization of acquired intangible assets		487		614		(127	)		-20.7	%

Depreciation and amortization — operating expense	$	1,053	$	936	$	117			12.5	%

Depreciation expense included in cost of revenues increased compared to the prior year as a result of an review of the net book value of inventory and HHE rental equipment assets during the current quarter. Certain assets were written off and thus contributed to an increase depreciation expense during the three-month period ended September 30, 2008 compared to the same period in the prior year.

Depreciation and amortization of property and equipment increased slightly during the three-month period ended September 30, 2008 compared to the prior year, primarily as a result of depreciation of computer software equipment and leasehold improvements subsequent to the JASCORP acquisition. Amortization of acquired intangible assets decreased 20.7%, primarily as a result of the completion of certain intangible asset amortization during fiscal year 2009.

Interest Expense and Income

The following summarizes net interest expense for the three-month periods ended September 30, (in thousands):


							$ Increase/			% Increase/
	2008			2007			(Decrease)			(Decrease)

Interest expense	$	1,068		$	978		$	90			9.2	%
Interest income		(14	)		(29	)		(15	)		-51.7	%

	$	1,054		$	949		$	105			11.1	%

The average interest bearing liabilities balance (balance at the beginning of the period plus the balance at the end of the period divided by two) for the three-month period ended September 30, 2008 was $36.9 million compared to $37.6 million for the same period in the prior year. The decrease in interest expense related to the decrease in the average balance of total interest bearing liabilities was offset by amortization of deferred financing costs and debt discount of $246,000, which accounted for the slight increase in net interest expense compared the comparable periods.

Income Taxes

Income tax expense was $198,000 for the three-month period ended September 30, 2008 compared to $7,000 for the three-month period ended September 30, 2007, an increase of $191,000. The income tax expense is primarily the result of state income tax liabilities of the subsidiary operating companies. Additionally, the State of Michigan changed the method of taxation for businesses effective January 1, 2008. Previous to this change, the expense related to the Single Business Tax (“SBT”) was primarily a tax on compensation. The cost of revenues for the Services segment is primarily compensation and, as such, the SBT expense was included in the cost of revenues. Effective January 1, 2008, the expenses associated with the new Michigan Business Tax were recorded in the Income Tax line item due to its primary taxation on income as opposed to compensation.

Loss from Discontinued Operations

As noted in Note 3 to the Company’s Consolidated Financial Statements under Item 1 of this Report, the Company divested several entities beginning in the second quarter of fiscal 2008. As such, the prior period consolidated statements of operations have been recast to conform to this presentation. The loss from discontinued operations for the three-month and six-month periods ended September 30, 2007 was $4.9 million and $8.7 million, respectively.

Six-Month Period Ended September 30, 2008 Compared to the Six-Month Period Ended September 30, 2007

Results of Continuing Operations, (in thousands, except share amounts)


	Six-Month Period
	Ended September 30,
	2008			2007

Revenues, net	$	74,308		$	75,993
Cost of revenues		48,399			51,900

Gross profit		25,909			24,093

Selling, general and administrative expenses		27,913			28,079
Depreciation and amortization		1,810			1,784

Total operating expenses		29,723			29,863


Operating loss		(3,814	)		(5,770	)
Other expenses		2,313			2,122

Net loss before income tax expense		(6,127	)		(7,892	)
Income tax expense		394			23

Net loss from continuing operations	$	(6,521	)	$	(7,915	)

Weighted average number of shares — basic and diluted		132,357,000			119,250,000
Net loss from continuing operations per share — basic and diluted	$	(0.05	)	$	(0.07	)

Revenues, Cost of Revenues and Gross Profits

The following summarizes revenues, cost of revenues and gross profits by segment for the six-month periods ended September 30, (in thousands):


														%
			% of Total					% of Total			$ Increase/			Increase/
	2008		Revenue			2007		Revenue			(Decrease)			(Decrease)

Revenues, net:
Services	$	59,870		80.6	%	$	62,378		82.1	%	$	(2,508	)		-4.0	%
Home Health Equipment		11,034		14.8	%		10,426		13.7	%		608			5.8	%
Pharmacy		3,404		4.6	%		3,189		4.2	%		215			6.7	%

		74,308		100.0	%		75,993		100.0	%		(1,685	)		-2.2	%


Cost of revenues:
Services	$	42,549				$	45,857				$	(3,308	)		-7.2	%
Home Health Equipment		3,708					3,703					5			0.1	%
Pharmacy		2,142					2,340					(198	)		-8.5	%

		48,399					51,900					(3,501	)		-6.7	%


			Gross					Gross
			Margin %					Margin %
Gross margins:
Services		17,321		28.9	%		16,521		26.5	%		800	4.8	%
Home Health Equipment		7,326		66.4	%		6,723		64.5	%		603	9.0	%
Pharmacy		1,262		37.1	%		849		26.6	%		413	48.6	%

	$	25,909		34.9	%	$	24,093		31.7	%	$	1,816	7.5	%

The Services segment remains the largest source of revenue for the Company. Total revenue in the Services segment during the first six months of fiscal 2009 was $59.9 million, a 4.0% decline from the same period of the prior year. Home care, medical staffing and industrial staffing revenues represented 50.8%, 29.9% and 19.3%, respectively, of Services revenues for the six-months ended September 30, 2008, compared with 43.3%, 36.0% and 20.7%, respectively, for the same period last year.

The Company continues to generate higher sales from its home care business. During the first six months of fiscal 2009, home care revenues increased approximately 12% over the same period a year ago. A majority of this increase represents organic growth in several of the Company’s main geographic markets. The increase in sales included growth in government programs served, as well as private pay and insurance clients.

The growth in home care revenues was more than offset by significant year-over-year declines in revenue in the medical staffing and industrial staffing markets, which declined by approximately 20% and 15%, respectively, as compared with the prior year. Demand for per diem medical and travel nurse staffing services is at lower levels than the same period a year ago, with patient censuses down in many of the markets and facilities serviced by the Company’s offices. Economic conditions have also caused part-time staff in these facilities to increase work hours, and full-time staff to accept more overtime hours, thus reducing the demand for temporary staffing. Industrial staffing has declined significantly due to economic conditions in Michigan, the Company’s primary industrial staffing market, offset by growth in the new Mid-Atlantic region now being served by the Company. One customer accounted for a decrease in the industrial staffing revenue of approximately $3.0 million during the six month period ended September 30, 2008 compared with the prior year.

Gross margins in the Services segment increased from 26.5% in the first six months of fiscal 2008 to 28.9% in the same current period. The cost of revenues in this segment consists primarily of employee costs, including wages, taxes, fringe benefits and workers’ compensation expense. The year-over-year improvement in gross margins was driven primarily by two factors. The first was a reduction in workers’ compensation expense, reflecting the success of the Company’s on-going efforts to control and reduce these costs through improved training, timelier reporting and investigation of claims, and reduced administrative costs. The second factor was the increased mix of home care revenue as a percentage of sales, with margins in this market being significantly higher than gross margins in the medical staffing and industrial staffing.

The increase in HHE net sales revenue of $608,000 for the six-month period ended September 30, 2008 compared to the same period a year ago reflects a reduction in the level of contractual adjustments made to gross sales versus the same period of fiscal 2008. Management has reviewed historical adjustments, including those related to the fiscal year 2007 Medicare provider number deactivation issues, and has updated its model for classifying both contractual adjustments and bad debt provisions based on a detailed analysis of the HHE segment’s recent billing and collection history.

The revenue in the Pharmacy segment remained relatively flat compared to the first six months of fiscal 2008. The Company has launched its DailyMed™ medication management program and is pursuing opportunities with government entities, managed care organizations, assisted living and group home facilities, existing home care and HHE customers and in direct-to-consumer initiatives. The Company is working with the Indiana Medicaid program and its managed care providers to identify those Care Select enrollees who will benefit most from participation in the DailyMed™ program.

Selling, General and Administrative

The following summarizes selling, general and administrative expenses by segment for the six-month periods ended September 30, (in thousands):


				% of						% of						%
				Total						Total			$ Increase/			Increase/
	2008			SG&A			2007			SG&A			(Decrease)			(Decrease)

Services	$	13,645			48.9	%	$	13,968			49.7	%	$	(323	)		-2.3	%
Home Health Equipment		6,321			22.6	%		7,725			27.5	%		(1,404	)		-18.2	%
Pharmacy		2,659			9.5	%		1,331			4.7	%		1,328			99.8	%
Corporate		5,288			18.9	%		5,055			18.0	%		233			4.6	%

	$	27,913			100.0	%	$	28,079			100.0	%		($166	)		-0.6	%


SG&A as % of Net Revenues		37.6	%					36.9	%

The Services segment selling, general and administrative expense decreased primarily due to a decrease in selling expenses, which include commissions paid to the affiliate agencies. These commissions are based on the gross margins of the individual affiliates, and the decrease reflects a decrease in revenues and gross margins for the six-month period ended September 30, 2008 compared to the same period for the prior year. In addition to the reduction in selling expenses, the Services selling, general and administrative expenses decreased due to a change in classification of certain functions in the Southfield, Michigan support office as more fully discussed below.

The decrease in the HHE segment selling, general and administrative expense was primarily due to the closure of the Orlando, Florida administrative support office in November 2007. The Orlando office housed the HHE accounting, IT and compliance functions. The Company consolidated these HHE support functions with the Services support function located in Southfield, Michigan beginning in the third quarter of fiscal 2008. This consolidation resulted in decreased employee and location costs in the HHE segment.

The increase in the Pharmacy segment selling, general and administrative expense was due to the following:

	•		A full six months of expenses subsequent to the JASCORP acquisition in July 2007; and

	•		The Company’s investment in the infrastructure and additional employees that will be necessary to support the anticipated growth in the Pharmacy segment during fiscal 2009.

The increase in Corporate selling, general and administrative expense was due to the following:

	•		A change in the classification of certain employees who were previously included in the Services segment to Corporate. Historically, employees in the Southfield, Michigan location supported the Services segment almost exclusively. During fiscal 2008, the Company centralized many of its corporate functions in Southfield, Michigan, and these employees now support the entire organization. Beginning in fiscal 2009, the Company began to more accurately separate and record these corporate functions from the segment specific functions; and

	•		Severance expense relating to two former executives.

These increases were partially offset by the following:

•

In the third quarter of fiscal 2008, the Company hired an in-house legal counsel, and since this hiring, the Company’s legal fees have decreased significantly. Additionally, audit fees and fees relating to Sarbanes-Oxley requirements decreased due to improved efficiencies and general fee reduction efforts.

•

The reduction of equity compensation expense. During the three-month period ended September 30, 2007, the Company recognized approximately $700,000 relating to the vesting of certain stock options consistent with the former CEO’s separation agreement executed in July 2007.

Depreciation and Amortization

The following summarizes depreciation and amortization expense from continuing operations for the six-month periods ended September 30, (in thousands):


					$ Increase/			% Increase/
	2008		2007		(Decrease)			(Decrease)

Depreciation — cost of revenues	$	1,430	$	1,190	$	240			20.2	%

Depreciation and amortization of property and equipment	$	867	$	596	$	271			45.5	%
Amortization of acquired intangible assets		943		1,188		(245	)		-20.6	%

Depreciation and amortization — operating expense	$	1,810	$	1,784	$	26			1.5	%

Depreciation expense included in cost of revenues increased by 20.2% during the six-month period ended September 30, 2008 compared to the prior year as a result of increased depreciation expense due to an increase in HHE rental equipment purchases in recent quarters and certain inventory and rental equipment written off due to these assets converts to sales to customers.

Depreciation and amortization of property and equipment increased slightly during the six-month period ended September 30, 2008 compared to the prior year, primarily as a result of depreciation of computer software equipment and leasehold improvements subsequent to the JASCORP acquisition. Amortization of acquired intangible assets decreased 20.6%, primarily as a result of the completion of certain intangible asset amortization during fiscal year 2009.

Interest Expense and Income

The following summarizes net interest expense for the six-month periods ended September 30, (in thousands):


							$ Increase/			% Increase/
	2008			2007			(Decrease)			(Decrease)

Interest expense	$	2,042		$	2,181		$	(139	)		-6.4	%
Interest income		(32	)		(73	)		(41	)		-56.2	%

	$	2,010		$	2,108		$	(98	)		-4.6	%

The average interest bearing liabilities balance (balance at the beginning of the period plus the balance at the end of the period divided by two) for the six-month period ended September 30, 2008 was $38.4 million compared to $41.2 million for the six-month period ended September 30, 2007. The reduction in the average balance reflects a $2.8 million reduction of total interest bearing liabilities for the comparable periods. Additionally, the decrease in the prime rate of 325 basis points over the last 12 months has contributed to the reduction in interest expense.

Income Taxes

Income tax expense was $394,000 for the six-month period ended September 30, 2008 compared to $23,000 for the six-month period ended September 30, 2007, an increase of $371,000. The income tax expense is primarily the result of state income tax liabilities of the subsidiary operating companies. Additionally, the State of Michigan changed the method of taxation for businesses effective January 1, 2008. Previous to this change, the expense related to the Single Business Tax (“SBT”) was primarily a tax on compensation. The cost of revenues for the Services segment is primarily compensation and, as such, the SBT expense was included in the cost of revenues. Effective January 1, 2008, the expenses associated with the new Michigan Business Tax were recorded in the Income Tax line item due to its primary taxation on income as opposed to compensation.

Due to the Company’s losses in recent years, it has paid nominal federal income taxes. For federal income tax purposes, the Company had significant permanent and timing differences between book income and taxable income resulting in combined net deferred tax assets of $19.2 million to be utilized by the Company for which an offsetting valuation allowance has been established for the entire amount. The Company has a net operating loss carryforward for tax purposes totaling $43.3 million that expires at various dates through 2028. Internal Revenue Code Section 382 rules limit the utilization of certain of these net operating loss carryforwards upon a change of control of the Company. It has been determined that a change in control took place at the time of the reverse merger in 2004, and as such, the utilization of $700,000 of the net operating loss carryforwards will be subject to severe limitations in future periods.

Liquidity and Capital Resources

Working capital, which represents current assets less current liabilities, was $18.5 million at September 30, 2008 compared to $24.9 million at March 31, 2008.

The following summarizes the Company’s cash flows for the six-month periods ended September 30, (in thousands):


	2008			2007

Net cash used in operating activities	$	(27	)	$	(8,010	)
Net cash provided by (used in) investing activities		(516	)		4,288
Net cash provided by (used in) financing activities		(3,514	)		2,476
Net change in cash and cash equivalents		(4,057	)		(1,246	)
Cash and cash equivalents, end of period		2,294			1,748
Availability under line of credit agreements	$	1,818		$	5,048

Total cash and cash equivalents decreased by $4.1 million from March 31, 2008 to $2.3 million during the six-month period ended September 30, 2008. At September 30, 2008, the Company had $1.8 million in additional line of credit availability, which results in $4.1 million in cash and availability. The line of credit availability at September 30, 2007 included a line that was closed by the Company on March 31, 2008 and replaced by financing. The decrease in cash during the six-month period ended September 30, 2008 includes a $3.0 million reduction in the line of credit balance and a $558,000 decrease in debt and capital lease obligations. The line of credit balance fluctuates based on working capital needs.

Net cash used in operating activities of $27,000 for the six-month period ended September 30, 2008 represents a significant improvement compared to the use of $8.0 million for the same period in the prior year. The improvement was primarily due to the reduction in the net loss by $10.0 million. The loss from discontinued operations during the six-month period ended September 30, 2007 accounted for $8.7 million of the total $16.6 million net loss during the period. The improvement in cash flows for operations during the six-month period ended September 30, 2008 reflects an increased emphasis on day-to-day cash management while investing in the pharmacy segment in anticipation of the increased volume from the Company’s growth strategies associated with DailyMed™.

Cash used in investing activities for the six-month period ended September 30, 2008 included $429,000 of cash paid for acquisitions in the Services segment and $462,000 of capital expenditures. The $429,000 used for business acquisitions includes the $245,000 for current year acquisitions while the remaining $184,000 represents payments associated with acquisitions made in previous periods. Additionally, in September 2008, the Company received a final payment of $356,000 relating to the sale of its Florida HHE operations during fiscal 2008. Cash provided by investing activities for the six-month period ended September 30, 2007 included $5.8 million received upon the sale of the Florida and Colorado HHE operations, offset by $384,000 used to purchase JASCORP, LLC.

Cash used in financing activities for the six-month period end September 30, 2008 consisted of debt payments, including the reduction in the outstanding balance on the lines of credit. The $3.0 million reduction in the line of credit balance primarily reflects the timing of cash receipts and disbursements. Available cash is used to reduce the line of credit balance, and the available cash can fluctuate significantly on a daily basis. During the six-month period ended September 30, 2007, the Company raised $12.4 million in cash through a private placement of its common stock. Approximately $5.6 million and $4.3 million of these proceeds and proceeds from the sale of Florida and Colorado HHE locations, respectively, were used to pay down outstanding debt.

If the Company sells assets, other than inventory in the ordinary course of business, it is required to use a portion of the proceeds to pay down the outstanding JANA debt. Specifically, the Company must remit to JANA 50% of the net proceeds on the sale of assets up to $10 million and 75% of the net proceeds to the extent that the aggregate net proceeds exceed $10 million.

Net accounts receivable were $26.0 million at September 30, 2008 compared to $24.7 million at March 31, 2008. The Services and HHE segments account for 82% and 16%, respectively, of total accounts receivable at September 30, 2008 compared to 80% and 17% at March 31, 2008.

The Company has a limited number of customers with individually large amounts due at any given balance sheet date. The Company’s payer mix for the six-month period ended September 30, 2008 was as follows:


Medicare	8	%
Medicaid/other government	16	%
Commercial Insurance	12	%
Institution/Facilities	40	%
Private Pay	24	%

In order for the Company and its subsidiaries to receive reimbursement from Medicare for goods and services provided, appropriate provider numbers and billing codes must be maintained and active. As part of its need to update information required to keep these provider numbers and billing codes active, the Company submits information to the Centers for Medicare and Medicaid Services (“CMS”). During the CMS review process, the Company has from time to time experienced temporary deactivation of some provider numbers and/or billing codes needed to obtain timely reimbursement from Medicare. The temporary deactivation has resulted in a delay in reimbursement, which impacts the Company’s cash collections. Generally, the Company obtains reimbursement retroactive to the date of deactivation. However, there is some risk that revenues recognized during the deactivation period may not ultimately be reimbursed. The delayed cash collection can adversely impact the Company’s short-term liquidity. As of September 30, 2008, the amounts associated with these reimbursement delays are not considered material.

Recent Accounting Pronouncements

Please see Note 1 of this Report for recent accounting pronouncements that may have an impact on the Company’s financial statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

The majority of our cash balances are held primarily in highly liquid commercial bank accounts. The Company utilizes lines of credit to fund operational cash needs. The risk associated with fluctuating interest rates is primarily limited to our borrowings. We do not believe that a 10% change in interest rates would have a significant effect on our results of operations or cash flows. All our revenues since inception have been in the U.S. and in U.S. Dollars; therefore, we have not yet adopted a strategy for the future currency rate exposure as it is not anticipated that foreign revenues are likely to occur in the near future.

Item 4. Controls and Procedures.

The Company maintains a system of disclosure controls and procedures which are designed to ensure that information required to be disclosed by the Company in reports that it files or submits to the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), including this report, is recorded, processed, summarized and reported on a timely basis. These disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed under the Exchange Act is accumulated and communicated to the Company’s management on a timely basis to allow decisions regarding required disclosure.

As of September 30, 2008, the Company’s management, including the Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), conducted an evaluation of the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Based on this evaluation, the CEO and CFO have concluded that the Company’s disclosure controls and procedures are effective.

There has been no change in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended September 30, 2008 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings.

We are a defendant from time to time in lawsuits incidental to our business in the ordinary course of business. We are not currently subject to, and none of our subsidiaries are subject to, any material legal proceedings.

Item 1A. Risk Factors.

In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the Risk Factors included in Part I, “Item 1A. — “Risk Factors” of our Annual Report on Form 10-K for the year ended March 31, 2008, and the additional Risk Factors set forth below. These Risk Factors could materially impact our business, financial condition and/or operating results. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely impact our business, financial condition and/or operating results.

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.

The market price of our common stock, like that of the securities of many other companies with limited operating history and public float, has fluctuated over a wide range, and it is likely that the price of our common stock will fluctuate in the future. The closing price of our common stock, as quoted by the American Stock Exchange (AMEX) beginning July 3, 2006 through October 22, 2008, has fluctuated from a low of $0.15 to a high of $3.50. From October 22, 2007 through October 22, 2008, our common stock has fluctuated from a low of $0.15 to a high of $2.34. Limited demand for our common stock has resulted in limited liquidity, and it may be difficult to dispose of the Company’s securities. Due to the volatility of the price our common stock, an investor may be unable to resell shares of our common stock at or above the price paid for them, thereby exposing an investor to the risk that he may not recoup an investment in our Company or earn a return on an investment. In the past, securities class action litigation has been brought against companies following periods of volatility in the market price of their securities. If we are the target of similar litigation in the future, our Company would be exposed to incurring significant litigation costs. This would also divert management’s attention and resources, all of which could substantially harm our business and results of operations.

To the extent we do not generate adequate cash flow from operations, we may need to raise additional cash through equity or debt financing, both of which may be difficult due to the Company’s current capital structure and stock price.

We raised $5.0 million in additional debt financing in March 2008. While we believe this funding, along with other lines of available credit, will enable us to fund our plans for fiscal 2009, we may have additional cash needs during the course of the year. It may be difficult to raise additional cash through debt financing due to our current outstanding debt level (lines of credit, notes payable and capital lease obligations) of $37.5 million. Further, due to our recent stock price and volatility as well as the total number of common shares outstanding and available, additional equity financing may not be attractive or possible. If we were unable to raise additional cash, we may need to modify or abandon our growth strategy or may need to eliminate certain product or service offerings. Higher financing costs, modification or abandonment of our growth strategy, or the elimination of product or service offerings could negatively impact our profitability and financial position, which in turn could negatively impact the price of our common stock and shareholder value.

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

Recent federal legislative changes contain provisions that will directly impact reimbursement for some of the products supplied by the HHE segment, including oxygen equipment. Over the past several years federal legislative changes implemented by the Centers for Medicare and Medicaid Services (“CMS”) have

included the Medicare, Medicaid and SCHIP Extension Act of 2007; the Deficit Reduction Act of 2005; and the Medicare Prescription Drug, Improvement and Modernization Act of 2003. Under these new provisions, the most significant changes for our HHE segment were to have included (a) establishment of competitive bidding areas (“CBA’s”) for certain HHE products, starting in ten metropolitan statistical areas (“MSAs”) in 2008 and extending to additional MSAs in 2009 and beyond; (b) quality standards and accreditation requirements for participants in the competitive bidding program; (c) capped rental payments limiting the period of time for which the Company may be reimbursed for oxygen equipment supplied to its customers to 36 months, and required transfer of title to such equipment to the client after the 36 month reimbursement cap was reached; and (d) reductions in the reimbursement levels for certain inhalation drugs.

In April 2007 CMS issued its final rule implementing the first round of the competitive bidding program in ten of the largest MSA’s across the country, applying initially to ten categories of HHE and medical supplies. This first round of competitive bidding included a CBA in which one of the Company’s fourteen HHE businesses was located. CMS announced the winning suppliers in March 2008. The Company was not a winning supplier of the product categories for which we submitted bids.

On January 8, 2008, CMS announced the next 70 MSAs and the applicable product categories for the second round of the competitive bidding program for certain HHE products under Medicare Part B. CMS stated that it planned to announce the specific zip codes included in each of the respective MSA for the second round of competitive bidding during the second quarter of 2008.

In July 2008, the Unites States Congress enacted the Medicare Improvements for Patients and Providers Act of 2008 (“MIPPA”). Among other things, MIPPA (1) terminates contracts awarded in the first round of competitive bidding; (2) delays the first round of competitive bidding until 2009 and requires changes to the program be adopted prior to its re-implementation; (3) delays the second round of competitive bidding to after 2011; (4) retains the 36 month cap on reimbursement for oxygen equipment rentals, but deletes the requirement that title to such equipment be transferred to the patient at that time; and (5) implements effective January 1, 2009 a 9.5% reduction in reimbursement for certain HHE items supplied anywhere in the United States. On October 30, 2008, CMS announced that providers would be reimbursed for providing one in-home routine maintenance and servicing visit for oxygen concentrators every six months, beginning six months after the end of the 36 month rental period. This rule will be in effect for calendar year 2009 and CMS is soliciting comments about whether such payments should continue after 2009.

The Company is evaluating the impact of these changes on its existing business. The changes will reduce reimbursement levels for certain HHE equipment, which will adversely impact revenues and margins starting in the fourth quarter of fiscal 2009. While these changes are not expected to have a material adverse change on the net revenues, operating income and cash flows of the Company as a whole in fiscal 2009 as compared to fiscal 2008, the impact of these and possible future legislative changes could have a material adverse impact on the net revenues, operating income and cash flow of the HHE segment, starting in January 2009 and continuing into future periods. The company continually evaluates opportunities to increase revenue and reduce costs in response to these and other changes affecting the HHE business. These initiatives, if successful, will mitigate the impact of these changes on the net revenues and margins realized in the Company’s HHE segment. Moreover, until such time that the competitive bid program is implemented, bids are awarded in the applicable CBA’s and the associated fee schedules and participating providers are announced, we will not be able to determine the impact of MIPPA nor can we predict the effect the process will have on our ability to continue to provide products to Medicare beneficiaries in one or more of the markets we currently serve.

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

During the quarter ended September 30, 2008, the following matter was submitted by us to a vote of our security holders at the Company’s 2008 Annual Meeting of Stockholders held on September 5, 2008.

1. The following individuals were elected as Class B Directors serving for a three (3) year term:


					Percentage of
					Votes Cast in
	For		Withheld		Favor of:
Joseph Mauriello		96,303,241		552,139		99.4	%
Daniel Eisenstadt		96,259,641		595,739		99.4	%

Item 5. Other Information.

On November 5, 2008, the Company’s Board of Directors amended its Bylaws to delete a provision providing an exception to the application of Nevada Revised Statutes Sections 78.378 through and including 78.793 to an acquisition of a controlling interest in the Company by either of two parties identified as the “Shareholders” to a certain Voting Agreement, dated May 7, 2004 (which Voting Agreement is no longer in effect). The Bylaws of the Company, as restated to incorporate the amendment made on November 5, 2008, is attached as Exhibit 3.2 and incorporated by this reference.

On November 5, 2008, the Company’s Board of Directors adopted and approved the Arcadia Resources, Inc. Board of Director Compensation for October 1, 2008 to September 30, 2009, attached hereto as Exhibit 10.1.

Item 6. Exhibits.

The Exhibits included as part of this report are listed in the attached Exhibit Index, which is incorporated herein by this reference.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.



November 6, 2008	By:	/s/ Marvin R. Richardson
		Marvin R. Richardson
		Chief Executive Officer (Principal Executive Officer) and Director


November 6, 2008	By:	/s/ Matthew R. Middendorf
		Matthew R. Middendorf
		Treasurer and Chief Financial Officer (Principal Financial and Accounting Officer)

EXHIBIT INDEX

The following documents are filed as part of this report. Exhibits not required for this report have been omitted. The Company’s Commission file number is 000-32935.


Exhibit
No.		Exhibit Description

3.2		Amended and restated Bylaws of Arcadia Resources, Inc. (November 5, 2008)

10.1		Arcadia Resources, Inc. Board of Director Compensation for October 1, 2008 to September 30, 2009

31.1		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.