UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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þ
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Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
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For the quarterly period ended September 30, 2010
OR
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o
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Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
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For the Transition period from
to
Commission file number 001-32935
ARCADIA RESOURCES, INC.
(Exact name of registrant as specified in its charter)
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NEVADA
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88-0331369
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(State or other jurisdiction of Incorporation)
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(I.R.S. Employer Identification
Number)
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9320 PRIORITY WAY WEST DRIVE
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INDIANAPOLIS, INDIANA
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46240
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(Address of principal executive offices)
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(Zip Code)
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Registrants 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 has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). YES
o
NO
o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer,
non-accelerated filer or a smaller reporting company (as defined in Exchange Act Rule 12b-2).
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Large Accelerated filer
o
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Accelerated filer
þ
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Non-accelerated filer
o
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Smaller Reporting Company
o
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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 November 8, 2010, 193,053,000 shares of common stock, $0.001 par value, of the Registrant
were outstanding.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ARCADIA RESOURCES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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September 30,
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March 31,
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2010
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2010
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(unaudited)
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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1,704
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$
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5,444
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Accounts receivable, net of allowance of $2,309 and $2,623, respectively
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12,184
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12,290
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Inventories, net
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1,357
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917
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Prepaid expenses and other current assets
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1,995
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1,551
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Current assets of discontinued operations
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155
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174
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Total current assets
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17,395
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20,376
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Property and equipment, net
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1,801
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1,738
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Goodwill
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2,500
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2,500
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Acquired intangible assets, net
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7,384
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7,670
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Other assets
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426
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412
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Restricted cash
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500
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500
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Total assets
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$
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30,006
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$
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33,196
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LIABILITIES AND STOCKHOLDERS DEFICIT
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Current liabilities:
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Accounts payable
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$
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1,836
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$
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2,859
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Accrued expenses:
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Compensation and related taxes
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2,629
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3,184
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Interest
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38
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82
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Health insurance
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507
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463
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Other
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1,539
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1,507
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Fair value of warrant liability
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1,635
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1,499
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Payable to affiliated agencies
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502
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1,076
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Long-term obligations, current portion
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189
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939
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Capital lease obligations, current portion
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43
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69
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Current liabilities of discontinued operations
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117
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308
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Total current liabilities
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9,035
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11,986
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Lines of credit
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12,186
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7,774
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Long-term obligations, less current portion
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26,471
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25,192
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Capital lease obligations, less current portion
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12
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19
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Total liabilities
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47,704
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44,971
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Commitments and contingencies
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STOCKHOLDERS DEFICIT
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Preferred stock, $.001 par value, 5,000,000 shares authorized, none outstanding
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Common stock, $.001 par value, 300,000,000 shares authorized; 177,428,044
shares and 177,918,044 shares issued, respectively
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177
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178
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Additional paid-in capital
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146,396
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145,381
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Accumulated deficit
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(164,271
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)
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(157,334
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)
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Total stockholders deficit
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(17,698
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)
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(11,775
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)
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Total liabilities and stockholders deficit
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$
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30,006
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$
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33,196
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See accompanying notes to these consolidated financial statements.
2
ARCADIA RESOURCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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Three Month Period Ended
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Six Month Period Ended
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September 30,
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September 30,
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(Unaudited)
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(Unaudited)
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2010
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2009
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2010
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2009
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Services
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$
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20,931
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$
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21,709
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$
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41,295
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$
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44,389
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Pharmacy
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4,911
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3,408
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9,965
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6,625
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Revenues, net
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25,842
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25,117
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51,260
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51,014
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Cost of revenues
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18,797
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17,923
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37,453
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36,549
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Gross profit
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7,045
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7,194
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13,807
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14,465
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Selling, general and administrative
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9,581
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9,878
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19,315
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19,329
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Depreciation and amortization
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326
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531
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634
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942
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Total operating expenses
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9,907
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10,409
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19,949
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20,271
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Operating loss
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(2,862
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)
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|
(3,215
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)
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(6,142
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)
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(5,806
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)
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Other expenses:
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Interest expense, net
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980
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846
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1,823
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1,684
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Change in fair value of warrant liability
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(779
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)
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(137
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)
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Other
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(6
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)
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30
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|
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|
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Total other expenses
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|
|
201
|
|
|
|
840
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|
|
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1,686
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|
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1,714
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|
|
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Loss from continuing operations before income taxes
|
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(3,063
|
)
|
|
|
(4,055
|
)
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(7,828
|
)
|
|
|
(7,520
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)
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|
|
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|
|
|
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|
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Income tax expense
|
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|
40
|
|
|
|
7
|
|
|
|
73
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Loss from continuing operations
|
|
|
(3,103
|
)
|
|
|
(4,062
|
)
|
|
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(7,901
|
)
|
|
|
(7,620
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)
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|
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|
|
|
|
|
|
|
|
|
|
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|
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Discontinued operations:
|
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|
|
|
|
|
|
|
|
|
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Loss from discontinued operations
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(52
|
)
|
|
|
(248
|
)
|
|
|
(82
|
)
|
|
|
(1,477
|
)
|
Net gain on disposal
|
|
|
259
|
|
|
|
163
|
|
|
|
1,046
|
|
|
|
379
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
207
|
|
|
|
(85
|
)
|
|
|
964
|
|
|
|
(1,098
|
)
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|
|
|
|
|
|
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|
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|
|
|
|
|
|
|
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|
|
|
|
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NET LOSS
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$
|
(2,896
|
)
|
|
$
|
(4,147
|
)
|
|
$
|
(6,937
|
)
|
|
$
|
(8,718
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Weighted average number of common shares outstanding
|
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|
177,295
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|
|
|
161,201
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|
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177,267
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160,709
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|
|
|
|
|
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Basic and diluted net loss per share:
|
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|
|
|
|
|
|
|
|
|
|
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|
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Loss from continuing operations
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$
|
(0.02
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.05
|
)
|
Income (loss) from discontinued operations
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|
|
|
|
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|
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|
|
|
|
|
|
|
|
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|
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|
|
|
|
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Net loss per share
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|
$
|
(0.02
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.05
|
)
|
|
|
|
|
|
|
|
|
|
|
|
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|
See accompanying notes to these condensed consolidated financial statements.
3
ARCADIA RESOURCES, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS DEFICIT
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(Unaudited)
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|
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|
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|
|
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|
|
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Additional
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Total
|
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|
|
Common Stock
|
|
|
Paid-In
|
|
|
Accumulated
|
|
|
Stockholders
|
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|
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Shares
|
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Amount
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|
|
Capital
|
|
|
Deficit
|
|
|
Deficit
|
|
Balance, April 1, 2010
|
|
|
177,918,044
|
|
|
$
|
178
|
|
|
$
|
145,381
|
|
|
$
|
(157,334
|
)
|
|
$
|
(11,775
|
)
|
Stock-based compensation expense
|
|
|
106,250
|
|
|
|
|
|
|
|
753
|
|
|
|
|
|
|
|
753
|
|
Issuance of warrants in conjunction with debt financing
|
|
|
|
|
|
|
|
|
|
|
260
|
|
|
|
|
|
|
|
260
|
|
Exercise of stock options
|
|
|
3,750
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
1
|
|
Cancellation of shares held in escrow
|
|
|
(600,000
|
)
|
|
|
(1
|
)
|
|
|
1
|
|
|
|
|
|
|
|
|
|
Net loss for the period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,937
|
)
|
|
|
(6,937
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2010
|
|
|
177,428,044
|
|
|
$
|
177
|
|
|
$
|
146,396
|
|
|
$
|
(164,271
|
)
|
|
$
|
(17,698
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to these condensed consolidated financial statements.
4
ARCADIA RESOURCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
|
|
|
|
|
|
|
|
|
|
|
Six-Month Period Ended
|
|
|
|
September 30,
|
|
|
|
(Unaudited)
|
|
|
|
2010
|
|
|
2009
|
|
Operating activities
|
|
|
|
|
|
|
|
|
Net loss for the period
|
|
$
|
(6,937
|
)
|
|
$
|
(8,718
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Provision for doubtful accounts
|
|
|
351
|
|
|
|
1,155
|
|
Depreciation of property and equipment
|
|
|
348
|
|
|
|
912
|
|
Amortization of intangible assets
|
|
|
286
|
|
|
|
405
|
|
Gain on business disposals
|
|
|
(1,046
|
)
|
|
|
(379
|
)
|
Non-cash interest expense
|
|
|
1,392
|
|
|
|
1,224
|
|
Amortization of deferred financing costs and debt discounts
|
|
|
190
|
|
|
|
121
|
|
Stock-based compensation expense
|
|
|
753
|
|
|
|
551
|
|
Change in fair value of warrant liability
|
|
|
(137
|
)
|
|
|
|
|
Changes in operating assets and liabilities, net of acquisitions:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(260
|
)
|
|
|
2,440
|
|
Inventories
|
|
|
(437
|
)
|
|
|
904
|
|
Other assets
|
|
|
(413
|
)
|
|
|
821
|
|
Accounts payable
|
|
|
(1,274
|
)
|
|
|
(1,449
|
)
|
Accrued expenses
|
|
|
(536
|
)
|
|
|
(957
|
)
|
Due to affiliated agencies
|
|
|
(564
|
)
|
|
|
(277
|
)
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(8,284
|
)
|
|
|
(3,247
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities
|
|
|
|
|
|
|
|
|
Business acquisitions, net of cash acquired
|
|
|
(106
|
)
|
|
|
(196
|
)
|
Proceeds from business disposal
|
|
|
1,046
|
|
|
|
9,320
|
|
Increase in restricted cash
|
|
|
|
|
|
|
(500
|
)
|
Purchases of property and equipment
|
|
|
(411
|
)
|
|
|
(96
|
)
|
|
|
|
|
|
|
|
Net cash provided by investing activities
|
|
|
529
|
|
|
|
8,528
|
|
|
|
|
|
|
|
|
|
Financing activities
|
|
|
|
|
|
|
|
|
Lines of credit, net activity
|
|
|
4,798
|
|
|
|
(4,610
|
)
|
Proceeds from note payable, net of fees
|
|
|
|
|
|
|
2,141
|
|
Payments on notes payable and capital lease obligations
|
|
|
(784
|
)
|
|
|
(4,334
|
)
|
Proceeds from exercise of stock options
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
4,015
|
|
|
|
(6,803
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
|
(3,740
|
)
|
|
|
(1,522
|
)
|
Cash and cash equivalents, beginning of period
|
|
|
5,444
|
|
|
|
1,522
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
1,704
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplementary information:
|
|
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
247
|
|
|
$
|
322
|
|
Income taxes
|
|
|
73
|
|
|
|
100
|
|
Non-cash investing / financing activities:
|
|
|
|
|
|
|
|
|
Capital lease
|
|
|
|
|
|
|
70
|
|
Accounts payable converted to notes payable
|
|
|
|
|
|
|
750
|
|
Accrued interest converted to notes payable
|
|
|
1,392
|
|
|
|
1,224
|
|
See accompanying notes to these consolidated financial statements.
5
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 care, medical staffing and pharmacy services operating
under the service mark Arcadia HealthCare. In May and June 2009, the Company disposed of its Home
Health Equipment (HHE), retail pharmacy software and industrial staffing businesses. In October
2010, the Company disposed of its home-health oriented mail-order catalog and website business
(Catalog). Subsequent to these divestitures, the Company operates in two reportable business
segments: Home Care/Medical Staffing Services (Services) and Pharmacy. The Companys corporate
headquarters are located in Indianapolis, Indiana. The Company conducts its business from
approximately 65 facilities located in 18 states. The Company operates pharmacies in Indiana,
California and Minnesota and has customer service centers in Michigan and Indiana.
Unaudited Interim Financial Information
The accompanying consolidated balance sheet as of September 30, 2010, the consolidated statements
of operations for the three-month and six-month periods ended September 30, 2010 and 2009, the
consolidated statements of cash flows for the six-month periods ended September 30, 2010 and 2009
and the consolidated statement of stockholders deficit for the six-month period ended September
30, 2010 are unaudited but include all adjustments (consisting of normal recurring adjustments)
that are, in the opinion of management, necessary for a fair presentation of our 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, 2010 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, 2010 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, 2010 included in the
Companys Form 10-K filed with the SEC on June 11, 2010.
Reclassifications
Certain amounts presented in prior years have been reclassified to conform to current year
presentations including the reflection of discontinued operations separately from continuing
operations.
Recent Accounting Pronouncements
In June 2009, the FASB issued new guidance which improves and defines the information that a
reporting entity provides in its financial statements about a transfer of financial assets; the
effects of a transfer on its financial position, financial performance, and cash flows; and a
transferors continuing involvement, if any, in transferred financial assets. This new guidance is
effective for financial statements issued for fiscal years beginning after November 15, 2009. The
implementation of this guidance did not have a material impact on the Companys consolidated
financial statements.
In June 2009, the FASB issued new guidance which improves financial reporting by enterprises
involved with variable interest entities. The new guidance is effective for financial statements
issued for fiscal years beginning after November 15, 2009. Adoption did not have a material impact
on the Companys consolidated financial statements.
In October 2009, the FASB issued new guidance which addresses the unit of accounting for
arrangements involving multiple deliverables and addresses how arrangement consideration should be
allocated to the separate units of accounting. Entities also will no longer be permitted to use the
residual method to allocate arrangement consideration to deliverables in an arrangement and rather
requires consideration to be allocated to each unit of account based on a relative selling price
method. The new guidance is effective prospectively for revenue arrangements entered into or
materially modified in fiscal years beginning on or after June 15, 2010 and is not expected to have
a material impact on the Companys consolidated financial statements.
6
In December 2009, the FASB issued revised authoritative guidance associated with the consolidation
of variable interest entities. This revised guidance replaces the current quantitative-based
assessment for determining which enterprise has a controlling interest in a variable interest
entity with an approach that is now primarily qualitative. This qualitative approach focuses on
identifying the enterprise that has (i) the power to direct the activities of the variable interest
entity that can most significantly impact the entitys economic performance; and (ii) the
obligation to absorb losses or the right to receive benefits from the entity that could potentially
be significant to the variable interest entity. This revised guidance also requires an ongoing
assessment of whether an enterprise is the primary beneficiary of a variable interest entity rather
than a reassessment only upon the occurrence of specific events. The revised guidance is effective
for financial statements issued for fiscal years beginning after November 15, 2009. The
implementation of this guidance did not have a material impact on the Companys consolidated
financial statements.
Note 2 Discontinued Operations
Catalog Operations
On October 1, 2010, the Company completed the sale of its ownership interest in Rite at Home Health
Care Products, LLC to Home Health Depot, Inc. The Company is to receive 50% of future earnings of
the business until total payments equal $375,000. 40% of these proceeds are to be paid to a third
party. No earn-out payments will be payable after the quarter ending September 30, 2013. This
entity represented the Companys Catalog segment.
HHE Operations
On May 18, 2009, the Company completed the sale of its ownership interest in Lovell Medical Supply,
Inc., Beacon Respiratory Services of Georgia, Inc., and Trinity Healthcare of Winston-Salem, Inc.
to Aerocare Holdings, Inc. for total proceeds of $4,750,000, less fees of $150,000. At the time of
closing, $475,000 of the purchase price was held by the buyer to cover the Companys contingent
obligations. During fiscal 2010, the buyer released $267,000 of this amount. In May 2010, the
Company received the final payment of $155,000. These payments were recognized as additional gain
on the sale during the periods in which they were received. A total of $53,000 was retained by the
buyer to cover certain obligations of the Company. The entities sold represented the Southeast
region of the Companys HHE business.
On May 19, 2009, the Company entered into an Asset Purchase Agreement with Braden Partners, L.P. to
sell the assets of its Midwest region of the Companys HHE business. Total proceeds were
$4,000,000, less fees of $150,000. $1,000,000 of the purchase price was held by the buyer to cover
the Companys contingent obligations. The Company retained all accounts receivable for services
provided prior to May 2009. Subsequent to the transaction date, the buyer made certain claims,
and in June 2010, the buyer and the Company received a final settlement payment of $500,000 to
resolve these claims. This payment was recognized as an additional gain on the sale during the
six-month period ended September 30, 2010.
As of May 2009, the Company had sold all of its HHE operations.
Pharmacy Operations
On June 11, 2009, the Company entered into an Asset Purchase Agreement with a leading pharmacy
management company to sell substantially all of the assets of JASCORP, LLC (JASCORP) for proceeds
of $2,200,000, less fees of $185,000. $220,000 of the purchase price is being held back by the
buyer until December 2010 in order to cover the Companys contingent obligations. JASCORP operated
the retail pharmacy software business that the Company acquired in July 2007.
Industrial Staffing Operations
On May 29, 2009, the Company finalized the sale of substantially all of the assets of its
industrial and non-medical staffing business for cash proceeds of $250,000, which was paid in five
equal installments through September 2009. Additionally, the Company is to receive 50% of the
future earnings of the business until the total payments equal $1,600,000. During fiscal 2010, the
Company received $72,000 in earn out payments. The Company received additional payments of
$132,000 and $259,000 in May and August 2010, respectfully. These
payments were recorded as additional gain on the sale transaction. The Company retained all
accounts receivable for services provided prior to May 29, 2009.
7
The assets and liabilities associated with these discontinued business operations have been
classified as assets and liabilities of discontinued operations in the accompanying consolidated
balance sheets. The results of the above are reported in discontinued operations in the
accompanying consolidated statements of operations, and the prior period consolidated statement 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 internal employee costs
associated with administrative functions, including accounting, information technology, human
resources, compliance and contracting as well as external costs for legal fees, insurance, audit
fees, payroll processing, and various public-company expenses. 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 assets and liabilities of the discontinued Catalog segment operations are
presented below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010
|
|
|
March 31, 2010
|
|
Assets
|
|
|
|
|
|
|
|
|
Accounts receivable, net of allowance of $4
|
|
$
|
90
|
|
|
$
|
76
|
|
Inventory
|
|
|
15
|
|
|
|
17
|
|
Prepaid expenses and other current assets
|
|
|
50
|
|
|
|
81
|
|
|
|
|
|
|
|
|
Total current assets of discontinued operations
|
|
$
|
155
|
|
|
$
|
174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
99
|
|
|
$
|
301
|
|
Accrued compensation and related taxes
|
|
|
17
|
|
|
|
6
|
|
Accrued other
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
|
|
|
Total current liabilities of discontinued operations
|
|
$
|
117
|
|
|
$
|
308
|
|
|
|
|
|
|
|
|
8
The components of the earnings/(loss) from discontinued operations are presented below (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Month Period Ended
|
|
|
Six Month Period Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Revenues, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services Industrial Staffing
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,223
|
|
Catalog
|
|
|
324
|
|
|
|
499
|
|
|
|
660
|
|
|
|
1,009
|
|
Home Health Equipment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,423
|
|
Pharmacy Software
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
348
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
324
|
|
|
$
|
499
|
|
|
$
|
660
|
|
|
$
|
4,003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services Industrial Staffing
|
|
$
|
|
|
|
$
|
(8
|
)
|
|
$
|
|
|
|
$
|
(44
|
)
|
Catalog
|
|
|
(52
|
)
|
|
|
7
|
|
|
|
(82
|
)
|
|
|
(31
|
)
|
Home Health Equipment
|
|
|
|
|
|
|
(189
|
)
|
|
|
|
|
|
|
(1,228
|
)
|
Pharmacy Software
|
|
|
|
|
|
|
(58
|
)
|
|
|
|
|
|
|
(174
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(52
|
)
|
|
$
|
(248
|
)
|
|
$
|
(82
|
)
|
|
$
|
(1,477
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on disposal:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services Industrial Staffing
|
|
$
|
259
|
|
|
$
|
3
|
|
|
$
|
391
|
|
|
$
|
129
|
|
Home Health Equipment
|
|
|
|
|
|
|
160
|
|
|
|
655
|
|
|
|
280
|
|
Pharmacy Software
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(30
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
259
|
|
|
$
|
163
|
|
|
$
|
1,046
|
|
|
$
|
379
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services Industrial Staffing
|
|
$
|
259
|
|
|
$
|
(5
|
)
|
|
$
|
391
|
|
|
$
|
85
|
|
Catalog
|
|
|
(52
|
)
|
|
|
7
|
|
|
|
(82
|
)
|
|
|
(31
|
)
|
Home Health Equipment
|
|
|
|
|
|
|
(29
|
)
|
|
|
655
|
|
|
|
(948
|
)
|
Pharmacy Software
|
|
|
|
|
|
|
(58
|
)
|
|
|
|
|
|
|
(204
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
207
|
|
|
$
|
(85
|
)
|
|
$
|
964
|
|
|
$
|
(1,098
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 3 Fair Value
Effective April 1, 2008, the Company adopted accounting guidance that established a framework for
measuring fair value and expanded disclosures about fair value measurements. Fair value is an exit
price, representing the amount that would be received to sell an asset, or paid to transfer a
liability, in an orderly transaction between market participants. Fair value is to be determined
based on assumptions that market participants would use in pricing an asset or liability. Current
authoritative accounting guidance uses a three-tier hierarchy that classifies assets and
liabilities based on the inputs used in the valuation methodologies. In accordance with this
guidance, the Company measures its warrant liability at fair value. Management classified these
as level 3 liabilities, as they are based on unobservable inputs and involve management judgement.
9
The following table presents a reconciliation of warrant liabilities measured at fair value on a
recurring basis at September 30, 2010 (in thousands):
|
|
|
|
|
|
|
Fair Value
|
|
|
|
Measurements
|
|
|
|
Using Significant
|
|
|
|
Unobservable
|
|
|
|
Inputs (Level 3)
|
|
|
|
Warrant Liability
|
|
Balance at April 1, 2009
|
|
$
|
|
|
Warrants issued
|
|
|
2,478
|
|
Decrease in market value
|
|
|
(979
|
)
|
|
|
|
|
Balance at March 31, 2010
|
|
|
1,499
|
|
Warrants issued
|
|
|
273
|
|
Decrease in market value
|
|
|
(137
|
)
|
|
|
|
|
Balance at September 30, 2010
|
|
$
|
1,635
|
|
|
|
|
|
Note 4 Goodwill and Acquired Intangible Assets
The following table presents the detail of the changes in goodwill by segment for the periods ended
September 30 and March 31, 2010, respectfully (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services
|
|
|
Pharmacy
|
|
|
Total
|
|
Goodwill at March 31, 2009
|
|
$
|
14,553
|
|
|
$
|
2,500
|
|
|
$
|
17,053
|
|
Acquisitions during the year
|
|
|
46
|
|
|
|
|
|
|
|
46
|
|
Impairment expense
|
|
|
(14,599
|
)
|
|
|
|
|
|
|
(14,599
|
)
|
|
|
|
|
|
|
|
|
|
|
Goodwill at September 30 and March 31, 2010
|
|
$
|
|
|
|
$
|
2,500
|
|
|
$
|
2,500
|
|
|
|
|
|
|
|
|
|
|
|
For tax purposes goodwill of approximately $16.4 million is amortizable over 15 years while the
remainder of the Companys goodwill is not amortizable for tax purposes as the acquisitions related
to the purchase of common stock rather than of assets or net assets.
Impairment Expense
In accordance with our policy, the Company performs its annual impairment review during the fiscal
fourth quarter. As of the end of fiscal year 2010, the Company recognized $14,599,000 of goodwill
impairment relating to the Services segment. Subsequent to this charge, there is no remaining
goodwill associated with the Services segment. As of the end of fiscal year 2009, the Company
recognized $13,217,000 of goodwill impairment relating to the Pharmacy segment. Subsequent to the
impairment charge, the Pharmacy segment has $2,500,000 of remaining goodwill. Prior to fiscal
2009, the Company had not previously recognized any goodwill impairment expense for continuing
operations.
10
Acquired intangible assets consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010
|
|
|
March 31, 2010
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Accumulated
|
|
|
|
Cost
|
|
|
Amortization
|
|
|
Cost
|
|
|
Amortization
|
|
Trade name
|
|
$
|
6,664
|
|
|
$
|
931
|
|
|
$
|
6,664
|
|
|
$
|
847
|
|
Customer relationships
|
|
|
4,720
|
|
|
|
3,069
|
|
|
|
4,720
|
|
|
|
2,867
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,384
|
|
|
$
|
4,000
|
|
|
|
11,384
|
|
|
$
|
3,714
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less accumulated amortization
|
|
|
(4,000
|
)
|
|
|
|
|
|
|
(3,714
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net acquired intangible assets
|
|
$
|
7,384
|
|
|
|
|
|
|
$
|
7,670
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
Amortization expense for acquired intangible assets included in continuing operations was $143,000
and $159,000 for the three-month periods ended September 30, 2010 and 2009, respectively, and
$286,000 and $318,000 for the six-month periods ending September 30, 2010 and 2009, respectively.
The estimated amortization expense related to acquired intangible assets in existence as of
September 30, 2010 is as follows (in thousands):
|
|
|
|
|
Remainder of fiscal 2011
|
|
$
|
286
|
|
Fiscal 2012
|
|
|
518
|
|
Fiscal 2013
|
|
|
476
|
|
Fiscal 2014
|
|
|
382
|
|
Fiscal 2015
|
|
|
350
|
|
Thereafter
|
|
|
5,372
|
|
|
|
|
|
Total
|
|
$
|
7,384
|
|
|
|
|
|
Note 5 Lines of Credit
The following table summarizes the lines of credit for the Company (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available
|
|
|
|
|
|
|
March 31,
|
|
|
|
|
Lending Institution
|
|
Maturity date
|
|
|
Borrowing
|
|
|
Balance
|
|
|
2010
|
|
|
Interest rate
|
|
Comerica Bank
|
|
April 1, 2012
|
|
$
|
8,881
|
|
|
$
|
8,072
|
|
|
$
|
7,774
|
|
|
Prime plus 2.75%
|
H.D. Smith
|
|
April 23, 2013
|
|
|
4,613
|
|
|
|
4,613
|
|
|
|
|
|
|
|
7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total lines of credit obligations
|
|
|
|
|
|
$
|
13,494
|
|
|
|
12,685
|
|
|
|
7,774
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
H.D. Smith debt discount
|
|
|
|
|
|
|
|
|
|
|
(499
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
12,186
|
|
|
$
|
7,774
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comerica Bank
Arcadia Services, Inc. (ASI), a wholly-owned subsidiary of the Company, and three of ASIs
wholly-owned subsidiaries have an outstanding line of credit agreement with Comerica Bank. As of
September 30, 2010, advances under the line of credit agreement cannot exceed the revolving credit
commitment amount of $14 million or the aggregate principal amount of indebtedness permitted under
the advance formula amount at any one time. The advance formula base is 85% of the eligible
accounts receivable, plus the lesser of 85% of eligible unbilled accounts or $3,000,000. The line
of credit agreement contains a subjective acceleration clause and requires the Company to maintain
a lockbox. However, the Company has the ability to control the funds in the deposit account and to
determine the amount used to pay down the line of credit balance. As such, the line of credit is
not automatically classified as a current obligation in the consolidated balance sheets. Arcadia
Services, Inc. agreed to various financial covenant ratios (as described below), to have any person
who acquires Arcadia Services, Inc.s capital stock to pledge such stock to Comerica Bank, and to
customary negative covenants. The line of credit agreement also requires the Company to maintain a
deposit account with a minimum balance, and this amount is classified as restricted cash on the
Companys consolidated balance sheet. If an event of default occurs, Comerica Bank may, at its
option, accelerate the maturity of the debt and exercise its right to foreclose on the issued and
outstanding capital stock of Arcadia Services, Inc. and on all of the assets of Arcadia Services,
Inc. and its subsidiaries. On September 30, 2010, the interest rate on this line of credit
agreement was the banks prime rate plus 2.75% (6.0%), and the availability under the line was
$809,000.
12
RKDA, Inc. (RKDA), a wholly-owned subsidiary of the Company and the holding company of Arcadia
Services, Inc. and Arcadia Products, Inc., granted Comerica Bank a first priority security interest
in all of the
issued and outstanding capital stock of Arcadia Services, Inc. Arcadia Services, Inc. granted
Comerica Bank a first priority security interest in all of its assets. The subsidiaries of Arcadia
Services, Inc. granted the bank security interests in all of their assets. RDKA is restricted from
paying dividends to the Company. RKDA executed a guaranty to Comerica Bank for all indebtedness of
Arcadia Services, Inc. and its subsidiaries. Any such default and resulting foreclosure would have
a material adverse effect on the Companys financial condition.
On October 31, 2010, the Company and the bank entered into an amendment and waiver agreement. The
amendment reduced the revolving credit commitment amount from $14 million to $11 million and
extended the maturity date to April 1, 2012. As of September 30, 2010, the Company was not in
compliance with two financial covenants. The amendment waived these covenant violations and
established new covenant requirements. Specifically, subsequent to this amendment, the following
financial covenants apply: tangible effective net worth of $750,000 as of December 31, 2010 and
gradually increasing on a quarterly basis to $1.25 million by March 31,
2012; minimum quarterly net income of $400,000; and, minimum subordination of indebtedness to
Arcadia Resources, Inc. of $9.15 million. Finally, the amendment increased the required restricted
cash balance from $500,000 to $1 million.
H.D. Smith Wholesale Drug Co.
On April 23, 2010, the Company executed a Line of Credit and Security Agreement with H.D. Smith
Wholesale Drug Co. (H.D. Smith), its new primary supplier of pharmaceutical products. Under
terms of the agreement, the Company can borrow up to $5,000,000, including amounts payable under
normal product purchasing terms. Beginning April 1, 2011, additional borrowings under the
agreement will be limited based upon a borrowing base of the assets of the Pharmacy business. The
debt accrues interest at the greater of 7% and the prime rate plus 3%, and it matures on April 23,
2013. Interest during the first 12 months of the agreement will be capitalized and then interest
only payments are required from May 2011 through April 2012. Beginning with May 2012, the Company
will make monthly payments of $75,000 plus interest. Borrowing may be prepaid at any time without
penalty. The agreement includes certain financial covenants beginning in fiscal 2012. As of
September 30, 2010, the availability under the line was immaterial.
In conjunction with the credit agreement, the Company issued H.D. Smith certain warrants to
purchase common stock (see Note 7 Stockholders Deficit for more details) and incurred certain
professional fees. These costs, which originally totaled $561,000, were recorded as a debt
discount and will be amortized over the term of the debt agreement.
13
Note 6 Long-Term Obligations
Long-term obligations consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
March 31,
|
|
|
|
2010
|
|
|
2010
|
|
Note payable to JANA Master Fund, Ltd.
(JANA) in the original amount of $18.0
million, dated March 25, 2009 bearing an
effective interest rate of 10% with unpaid
accrued interest and principal due in full on
April 1, 2012. Cash interest that would
otherwise be payable on such quarterly
interest payment dates may be added to the
principal balance of the note payable at the
Companys option. The note payable is
unsecured.
|
|
$
|
18,473
|
|
|
$
|
17,581
|
|
|
|
|
|
|
|
|
|
|
Note payable to Vicis Capital Master Fund
(Vicis) in the original amount of $7.8
million, dated March 25, 2009 bearing an
effective interest rate of 10% with unpaid
accrued interest and principal due in full on
April 1, 2012. Cash interest that would
otherwise be payable on such quarterly
interest payment dates may be added to the
principal balance of the note payable at the
Companys option. The note payable is
unsecured.
|
|
|
6,836
|
|
|
|
6,505
|
|
|
|
|
|
|
|
|
|
|
Note payable to LSP Partners, LP (LSP) in
the amount of $1.0 million, dated March 25,
2009 bearing an effective interest rate of
10% with unpaid accrued interest and
principal due in full on April 1, 2012. Cash
interest that would otherwise be payable on
such quarterly interest payment dates may be
added to the principal balance of the note
payable at the Companys option. The note
payable is unsecured.
|
|
|
1,162
|
|
|
|
1,106
|
|
|
|
|
|
|
|
|
|
|
Payable due to AmerisourceBergen Drug
Corporation consistent with the terms of an
amendment to a line of credit agreement dated
June 10, 2009 bearing an effective interest
rate of 8.0%. The unpaid accrued interest
and principal was paid in full in April 2010.
The debt was secured by the assets of the
Pharmacy segment.
|
|
|
|
|
|
|
750
|
|
|
Other
|
|
|
189
|
|
|
|
189
|
|
|
|
|
|
|
|
|
Total long-term obligations
|
|
|
26,660
|
|
|
|
26,131
|
|
Less current portion of long-term obligations
|
|
|
(189
|
)
|
|
|
(939
|
)
|
|
|
|
|
|
|
|
Long-term obligations, less current portion
|
|
$
|
26,471
|
|
|
$
|
25,192
|
|
|
|
|
|
|
|
|
The promissory notes due to JANA, Vicis, and LSP include covenants relating to, among other items,
limitations of additional indebtedness, issuance of new equity securities and the application of
proceeds from future asset sales. Specifically, the notes provide that the first $2,000,000 in
proceeds would be retained by the Company. Additional proceeds are then paid to JANA, Vicis and
LSP as provided in the promissory notes. After these promissory note prepayments are made,
proceeds up to $20,000,000 are split 50% to the Company and 50% to be paid pro-rata to these three
lenders. Thereafter, proceeds are split 25% to the Company and 75% to the lenders. As of
September 30, 2010, the Company owes these lenders $800,000 before additional proceeds are split
between the Company and the lenders.
As of September 30, 2010 future maturities of long-term obligations are as follows (in thousands):
|
|
|
|
|
Remainder of fiscal 2011
|
|
$
|
189
|
|
Fiscal 2012
|
|
|
|
|
Fiscal 2013
|
|
|
26,471
|
|
|
|
|
|
Total
|
|
$
|
26,660
|
|
|
|
|
|
The weighted average interest rate of outstanding long-term obligations as of September 30 and
March 31, 2010 was 10.0%.
14
Note 7 Stockholders Deficit
General
On October 14, 2009, the Companys shareholders approved an amendment to the Companys Articles of
Incorporation to increase the number of authorized shares of the Companys common stock to
300,000,000, $0.001 par value per share, from 200,000,000, $0.001 par value per share.
Warrants
The following represents warrants outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
March 31,
|
|
Exercise Price
|
|
|
Granted
|
|
Expiration
|
|
2010
|
|
|
2010
|
|
$
|
0.40
|
|
|
April 2010
|
|
April 2015
|
|
|
500,000
|
|
|
|
|
|
$
|
0.41
|
|
|
April 2009
|
|
April 2014
|
|
|
52,800
|
|
|
|
52,800
|
|
$
|
0.50
|
|
|
various
|
|
May 2011
|
|
|
2,301,774
|
|
|
|
2,301,774
|
|
$
|
0.50
|
|
|
May 2004
|
|
March 2014
|
|
|
1,070,796
|
|
|
|
1,070,796
|
|
$
|
0.75
|
|
|
June 2008
|
|
June 2015
|
|
|
490,000
|
|
|
|
490,000
|
|
$
|
0.95
|
|
|
November 2009
|
|
May 2015
|
|
|
7,135,713
|
|
|
|
7,135,713
|
|
$
|
2.25
|
|
|
September 2005
|
|
September 2010
|
|
|
44,444
|
|
|
|
44,444
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,595,527
|
|
|
|
11,095,527
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The outstanding warrants have no voting rights and provide the holder with the right to convert one
warrant for one share of the Companys common stock at the stated exercise price. The majority of
the outstanding warrants have a cashless exercise feature.
The 7,135,713 warrants issued in November 2009 in conjunction with the equity financing transaction
did not meet all of the criteria for equity classification. As a result, on November 17, 2009, the
Company recorded the warrants in accordance with ASC Topic 815-40,
Derivatives and Hedging
, as a
warrant liability at its then fair value of $2,478,000. The Company will mark the warrant
liability to market at the end of each period until the Company complies with the requirements of
equity classification of the warrant, at which time the warrant liability will be reclassified to
equity. For the three-month and six-month periods ended September 30, 2010, the Company recorded
$642,000 and $0, respectively, of other income, and these amounts represent the change in the fair
value of the warrant liability during these periods.
The fair value of warrant liability was calculated under the Black-Scholes pricing model using the
Companys stock price on the date of the warrant grant, the warrant exercise price, the Companys
expected volatility, and the risk free interest rate matched to the warrants expected life. The
Company does not anticipate paying dividends during the term of the warrants. The Company uses
historical data to estimate volatility assumptions used in the valuation model. The expected term
of warrants is equal to the contract life. The risk-free rate for periods within the contractual
life of the warrant is based on the U.S. Treasury yield curve in effect at the time of grant.
The specific assumptions used to determine the fair value of the warrants are as follows:
|
|
|
|
|
|
|
|
|
Weighted-average
|
|
November 17, 2009
|
|
|
September 30, 2010
|
|
Expected volatility
|
|
|
86
|
%
|
|
|
90
|
%
|
Expected dividend yields
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected terms (in years)
|
|
|
5.5
|
|
|
|
4.6
|
|
Risk-free interest rate
|
|
|
2.19
|
%
|
|
|
1.27
|
%
|
During the six-month period ending September 30, 2010, no warrants were exercised. During the
six-month period ended September 30, 2009, the Company accounted for 22,489 shares of common stock
forfeited to the Company as part of the cashless exercise of 8,545,833 warrants in March 2009.
15
On April 23, 2010 and in conjunction with the H.D. Smith line of credit agreement (see Note 5
Lines of Credit), the Company granted H. D. Smith 500,000 warrants to purchase common stock at an
exercise price of $0.40 per share. The warrants expire on April 23, 2015. The Company also
granted H.D. Smith up to an additional 500,000 warrants to purchase common stock. These warrants
vest on March 31, 2011 if the value of the Pharmacy segments borrowing base does not exceed
certain thresholds. The number of warrants that vest depends on the computed borrowing base amount
as of March 31, 2011. The exercise price will be the lower of $0.40 or the preceding 10-day
average of the closing prices per shares on March 31, 2011. The warrants have a 5-year life.
Because these warrants have not vested and the terms have not been finalized, they are excluded
from the above table.
The fair value of the initial 500,000 warrants issued to H.D. Smith was estimated using the
Black-Scholes pricing model and was determined to be $260,000. This was recorded as a debt
discount and will be amortized over the term of the H.D. Smith line of credit. The assumptions
used in the fair value calculation were as follows: risk free interest rate of 2.6%, expected
dividend yield of 0%, expected volatility of 86%, and expected life of 5 years.
The fair value of the 500,000 warrants issued to H.D. Smith that potentially vest on March 31, 2011
was estimated using the Black-Scholes pricing model and was determined to be $273,000. This was
recorded as a debt discount and will be amortized over the term of the H.D. Smith line of credit.
The assumptions used in the fair value calculation were as follows: risk free interest rate of
3.0%, expected dividend yield of 0%, expected volatility of 87%, and expected life of 6 years.
Because the vesting of these warrants is contingent on a future event, the fair value of the
warrants is classified as a liability until they vest, at which time they will be reclassified to
permanent equity assuming all criteria for equity treatment are met at that point in time. The
fair value of this liability is adjusted on a quarterly basis. For the three-month and six-month
periods ended September 30, 2010, the Company recorded $137,000 of other income for both periods,
and these amounts represent the change in the fair value of the warrant liability during these
periods.
Escrow Shares
In conjunction with the PrairieStone Pharmacy, LLC (PrairieStone) acquisition on February 15,
2007, the purchase agreement provided for a potential earn out for two continuing employees of up
to an aggregate of 600,000 shares of common stock. The earn out was based on PrairieStones
earnings before interest, taxes depreciation and amortization for periods through March 31, 2010.
The earn out targets were not met, and the shares were returned to the Company and canceled during
the three-month period ending September 30, 2010.
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 Companys business, results of operations or financial condition.
16
Note 9 Stock-Based Compensation
On August 18, 2006, the Board of Directors 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. All non-employee directors, executive officers and employees of the Company and its
subsidiaries are eligible to receive Awards under the 2006 Plan.
On January 27, 2009, the Board of Directors approved and adopted the Second Amendment (the
Amendment) to the 2006 Plan, and the Amendment was approved by the stockholders on October 14,
2009. The Amendment increased the number of shares available to be issued under the Plan to 5% of
the Companys authorized shares of common stock, or 15 million shares.
As of September 30, 2010, approximately 5.1 million shares were available for grant under the
amended 2006 Plan.
Following are the specific valuation assumptions used for each respective period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month Period
|
|
|
Six-Month Period
|
|
|
|
Ended September 30,
|
|
|
Ended September 30,
|
|
Weighted-average
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Expected volatility
|
|
|
N/A
|
|
|
|
85
|
%
|
|
|
96
|
%
|
|
|
78
|
%
|
Expected dividend yields
|
|
|
N/A
|
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected terms (in years)
|
|
|
N/A
|
|
|
|
4
|
|
|
|
4
|
|
|
|
4
|
|
Risk-free interest rate
|
|
|
N/A
|
|
|
|
2.59
|
%
|
|
|
2.15
|
%
|
|
|
2.64
|
%
|
Stock option activity for the six-month period ended September 30, 2010 is summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Average
|
|
|
Aggregate
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Intrinsic
|
|
|
|
|
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Value
|
|
Options
|
|
Shares
|
|
|
Price
|
|
|
Term (Years)
|
|
|
(thousands)
|
|
Outstanding at April 1, 2010
|
|
|
8,336,184
|
|
|
|
0.65
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
45,000
|
|
|
|
0.42
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(3,750
|
)
|
|
|
0.38
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
(98,479
|
)
|
|
|
0.45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2010
|
|
|
8,278,955
|
|
|
$
|
0.65
|
|
|
|
5.2
|
|
|
$
|
102
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2010
|
|
|
6,624,163
|
|
|
$
|
0.66
|
|
|
|
5.0
|
|
|
$
|
101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
The following table summarizes information about stock options outstanding at September 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
$0.18 - $0.42
|
|
|
3,329,394
|
|
|
|
6.0
|
|
|
$
|
0.38
|
|
|
|
2,815,644
|
|
|
$
|
0.38
|
|
$0.43 - $0.72
|
|
|
3,599,334
|
|
|
|
4.9
|
|
|
$
|
0.72
|
|
|
|
2,483,292
|
|
|
$
|
0.72
|
|
$0.73 - $1.07
|
|
|
781,647
|
|
|
|
5.2
|
|
|
$
|
0.79
|
|
|
|
756,647
|
|
|
$
|
0.79
|
|
$1.01 - $1.50
|
|
|
450,967
|
|
|
|
2.9
|
|
|
$
|
1.34
|
|
|
|
450,967
|
|
|
$
|
1.34
|
|
$1.51 - $2.25
|
|
|
43,000
|
|
|
|
2.6
|
|
|
$
|
2.22
|
|
|
|
43,000
|
|
|
$
|
2.22
|
|
$2.92
|
|
|
74,613
|
|
|
|
2.8
|
|
|
$
|
2.92
|
|
|
|
74,613
|
|
|
$
|
2.92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2010
|
|
|
8,278,955
|
|
|
|
|
|
|
$
|
0.65
|
|
|
|
6,624,163
|
|
|
$
|
0.66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted-average grant-date fair value of options granted during the six-month period ended
September 30, 2010 and 2009 was $0.28 and $0.43, respectively.
3,750 stock options were exercised during the six-month period ended September 30, 2010. No stock
options were exercised during the six-month period ended September 30, 2009.
The Company recognized $283,000 and $178,000 in stock-based compensation expense from all
operations relating to stock options during the three-month periods ended September 30, 2010 and
2009, respectively, and $558,000 and $364,000 for the six-month periods ended September 30, 2010
and 2009.
As of September 30, 2010, total unrecognized stock-based compensation expense related to stock
options was $666,000, which is expected to be expensed through March 2012.
Restricted Stock
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 Companys common stock. The value is recognized as compensation
expense ratably over the corresponding employees 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 three-month
period ended September 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
Grant Date
|
|
|
|
|
|
|
|
Fair Value
|
|
|
|
Shares
|
|
|
per Share
|
|
Unvested at April 1, 2010
|
|
|
332,967
|
|
|
$
|
1.10
|
|
Vested
|
|
|
(106,250
|
)
|
|
|
1.50
|
|
|
|
|
|
|
|
|
Unvested at September 30, 2010
|
|
|
226,717
|
|
|
$
|
0.91
|
|
|
|
|
|
|
|
|
During the three-month periods ended September 30, 2010 and 2009, the Company recognized $108,000,
and $88,000, respectively, of stock-based compensation expense from all operations related to
restricted stock. During the six-month periods ended September 30, 2010 and 2009, the Company
recognized $195,000 and $187,000, respectively, of stock-based compensation expense from all
operations related to restricted stock.
During the six-month periods ended September 30, 2010 and 2009, the total fair value of restricted
stock vested was $195,000 and $318,000, respectively.
As of September 30, 2010, total unrecognized stock-based compensation expense related to unvested
restricted
stock awards was $165,000, which is expected to be expensed over a weighted-average period of
approximately 1.0 year.
18
Note 10 Income Taxes
The Company incurred state and local tax expense of $40,000 and $7,000 during the three-month
periods ended September 30, 2010 and 2009, respectively, and $72,000 and $100,000 during the
six-month periods ended September 30, 2010 and 2009
ASC Topic 740 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 companys performance,
the market environment in which the company operates, the length of carryback and carryforward
periods, and expectation of future profits. The relevant guidance 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 continue to 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 Companys ability to
utilize such assets.
Note 11 Related Party Transactions
On September 30, 2010, the Company had an outstanding balance of $18,473,000 related to a note
payable with JANA dated March 25, 2009. JANA held approximately 15% of the outstanding shares of
Company common stock on September 30, 2010. The Company incurred interest expense relating to the
debt due JANA in the amounts of $454,000 and $418,000 for the three-month periods ended September
30, 2010 and 2009, respectively, and $892,000 and $832,000 for the six-month periods ended
September 30, 2010 and 2009, respectively. See Note 6 Long-Term Obligations for additional
information pertaining to the balances of these debt instruments.
On September 30, 2010, the Company had an outstanding balance of $6,836,000 related to a note
payable with Vicis Capital Master Fund dated March 25, 2009. Vicis held approximately 15% of the
outstanding shares of Company common stock on September 30, 2010. The Company incurred interest
expense relating to the debt in the amount of $168,000 and $152,000 for the three-month periods
ended September 30, 2010 and 2009, respectively, and $330,000 and $297,000 for the six-month
periods ended September 30, 2010 and 2009, respectively. See Note 6 Long-Term Obligations
for additional information pertaining to the balances of this debt instrument.
The Companys Chief Operating Officer has a beneficial ownership interest in an affiliated agency
and thereby has an interest in the affiliates 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 $214,000 and $195,000 for the three-month periods ended September 30, 2010 and 2009,
respectively, and $404,000 and $406,000 for the six-month periods ended September 30, 2010 and
2009, 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 Companys continuing operations include two segments: Services and Pharmacy. Segments include
operations engaged in similar lines of business and in some cases, may utilize common back office
support services.
The Services segment is a national provider of home care services, including skilled and personal
care, and medical staffing services (per diem and travel nursing) to numerous types of acute care
and sub-acute care medical facilities. In May 2009, the Company sold its industrial staffing
business, which has since been included in discontinued operations.
19
The Pharmacy segment includes the Companys proprietary medication management system called
DailyMed. The Company operates pharmacies in Indiana, California and Minnesota, which dispense
patients prescriptions,
over-the-counter medications and vitamins, and organize them into pre-sorted packets clearly marked
with the date and time they should be taken. The DailyMed approach is designed to improve the
safety and efficacy of
the medications being dispensed. In June 2009, the Company sold its pharmacy dispensing and
billing software business, which has since been included in discontinued operations.
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 Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Revenue, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services
|
|
$
|
20,931
|
|
|
$
|
21,709
|
|
|
$
|
41,295
|
|
|
$
|
44,389
|
|
Pharmacy
|
|
|
4,911
|
|
|
|
3,408
|
|
|
|
9,965
|
|
|
|
6,625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
25,842
|
|
|
$
|
25,117
|
|
|
$
|
51,260
|
|
|
$
|
51,014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services
|
|
$
|
1,222
|
|
|
$
|
1,035
|
|
|
$
|
2,121
|
|
|
$
|
2,242
|
|
Pharmacy
|
|
|
(1,599
|
)
|
|
|
(1,564
|
)
|
|
|
(3,401
|
)
|
|
|
(2,877
|
)
|
Unallocated corporate overhead
|
|
|
(2,485
|
)
|
|
|
(2,686
|
)
|
|
|
(4,862
|
)
|
|
|
(5,171
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating loss
|
|
|
(2,862
|
)
|
|
|
(3,215
|
)
|
|
|
(6,142
|
)
|
|
|
(5,806
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
980
|
|
|
|
846
|
|
|
|
1,823
|
|
|
|
1,684
|
|
Change in fair value of warrant liability
|
|
|
(779
|
)
|
|
|
|
|
|
|
(137
|
)
|
|
|
|
|
Other
|
|
|
|
|
|
|
(6
|
)
|
|
|
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss before income tax expense
|
|
|
(3,063
|
)
|
|
|
(4,055
|
)
|
|
|
(7,828
|
)
|
|
|
(7,520
|
)
|
Income tax expense
|
|
|
40
|
|
|
|
7
|
|
|
|
73
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
|
|
$
|
(3,103
|
)
|
|
$
|
(4,062
|
)
|
|
$
|
(7,901
|
)
|
|
$
|
(7,620
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services
|
|
$
|
165
|
|
|
$
|
191
|
|
|
$
|
330
|
|
|
$
|
385
|
|
Pharmacy
|
|
|
74
|
|
|
|
206
|
|
|
|
135
|
|
|
|
293
|
|
Corporate
|
|
|
87
|
|
|
|
134
|
|
|
|
169
|
|
|
|
264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total depreciation and amortization
|
|
$
|
326
|
|
|
$
|
531
|
|
|
$
|
634
|
|
|
$
|
942
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Capital expenditures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services
|
|
$
|
8
|
|
|
$
|
8
|
|
|
$
|
48
|
|
|
$
|
26
|
|
Pharmacy
|
|
|
156
|
|
|
|
8
|
|
|
|
240
|
|
|
|
61
|
|
Corporate
|
|
|
15
|
|
|
|
6
|
|
|
|
123
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital expenditures
|
|
$
|
179
|
|
|
$
|
22
|
|
|
$
|
411
|
|
|
$
|
96
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
March 31,
|
|
|
|
2010
|
|
|
2010
|
|
Assets:
|
|
|
|
|
|
|
|
|
Services
|
|
$
|
20,530
|
|
|
$
|
25,007
|
|
Pharmacy
|
|
|
7,298
|
|
|
|
6,107
|
|
Unallocated coporate assets
|
|
|
2,023
|
|
|
|
1,908
|
|
Assets of discontinued operations
|
|
|
155
|
|
|
|
174
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
30,006
|
|
|
$
|
33,196
|
|
|
|
|
|
|
|
|
20
Note 13 Subsequent Event
On November 2, 2010, the Company finalized an equity financing transaction whereby it raised
$5,000,000 in gross proceeds. Under the terms of the agreements with the investors, the Company
sold 15,625,000 shares of common stock for $0.32 per share. Expenses associated with the
transaction, which include a 7.0% placement fee, are estimated to be $450,000 resulting in net
proceeds of $4,550,000.
21
ITEM 2. Managements 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, 2010 and 2009. 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 Managements Discussion and Analysis of Financial
Condition and Results of Operations in our Annual Report on Form 10-K for the year ended March 31,
2010 and Form 10-Q for the period ended June 30, 2010 filed with the SEC on June 11, 2010 and
August 6, 2010, 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.
22
Overview
Arcadia Resources, Inc., a Nevada corporation, together with its wholly-owned subsidiaries (the
Company), is a national provider of home care, medical staffing and pharmacy services operating
under the service mark Arcadia HealthCare. In May and June 2009, the Company disposed of its Home
Health Equipment (HHE), retail pharmacy software and industrial staffing businesses. In October
2010, the Company disposed of its home-health oriented mail-order catalog and website business
(Catalog). Subsequent to these divestitures, the Company operates in two reportable business
segments: Home Care/Medical Staffing Services (Services) and Pharmacy. The Companys corporate
headquarters are located in Indianapolis, Indiana. The Company conducts its business from
approximately 65 facilities located in 18 states. The Company operates pharmacies in Indiana,
California 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,
2010 filed with the SEC on June 11, 2010 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, 2010 Compared to the Three-Month Period Ended September 30,
2009
Results of Continuing Operations (in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
Three-Month Period
|
|
|
|
Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
Revenues, net
|
|
$
|
25,842
|
|
|
$
|
25,117
|
|
Cost of revenues
|
|
|
18,797
|
|
|
|
17,923
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
7,045
|
|
|
|
7,194
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
9,581
|
|
|
|
9,878
|
|
Depreciation and amortization
|
|
|
326
|
|
|
|
531
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
9,907
|
|
|
|
10,409
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(2,862
|
)
|
|
|
(3,215
|
)
|
|
|
|
|
|
|
|
|
|
Other expenses:
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
980
|
|
|
|
846
|
|
Change in fair value of warrant liability
|
|
|
(779
|
)
|
|
|
|
|
Other expenses:
|
|
|
|
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
Total other expenses
|
|
|
201
|
|
|
|
840
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss before income tax expense
|
|
|
(3,063
|
)
|
|
|
(4,055
|
)
|
Income tax expense
|
|
|
40
|
|
|
|
7
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
|
|
$
|
(3,103
|
)
|
|
$
|
(4,062
|
)
|
|
|
|
|
|
|
|
Weighted average number of shares basic and diluted
|
|
|
177,295
|
|
|
|
161,201
|
|
Net loss from continuing operations per share basic and diluted
|
|
$
|
(0.02
|
)
|
|
$
|
(0.03
|
)
|
|
|
|
|
|
|
|
23
Revenues, Cost of Revenues and Gross Profits
The following table summarizes revenues, cost of revenues and gross profit by segment for the
three-month periods ended September 30, (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Total
|
|
|
|
|
|
|
% of Total
|
|
|
$ Increase/
|
|
|
% Increase/
|
|
|
|
2010
|
|
|
Revenue
|
|
|
2009
|
|
|
Revenue
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
Revenues, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services
|
|
$
|
20,931
|
|
|
|
81.0
|
%
|
|
$
|
21,709
|
|
|
|
86.5
|
%
|
|
$
|
(778
|
)
|
|
|
-3.6
|
%
|
Pharmacy
|
|
|
4,911
|
|
|
|
19.0
|
%
|
|
|
3,408
|
|
|
|
13.6
|
%
|
|
|
1,503
|
|
|
|
44.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,842
|
|
|
|
100.0
|
%
|
|
|
25,117
|
|
|
|
100.0
|
%
|
|
|
725
|
|
|
|
2.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services
|
|
|
14,650
|
|
|
|
|
|
|
|
15,028
|
|
|
|
|
|
|
|
(378
|
)
|
|
|
-2.5
|
%
|
Pharmacy
|
|
|
4,147
|
|
|
|
|
|
|
|
2,895
|
|
|
|
|
|
|
|
1,252
|
|
|
|
43.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,797
|
|
|
|
|
|
|
|
17,923
|
|
|
|
|
|
|
|
874
|
|
|
|
4.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Margin %
|
|
|
|
|
|
Margin %
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margins:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services
|
|
|
6,281
|
|
|
|
30.0
|
%
|
|
|
6,681
|
|
|
|
30.8
|
%
|
|
|
(400
|
)
|
|
|
-6.0
|
%
|
Pharmacy
|
|
|
764
|
|
|
|
15.6
|
%
|
|
|
513
|
|
|
|
15.1
|
%
|
|
|
251
|
|
|
|
48.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,045
|
|
|
|
27.3
|
%
|
|
$
|
7,194
|
|
|
|
28.6
|
%
|
|
$
|
(149
|
)
|
|
|
-2.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services Segment
The following table summarizes the Services segment revenues by type for the three-month periods
ended September 30, (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Total
|
|
|
|
|
|
|
% of Total
|
|
|
$ Increase/
|
|
|
% Increase/
|
|
|
|
2010
|
|
|
Revenue
|
|
|
2009
|
|
|
Revenue
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home care
|
|
$
|
16,791
|
|
|
|
80.2
|
%
|
|
$
|
17,255
|
|
|
|
79.5
|
%
|
|
$
|
(464
|
)
|
|
|
-2.7
|
%
|
Per diem medical staffing
|
|
|
2,713
|
|
|
|
13.0
|
%
|
|
|
3,127
|
|
|
|
14.4
|
%
|
|
|
(414
|
)
|
|
|
-13.2
|
%
|
Travel staffing
|
|
|
1,427
|
|
|
|
6.8
|
%
|
|
|
1,327
|
|
|
|
6.0
|
%
|
|
|
100
|
|
|
|
7.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Services
|
|
$
|
20,931
|
|
|
|
100.0
|
%
|
|
$
|
21,709
|
|
|
|
100.0
|
%
|
|
$
|
(778
|
)
|
|
|
-3.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Services segment remains the largest source of revenue for the Company. Services revenue comes
from two business lines, Home Care and Medical Staffing. Medical Staffing consists of both per
diem staffing as well as travel nursing and allied health staffing.
24
For the quarter ending September 30, 2010, Home Care revenue as a percentage of total Services
segment revenue increased to 80.2% as compared with 79.5% for the prior year period. Home Care
revenues fell by $464,000, or 2.7%, from $17,255,000 to $16,791,000 compared to the prior year
quarter. Home Care revenue from government programs declined compared to the prior year period as
various state waiver and community-based programs reduced reimbursement rates, limit hours per
program participant or a combination of the two. This impacted the Companys business in several
key markets, including Arizona, Washington, North Carolina and California. In addition, private
duty Home Care revenue was impacted compared to the prior year by high unemployment rates and the
resulting availability of family caregivers in lieu of our services, and the impact of lower
retirement savings and investment accounts on the demand for private pay services.
Total Medical Staffing revenue declined 7.0% compared to the prior year quarter from $4,454,000 to
$4,140,000. Per diem medical staffing declined 13.2% over the prior year quarter, while travel
nursing and allied health medical staffing increased 7.5% over the prior year quarter. Overall
demand for temporary medical staffing remains depressed driven by low patient censuses, the return
of retired or part-time staff to full time status and the increases in overtime accepted by
permanent staff at many facilities. The increase in Travel staffing revenue was driven primarily
by a higher level of orders from a large correctional customer.
The Services segment operates independently and through a network of affiliated agencies
(Affiliates) 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 affiliated agencys commission is based on a percentage of gross profit (see
additional discussion in the Selling, General and Administrative section). Revenue generated
from the Affiliate locations was $13,779,000 for the three-month period ended September 30, 2010
compared to $14,630,000 for the prior year quarter. This $851,000, or 5.8%, decrease in revenue
was driven by lower levels of Medical Staffing as well as some reduction in Home Care revenues in
some Affiliate locations. The Company-Owned locations revenue increased by $73,000, or 1.0%, to
$7,152,000 during the fiscal second quarter 2011 compared to the prior year quarter. The Affiliate
locations accounted for 65.8% of total Services segment revenue during the fiscal second quarter
2011, and this percentage is down slightly from 67.4% for the prior year quarter.
Gross margin in the Services segment was 30.0% for the fiscal second quarter 2011, which represents
a slight decrease from 30.8% for the prior year quarter. While the overall mix of higher margin
home care business increased as a percentage of total revenues, this gross margin benefit was
offset by several factors. These factors included a reduction in margins on several
state-sponsored home care programs, such as Arizona, North Carolina, Washington and California; a
reduction in the percentage of business generated in some of the Companys higher margin offices
and markets, including the state of Michigan; and an overall decline in the margins in the medical
staffing business due to changes in staffing business mix.
Pharmacy Segment
The revenue in the Pharmacy segment increased by $1,503,000, or 44.1%, to $4,911,000 during fiscal
second quarter 2011 compared to the prior year quarter. The growth in the Pharmacy segment
continues to be driven by the Companys DailyMed program and its relationship with payers who are
ultimately responsible for the total healthcare spend of its patient members. In August 2010, the
Company announced the amendment and extension of its agreement with WellPoint, which was originally
executed in June 2009. Under this agreement, the Company continues to roll out the DailyMed
medication management program to WellPoints high-risk Medicaid members in states where WellPoint
companies provide Medicaid managed care benefits. The initial five states are: California,
Virginia, New York, Kansas and South Carolina. The program was launched to WellPoints high risk
members in Virginia in August 2009. The rollout to WellPoints California patients began during
fiscal fourth quarter 2010 and to South Carolina patients during fiscal first quarter 2011. The
increase in revenue during the fiscal second quarter 2011 was primarily driven by new California
patients. The DailyMed program will be rolled out to Kansas in November 2010. The Company
anticipates the majority of its Pharmacy revenue growth over the next several quarters to be
attributable to the WellPoint arrangement.
The costs of revenue in the Pharmacy segment include the cost of medications and packaging for the
DailyMed proprietary dispensing system. Gross margins for the three-month period ended September
30, 2010 were 15.6% compared to 15.1% for the prior year quarter. The margin improvement was
attributable to improved drug pricing under its new prime vendor agreement with H.D. Smith, which
was executed in April 2010. Additionally, subsequent to the amendment to the WellPoint agreement
in August 2010, the Pharmacy began recognizing revenue for the additional services provided through
the DailyMed program. This incremental revenue has no additional cost of goods sold associated
with it, which resulted in margin improvement.
25
Selling, General and Administrative
The following table summarizes selling, general and administrative expenses by segment for the
three-month periods ended September 30, (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Total
|
|
|
|
|
|
|
% of Total
|
|
|
$ Increase/
|
|
|
% Increase/
|
|
|
|
2010
|
|
|
SG&A
|
|
|
2009
|
|
|
SG&A
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services
|
|
$
|
4,894
|
|
|
|
51.1
|
%
|
|
$
|
5,453
|
|
|
|
55.2
|
%
|
|
$
|
(559
|
)
|
|
|
-10.3
|
%
|
Pharmacy
|
|
|
2,289
|
|
|
|
23.9
|
%
|
|
|
1,873
|
|
|
|
18.9
|
%
|
|
|
416
|
|
|
|
22.2
|
%
|
Corporate
|
|
|
2,398
|
|
|
|
24.9
|
%
|
|
|
2,552
|
|
|
|
25.8
|
%
|
|
|
(154
|
)
|
|
|
-6.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
9,581
|
|
|
|
100.0
|
%
|
|
$
|
9,878
|
|
|
|
100.0
|
%
|
|
$
|
(297
|
)
|
|
|
-(3.0
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SG&A as a % of net revenue
|
|
|
37.1
|
%
|
|
|
|
|
|
|
39.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Services Segment
The Services segment selling, general and administrative expense decreased to $4,894,000 for the
three-month period ended September 30, 2010 compared to $5,453,000 for same quarter a year ago.
This $559,000, or 10.3%, decrease was primarily due to decreases in commissions paid to Affiliates
and bad debt expense. Affiliate commissions are based on the gross margins of the individual
Affiliates, and the $204,000, or 7.5%, decrease is approximately consistent with the 5.8% decrease
in Affiliate revenue. Additionally, bad debt expense decreased by $244,000 over the prior year
quarter. The Services business has focused on improving its cash collections on both current and
past due accounts and has both reduced the absolute dollar level of past due accounts, particularly
over 150 days, as well as decreased its days sales outstanding. The improved management of
accounts receivable has resulted in the need for a lower bad debt provision than in the prior year
quarter.
Pharmacy Segment
The Pharmacy segment selling, general and administrative expense increased by $416,000, or 22.2%,
to $2,289,000 during the fiscal second quarter 2011 compared to the prior year quarter. In
general, the increase in Pharmacy expenses was due to the significant growth in revenue in this
segment. Specifically, the increase in Pharmacy expenses was due to increases in external call
center costs, contract labor, shipping costs and bad debt expense. Beginning in January 2010, the
Company began using an external call center to assist with patient enrollment efforts. In August
2010, the Pharmacy brought this function in-house, but fiscal second quarter 2011 included
approximately two months worth of external costs. In order to supplement full-time staff, the
Pharmacy segment has been using contract labor, specifically pharmacists and pharmacy technicians,
with the ultimate goal of reducing its reliance on this contract labor over time. Finally,
shipping costs and bad debt expense increased as the Pharmacy revenue grows.
In June 2010, the Indianapolis pharmacy and the Corporate offices moved to a new location.
Additionally, in late June 2010, the Pharmacy converted to a new operating system. Due to the move
and the software conversion, the Pharmacy segment incurred certain additional costs during the
first half of the quarter, primarily moving expenses, over-time and temporary labor.
The DailyMed program includes a significant level of patient care and value-added services designed
to improve compliance, adherence and safety of a patients medication regimen. These pharmacy
services include consolidation, synchronization and transfer of prescriptions and medication
therapy management (MTM) services. The Company makes a significant investment in these services as
they are a key part to achieving the patient benefits and health care cost reductions associated
with DailyMed. The Companys business model contemplates that payers will be willing to share some
of these cost savings as they are realized either through a per member per month (PMPM) fee, fees
for services provided, or some type of cost savings arrangement.
26
Corporate
Corporate selling, general and administrative expense decreased by $154,000, or 6.0%, to $2,398,000
for fiscal second quarter 2011 compared to $2,552,000 for the prior year quarter. This decrease
reflects reductions in professional fees and insurance costs partially offset by certain severance
costs. The reduction in legal fees was the primary driver in the lower professional fees as the
Company was involved in fewer disputes and claims in the current year quarter compared to the prior
year. Insurance costs were lower due to reductions in premiums effective with the policy year that
began on September 1, 2010. The Company recognized approximately $150,000 in severance costs
during fiscal second quarter 2011.
Depreciation and Amortization
The following table summarizes depreciation and amortization expense for the three-month periods
ended September 30 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ Increase/
|
|
|
% Increase/
|
|
|
|
2010
|
|
|
2009
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
Depreciation and amortization of property and equipment
|
|
$
|
183
|
|
|
$
|
372
|
|
|
|
(189
|
)
|
|
|
-50.8
|
%
|
Amortization of acquired intangible assets
|
|
|
143
|
|
|
|
159
|
|
|
|
(16
|
)
|
|
|
-10.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
326
|
|
|
$
|
531
|
|
|
$
|
(205
|
)
|
|
|
-38.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization of property and equipment decreased by $189,000 or 50.8%, during the
three-month period ended September 30, 2010 compared to the prior year period. The decrease
reflects the decrease in the depreciation expense relating to certain pharmacy software that became
fully depreciated during fiscal 2010.
Amortization of acquired intangible assets decreased by $16,000, or 10.1%, during fiscal second
quarter 2011 compared to the prior year quarter. The decrease reflects a slight decrease in the
amortization expense associated with customer relationships. The amortization expense is adjusted
annually and attempts to match the expense to the economic benefit generated by the specific
intangible asset.
Interest Expense and Income
The following table summarizes interest expense and income for the three-month periods ended
September 30, (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ Increase/
|
|
|
% Increase/
|
|
|
|
2010
|
|
|
2009
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
Interest expense
|
|
$
|
982
|
|
|
$
|
850
|
|
|
$
|
132
|
|
|
|
15.5
|
%
|
Interest income
|
|
|
(2
|
)
|
|
|
(4
|
)
|
|
|
2
|
|
|
|
-50.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
980
|
|
|
$
|
846
|
|
|
$
|
134
|
|
|
|
15.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense for fiscal second quarter 2011 was $982,000, which represents a $132,000, or
15.5%, increase compared to the prior year quarter expense of $850,000. Total interest expense
includes the amortization of debt discounts and deferred financing costs of $120,000 and $59,000
for fiscal second quarter 2011 and 2010, respectively. Additionally, interest expense includes
non-cash interest that was added to the principal balance of the outstanding debt of $731,000 and
$606,000 for fiscal second quarter 2011 and 2010, respectively.
The average interest bearing liabilities balance (sum of the balances at the end of each quarter
divided by the number of quarters) for fiscal second quarter 2011 was $38.9 million compared to
$33.6 million for fiscal second quarter 2010, which represents an increase of 14.3%. The increase
was primarily due to the increase in the amounts due to H.D. Smith under the line of credit
agreement executed in April 2010, and the additional H.D. Smith borrowings were the primary driver
for the increase in interest expense during the current year quarter.
27
Change in Fair Value of Warrant Liability
The 7,135,713 warrants issued in November 2009 in conjunction with the equity financing transaction
and an additional 500,000 warrants issued in conjunction with certain debt financing are recorded
as a liability at fair value with subsequent changes in fair value recorded in earnings. The fair
value of the warrants is determined using the Black-Scholes pricing model and is affected by
changes in inputs to that model, including: our stock price, expected stock price volatility, and
contractual terms. To the extent that the fair value of the warrant liability increases or
decreases, the Company records a loss or gain in the statement of operations. The total gain of
$779,000 on the change in fair value of the warrant liability during fiscal second quarter 2011 was
primarily due to the changes in our stock price.
Income Taxes
Income tax expense was $40,000 for the three-month period ended September 30, 2010 compared to
$7,000 for the same period a year ago.
Due to the Companys losses in recent years, it has paid nominal federal income taxes. For federal
income tax purposes, the Company had significant permanent and timing differences between book
income and taxable income resulting in combined net deferred tax asset balance to be utilized by
the Company for which an offsetting valuation allowance has been established for the entire amount.
The Company has a net operating loss carryforward for tax purposes totaling $63.3 million that
expires at various dates through 2029. Internal Revenue Code Section 382 rules limit the
utilization of certain of these net operating loss carryforwards upon a change of control of the
Company. It has been determined that a change in control took place at the time of the reverse
merger in 2004, and as such, the utilization of $700,000 of the net operating loss carryforwards
will be subject to severe limitations in future periods.
28
Earnings (Loss) from Discontinued Operations
The following table summarizes the components of the earnings (loss) from discontinued operations
for the three-month period ended September 30, (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Month Period Ended
|
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
Revenues, net:
|
|
|
|
|
|
|
|
|
Catalog
|
|
$
|
324
|
|
|
$
|
499
|
|
|
|
|
|
|
|
|
|
|
$
|
324
|
|
|
$
|
499
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations:
|
|
|
|
|
|
|
|
|
Services Industrial Staffing
|
|
$
|
|
|
|
$
|
(8
|
)
|
Catalog
|
|
|
(52
|
)
|
|
|
7
|
|
Home Health Equipment
|
|
|
|
|
|
|
(189
|
)
|
Pharmacy Software
|
|
|
|
|
|
|
(58
|
)
|
|
|
|
|
|
|
|
|
|
$
|
(52
|
)
|
|
$
|
(248
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on disposal:
|
|
|
|
|
|
|
|
|
Services Industrial Staffing
|
|
$
|
259
|
|
|
$
|
3
|
|
Home Health Equipment
|
|
|
|
|
|
|
160
|
|
|
|
|
|
|
|
|
|
|
$
|
259
|
|
|
$
|
163
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from discontinued operations:
|
|
|
|
|
|
|
|
|
Services Industrial Staffing
|
|
$
|
259
|
|
|
$
|
(5
|
)
|
Catalog
|
|
|
(52
|
)
|
|
|
7
|
|
Home Health Equipment
|
|
|
|
|
|
|
(29
|
)
|
Pharmacy Software
|
|
|
|
|
|
|
(58
|
)
|
|
|
|
|
|
|
|
|
|
$
|
207
|
|
|
$
|
(85
|
)
|
|
|
|
|
|
|
|
Catalog Operations
On October 1, 2010, the Company completed the sale of its ownership interest in Rite at Home Health
Care Products, LLC to Home Health Depot, Inc. The Company is to receive 50% of future earnings of
the business until total payments equal $375,000. 40% of these proceeds are to be paid to a third
party. No earn-out payments will be payable after the quarter ending September 30, 2013. This
entity represented the Companys Catalog segment.
HHE Operations
On May 18, 2009, the Company completed the sale of its ownership interest in Lovell Medical Supply,
Inc., Beacon Respiratory Services of Georgia, Inc., and Trinity Healthcare of Winston-Salem, Inc.
to Aerocare Holdings, Inc. for total proceeds of $4,750,000, less fees of $150,000. At the time of
closing, $475,000 of the purchase price was held by the buyer to cover the Companys contingent
obligations. During fiscal 2010, the buyer released $267,000 of this amount. In May 2010, the
Company received the final payment of $155,000. These payments were recognized as additional gain
on the sale during the periods in which they were received. A total of $53,000 was retained by the
buyer to cover certain obligations of the Company. The entities sold represented the Southeast
region of the Companys HHE business.
29
On May 19, 2009, the Company entered into an Asset Purchase Agreement with Braden Partners, L.P. to
sell the assets of its Midwest region of the Companys HHE business. Total proceeds were
$4,000,000, less fees of $150,000. $1,000,000 of the purchase price was held by the buyer to cover
the Companys contingent obligations.
The Company retained all accounts receivable for services provided prior to May 2009. Subsequent
to the
transaction date, the buyer made certain claims, and in June 2010, the buyer and the Company
received a final
settlement payment of $500,000 to resolve these claims. This payment was recognized as an
additional gain on the sale during the six-month period ended September 30, 2010.
As of May 2009, the Company had sold all of its HHE operations.
Pharmacy Operations
On June 11, 2009, the Company entered into an Asset Purchase Agreement with a leading pharmacy
management company to sell substantially all of the assets of JASCORP, LLC (JASCORP) for proceeds
of $2,200,000, less fees of $185,000. $220,000 of the purchase price is being held back by the
buyer until December 2011 in order to cover the Companys contingent obligations. JASCORP operated
the retail pharmacy software business that the Company acquired in July 2007. As part of the
divestiture, the Company entered into a License and Services Agreement with the buyer which
provides the Company the right to continue to use the software for internal purposes.
Industrial Staffing Operations
On May 29, 2009, the Company finalized the sale of substantially all of the assets of its
industrial and non-medical staffing business for cash proceeds of $250,000, which was paid in five
equal installments through September 2009. Additionally, the Company is to receive 50% of the
future earnings of the business until the total payments equal $1,600,000. During fiscal 2010, the
Company received $72,000 in earn out payments. The Company received additional payments of
$132,000 and $259,000 in May and August 2010, respectfully. These payments were recorded as
additional gain on the sale transaction. The Company retained all accounts receivable for services
provided prior to May 29, 2009.
30
Six-Month Period Ended September 30, 2010 Compared to the Six-Month Period Ended September 30,
2009
Results of Continuing Operations, (in thousands, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
Six-Month Period
|
|
|
|
Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
Revenues, net
|
|
$
|
51,260
|
|
|
$
|
51,014
|
|
Cost of revenues
|
|
|
37,453
|
|
|
|
36,549
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
13,807
|
|
|
|
14,465
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
19,315
|
|
|
|
19,329
|
|
Depreciation and amortization
|
|
|
634
|
|
|
|
942
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
19,949
|
|
|
|
20,271
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(6,142
|
)
|
|
|
(5,806
|
)
|
|
|
|
|
|
|
|
|
|
Other expenses:
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
1,823
|
|
|
|
1,684
|
|
Change in fair value of warrant liability
|
|
|
(137
|
)
|
|
|
|
|
Other
|
|
|
|
|
|
|
30
|
|
|
|
|
|
|
|
|
Total other expenses
|
|
|
1,686
|
|
|
|
1,714
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss before income tax expense
|
|
|
(7,828
|
)
|
|
|
(7,520
|
)
|
Income tax expense
|
|
|
73
|
|
|
|
100
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
|
|
$
|
(7,901
|
)
|
|
$
|
(7,620
|
)
|
|
|
|
|
|
|
|
Weighted average number of shares basic and diluted
|
|
|
177,267
|
|
|
|
160,709
|
|
Net loss from continuing operations per share basic and diluted
|
|
$
|
(0.04
|
)
|
|
$
|
(0.05
|
)
|
|
|
|
|
|
|
|
31
Revenues, Cost of Revenues and Gross Profits
The following table summarizes revenues, cost of revenues and gross profit by segment for the
six-month periods ended September 30, (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Total
|
|
|
|
|
|
|
% of Total
|
|
|
$ Increase/
|
|
|
% Increase/
|
|
|
|
2010
|
|
|
Revenue
|
|
|
2009
|
|
|
Revenue
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
Revenues, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services
|
|
$
|
41,295
|
|
|
|
80.6
|
%
|
|
$
|
44,389
|
|
|
|
87.1
|
%
|
|
$
|
(3,094
|
)
|
|
|
-7.0
|
%
|
Pharmacy
|
|
|
9,965
|
|
|
|
19.4
|
%
|
|
|
6,625
|
|
|
|
13.0
|
%
|
|
|
3,340
|
|
|
|
50.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51,260
|
|
|
|
100.0
|
%
|
|
|
51,014
|
|
|
|
100.0
|
%
|
|
|
246
|
|
|
|
0.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services
|
|
|
28,913
|
|
|
|
|
|
|
|
30,792
|
|
|
|
|
|
|
|
(1,879
|
)
|
|
|
-6.1
|
%
|
Pharmacy
|
|
|
8,540
|
|
|
|
|
|
|
|
5,757
|
|
|
|
|
|
|
|
2,783
|
|
|
|
48.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37,453
|
|
|
|
|
|
|
|
36,549
|
|
|
|
|
|
|
|
904
|
|
|
|
2.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Margin %
|
|
|
|
|
|
Margin %
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margins:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services
|
|
|
12,382
|
|
|
|
30.0
|
%
|
|
|
13,597
|
|
|
|
30.6
|
%
|
|
|
(1,215
|
)
|
|
|
-8.9
|
%
|
Pharmacy
|
|
|
1,425
|
|
|
|
14.3
|
%
|
|
|
868
|
|
|
|
13.1
|
%
|
|
|
557
|
|
|
|
64.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
13,807
|
|
|
|
26.9
|
%
|
|
$
|
14,465
|
|
|
|
28.4
|
%
|
|
$
|
(658
|
)
|
|
|
-4.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services Segment
The following table summarizes the Services segment revenues by type for the six-month periods
ended September 30, (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Total
|
|
|
|
|
|
|
% of Total
|
|
|
$ Increase/
|
|
|
% Increase/
|
|
|
|
2010
|
|
|
Revenue
|
|
|
2009
|
|
|
Revenue
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home care
|
|
$
|
33,221
|
|
|
|
80.4
|
%
|
|
$
|
34,943
|
|
|
|
78.7
|
%
|
|
$
|
(1,722
|
)
|
|
|
-4.9
|
%
|
Per diem medical staffing
|
|
|
5,308
|
|
|
|
12.9
|
%
|
|
|
6,702
|
|
|
|
15.1
|
%
|
|
|
(1,394
|
)
|
|
|
-20.8
|
%
|
Travel staffing
|
|
|
2,766
|
|
|
|
6.7
|
%
|
|
|
2,744
|
|
|
|
6.1
|
%
|
|
|
22
|
|
|
|
0.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Services
|
|
$
|
41,295
|
|
|
|
100.0
|
%
|
|
$
|
44,389
|
|
|
|
100.0
|
%
|
|
$
|
(3,094
|
)
|
|
|
-7.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Services segment remains the largest source of revenue for the Company. Services revenue comes
from two business lines: Home Care and Medical Staffing. Medical Staffing consists of both per
diem staffing as well as travel nursing and allied health staffing.
For the six-month period ending September 30, 2010, Home Care revenue as a percentage of total
Services segment revenue increased to 80.4% as compared with 78.7% for the prior year period. Home
Care revenues fell by $1,722,000, or 4.9%, from $34,943,000 to $33,221,000 compared to the prior
year period. Home Care revenue from government programs declined compared to the prior year period
as various state waiver and community-based programs reduced reimbursement rates, limit hours per
program participant or a combination of the two. This impacted the Companys business in several
key markets, including Arizona, Washington, North Carolina and California. In addition, private
duty Home Care revenue was impacted compared to the prior year by high unemployment rates and the
resulting availability of family caregivers in lieu of our services, and the impact of lower
retirement savings and investment accounts on the demand for private pay services.
32
Total Medical Staffing revenue declined 14.5% compared to the prior year period from $9,446,000 to
$8,074,000. Per diem medical staffing declined 20.8% over the prior year period, while travel
nursing and allied health medical staffing increased 0.8% over the prior year period. Overall
demand for temporary medical staffing remains depressed driven by low patient censuses, the return
of retired or part-time staff to full time status and the
increases in overtime accepted by permanent staff at many facilities. The increase in travel
staffing revenue was driven primarily by a higher level of orders from a large correctional
customer.
The Services segment operates independently and through a network of affiliated agencies
(Affiliates) 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 affiliated agencys commission is based on a percentage of gross profit (see
additional discussion in the Selling, General and Administrative section). Revenue generated
from the Affiliate locations was $27,145,000 for the six-month period ended September 30, 2010
compared to $29,951,000 for the prior year period. This $2,806,000, or 9.4%, decrease in revenue
was driven by lower levels of Medical Staffing as well as some reduction in Home Care revenues in
some Affiliate locations. The Company-Owned locations revenue decreased by $285,000, or 2.0%, to
$14,153,000 during this period compared to the prior year period. The Affiliate locations
accounted for 65.7% of total Services segment revenue during this period, and this percentage is
down slightly from 67.4% for the prior year period.
Gross margin in the Home Care and Medical Staffing business was 30.0% for the six-months ended
September 30, 2010, which is approximately consistent with 30.6% for the prior year period. While
the overall mix of higher margin home care business increased as a percentage of total revenues,
this gross margin benefit was offset by several factors. These factors included a reduction in
margins on several state-sponsored home care programs, such as Arizona, North Carolina, Washington
and California; a reduction in the percentage of business generated in some of the Companys higher
margin offices and markets, including the state of Michigan; and an overall decline in the margins
in the medical staffing business due to changes in staffing business mix.
Pharmacy Segment
The revenue in the Pharmacy segment increased by $3,339,000, or 50.4%, to $9,965,000 during the
six-month period ending September 30, 2010 compared to the prior year period. The growth in the
Pharmacy segment continues to be driven by the Companys DailyMed program and its relationship with
payers who are ultimately responsible for the total healthcare spend of its patient members. In
August 2010, the Company announced the amendment and extension of its agreement with WellPoint,
which was originally executed in June 2009. Under this agreement, the Company continues to roll
out the DailyMed medication management program to WellPoints high-risk Medicaid members in states
where WellPoint companies provide Medicaid managed care benefits. The initial five states are:
California, Virginia, New York, Kansas and South Carolina. The program was launched to WellPoints
high risk members in Virginia in August 2009. The rollout to WellPoints California patients began
during the latter portion of fiscal fourth quarter 2010 and to South Carolina patients during
fiscal first quarter 2011. The increase in revenue during the fiscal year to date was primarily
driven by new California patients. The DailyMed program will be rolled out to Kansas in November
2010. The Company anticipates the majority of its Pharmacy revenue growth over the next several
quarters to be attributable to the WellPoint arrangement.
The costs of revenue in the Pharmacy segment include the cost of medications and packaging for the
DailyMed proprietary dispensing system. Gross margins for the six-month period ended September 30,
2010 were 14.3% compared to 13.1% for the prior year period. The margin improvement was
attributable to improved drug pricing under its new prime vendor agreement with H.D. Smith, which
was executed in April 2010. Additionally, subsequent to the amendment to the WellPoint agreement
in August 2010, the Pharmacy began recognizing revenue for the additional services provided through
the DailyMed program. This incremental revenue has no additional cost of goods sold associated
with it, which resulted in margin improvement.
33
Selling, General and Administrative
The following table summarizes selling, general and administrative expenses by segment for the
six-month periods ended September 30, (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Total
|
|
|
|
|
|
|
% of Total
|
|
|
$ Increase/
|
|
|
% Increase/
|
|
|
|
2010
|
|
|
SG&A
|
|
|
2009
|
|
|
SG&A
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services
|
|
$
|
9,930
|
|
|
|
51.4
|
%
|
|
$
|
10,969
|
|
|
|
56.7
|
%
|
|
$
|
(1,039
|
)
|
|
|
-9.5
|
%
|
Pharmacy
|
|
|
4,691
|
|
|
|
24.3
|
%
|
|
|
3,454
|
|
|
|
17.8
|
%
|
|
|
1,237
|
|
|
|
35.8
|
%
|
Corporate
|
|
|
4,694
|
|
|
|
24.2
|
%
|
|
|
4,906
|
|
|
|
25.4
|
%
|
|
|
(212
|
)
|
|
|
-4.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
19,315
|
|
|
|
100.0
|
%
|
|
$
|
19,329
|
|
|
|
100.0
|
%
|
|
$
|
(14
|
)
|
|
|
-(0.1
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SG&A as a % of net revenue
|
|
|
37.7
|
%
|
|
|
|
|
|
|
37.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Services Segment
The Services segment selling, general and administrative expense decreased to $9,930,000 for the
six-month period ended September 30, 2010 compared to $10,969,000 for same period a year ago. This
$1,039,000, or 9.5%, decrease was primarily due to decreases in commissions paid to Affiliates and
bad debt expense. Affiliate commissions are based on the gross margins of the individual
Affiliates, and the $558,000, or 10.2%, decrease is approximately consistent with the 9.4% decrease
in Affiliate revenue. Additionally, bad debt expense decreased by $291,000 over the prior year
period. The Services business has focused on improving its cash collections on both current and
past due accounts and has both reduced the absolute dollar level of past due accounts, particularly
over 150 days, as well as decreased its days sales outstanding. The improved management of
accounts receivable has resulted in the need for a lower bad debt provision than in the prior year
quarter.
Pharmacy Segment
The Pharmacy segment selling, general and administrative expense increased by $1,237,000, or 35.8%,
to $4,691,000 during the six-month period ending September 30, 2010 compared to the prior year
period. In general, the increase in Pharmacy expenses was due to the significant growth in revenue
in this segment. Specifically, the increase in Pharmacy expenses during the six-month period
ending September 30, 2010 compared to the prior year period was due to increases in external call
center costs, contract labor, shipping costs and bad debt expense. Beginning in January 2010, the
Company began using an external call center to assist with patient enrollment efforts. In August
2010, the Pharmacy brought this function in-house. In order to supplement full-time staff, the
Pharmacy segment has been using contract labor, specifically pharmacists and pharmacy technicians,
with the ultimate goal of reducing its reliance on this contract labor over time. Finally,
shipping costs and bad debt expense increased as the Pharmacy revenue grows.
During the first half of fiscal 2011, the Indianapolis pharmacy and the Corporate offices moved to
a new location. Additionally, in late June, the Pharmacy converted to a new operating system. Due
to the move and the software conversion, the Pharmacy segment incurred certain additional costs
during the first half of the quarter, primarily moving expenses, over-time and temporary labor.
The DailyMed program includes a significant level of patient care and value-added services designed
to improve compliance, adherence and safety of a patients medication regimen. These pharmacy
services include consolidation, synchronization and transfer of prescriptions and medication
therapy management (MTM) services. The Company makes a significant investment in these services as
they are a key part to achieving the patient benefits and health care cost reductions associated
with DailyMed. The Companys business model contemplates that payers will be willing to share some
of these cost savings as they are realized either through a per member per month (PMPM) fee, fees
for services provided or some type of cost savings arrangement.
34
Corporate
Corporate selling, general and administrative expense decreased by $212,000, or 4.4%, to $4,694,000
for six-month period ending September 30, 2010 compared to $4,906,000 for the prior year period.
This decrease reflects reductions in professional fees and insurance costs partially offset by
certain severance costs. The reduction in legal fees was the primary driver in the lower
professional fees as the Company was involved in fewer disputes and claims in the current year
compared to the prior year. Insurance costs were lower due to reductions in premiums effective
with the policy year that began on September 1, 2010. The Company recognized approximately
$150,000 in severance-related costs during the six-month period ending September 30, 2010.
Depreciation and Amortization
The following table summarizes depreciation and amortization expense for the six-month periods
ended September 30 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ Increase/
|
|
|
% Increase/
|
|
|
|
2010
|
|
|
2009
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
Depreciation and amortization of property and equipment
|
|
$
|
348
|
|
|
$
|
624
|
|
|
|
(276
|
)
|
|
|
-44.3
|
%
|
Amortization of acquired intangible assets
|
|
|
286
|
|
|
|
317
|
|
|
|
(31
|
)
|
|
|
-9.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
634
|
|
|
$
|
942
|
|
|
$
|
(308
|
)
|
|
|
-32.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization of property and equipment decreased by $276,000 or 44.2%, during the
six-month period ended September 30, 2010 compared to the prior year period. The decrease reflects
the decrease in the depreciation expense relating to certain pharmacy software that became fully
depreciated during fiscal 2010.
Amortization of acquired intangible assets decreased by $31,000, or 9.8%, during fiscal second
quarter 2011 compared to the prior year quarter. The decrease reflects a slight decrease in the
amortization expense associated with customer relationships. The amortization expense is adjusted
annually and attempts to match the expense to the economic benefit generated by the specific
intangible asset.
Interest Expense and Income
The following table summarizes interest expense and income for the six-month periods ended
September 30, (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ Increase/
|
|
|
% Increase/
|
|
|
|
2010
|
|
|
2009
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
Interest expense
|
|
$
|
1,829
|
|
|
$
|
1,695
|
|
|
$
|
134
|
|
|
|
7.9
|
%
|
Interest income
|
|
|
(5
|
)
|
|
|
(11
|
)
|
|
|
6
|
|
|
|
-50.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,823
|
|
|
$
|
1,684
|
|
|
$
|
139
|
|
|
|
8.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense for the six-month period ending September 30, 2010 was $1,829,000 compared to
$1,695,000 for the prior year period, which represents an increase of $134,000, or 7.9%. Total
interest expense includes the amortization of debt discounts and deferred financing costs of
$190,000 and $111,000 for the periods ending September 30, 2010 and 2009, respectively.
Additionally, interest expense includes non-cash interest that was added to the principal balance
of the outstanding debt of $1,392,000 and $1,224,000 for the periods ending September 30, 2010 and
2009, respectively.
The average interest bearing liabilities balance (sum of the balances at the end of each quarter
divided by the number of quarters) for the six-month period ending September 30, 2010 was $37.0
million compared to $35.4 million for same period in the prior year, which represents an increase
of 4.4%. The increase was primarily due to the increase in the amounts due to H.D. Smith under the
line of credit agreement executed in April 2010, and the additional H.D. Smith borrowings were the
primary driver for the increase in interest expense during the current year quarter.
35
Change in Fair Value of Warrant Liability
The 7,135,713 warrants issued in November 2009 in conjunction with the equity financing transaction
and an additional 500,000 warrants issued in conjunction with certain debt financing are recorded
as a liability at fair value with subsequent changes in fair value recorded in earnings. The fair
value of the warrants is determined using the Black-Scholes pricing model and is affected by
changes in inputs to that model, including: our stock price, expected stock price volatility, and
contractual terms. To the extent that the fair value of the warrant liability increases or
decreases, the Company records a loss or gain in the statement of operations. The total gain of
$137,000 on the change in fair value of the warrant liability during the six-month period ending
September 30, 2010, was primarily due to the changes in our stock price.
Income Taxes
Income tax expense was $73,000 for the six-month period ended September 30, 2010 compared to
$100,000 for the same period a year ago. This income tax reduction is primarily a result of a
decrease in the estimated amounts due for Michigan Business Tax.
Due to the Companys losses in recent years, it has paid nominal federal income taxes. For federal
income tax purposes, the Company had significant permanent and timing differences between book
income and taxable income resulting in combined net deferred tax asset balance to be utilized by
the Company for which an offsetting valuation allowance has been established for the entire amount.
The Company has a net operating loss carryforward for tax purposes totaling $63.3 million that
expires at various dates through 2029. Internal Revenue Code Section 382 rules limit the
utilization of certain of these net operating loss carryforwards upon a change of control of the
Company. It has been determined that a change in control took place at the time of the reverse
merger in 2004, and as such, the utilization of $700,000 of the net operating loss carryforwards
will be subject to severe limitations in future periods.
36
Earnings (Loss) from Discontinued Operations
The following table summarizes the components of the earnings (loss) from discontinued operations
for the six-month periods ended September 30, (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Six Month Period Ended
|
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
Revenues, net:
|
|
|
|
|
|
|
|
|
Services Industrial Staffing
|
|
$
|
|
|
|
$
|
1,223
|
|
Catalog
|
|
|
660
|
|
|
|
1,009
|
|
Home Health Equipment
|
|
|
|
|
|
|
1,423
|
|
Pharmacy Software
|
|
|
|
|
|
|
348
|
|
|
|
|
|
|
|
|
|
|
$
|
660
|
|
|
$
|
4,003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations:
|
|
|
|
|
|
|
|
|
Services Industrial Staffing
|
|
$
|
|
|
|
$
|
(44
|
)
|
Catalog
|
|
|
(82
|
)
|
|
|
(31
|
)
|
Home Health Equipment
|
|
|
|
|
|
|
(1,228
|
)
|
Pharmacy Software
|
|
|
|
|
|
|
(174
|
)
|
|
|
|
|
|
|
|
|
|
$
|
(82
|
)
|
|
$
|
(1,477
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on disposal:
|
|
|
|
|
|
|
|
|
Services Industrial Staffing
|
|
$
|
391
|
|
|
$
|
129
|
|
Home Health Equipment
|
|
|
655
|
|
|
|
280
|
|
Pharmacy Software
|
|
|
|
|
|
|
(30
|
)
|
|
|
|
|
|
|
|
|
|
$
|
1,046
|
|
|
$
|
379
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from discontinued operations:
|
|
|
|
|
|
|
|
|
Services Industrial Staffing
|
|
$
|
391
|
|
|
$
|
85
|
|
Catalog
|
|
|
(82
|
)
|
|
|
(31
|
)
|
Home Health Equipment
|
|
|
655
|
|
|
|
(948
|
)
|
Pharmacy Software
|
|
|
|
|
|
|
(204
|
)
|
|
|
|
|
|
|
|
|
|
$
|
964
|
|
|
$
|
(1,098
|
)
|
|
|
|
|
|
|
|
Catalog Operations
On October 1, 2010, the Company completed the sale of its ownership interest in Rite at Home Health
Care Products, LLC to Home Health Depot, Inc. The Company is to receive 50% of future earnings of
the business until total payments equal $375,000. 40% of these proceeds are to be paid to a third
party. No earn-out payments will be payable after the quarter ending September 30, 2013. This
entity represented the Companys Catalog segment.
HHE Operations
On May 18, 2009, the Company completed the sale of its ownership interest in Lovell Medical Supply,
Inc., Beacon Respiratory Services of Georgia, Inc., and Trinity Healthcare of Winston-Salem, Inc.
to Aerocare Holdings, Inc. for total proceeds of $4,750,000, less fees of $150,000. At the time of
closing, $475,000 of the purchase price was held by the buyer to cover the Companys contingent
obligations. During fiscal 2010, the buyer released $267,000 of this amount. In May 2010, the
Company received the final payment of $155,000. These payments were recognized as additional gain
on the sale during the periods in which they were received. A total of $53,000 was retained by the
buyer to cover certain obligations of the Company. The entities sold represented the Southeast
region of the Companys HHE business.
37
On May 19, 2009, the Company entered into an Asset Purchase Agreement with Braden Partners, L.P. to
sell the assets of its Midwest region of the Companys HHE business. Total proceeds were
$4,000,000, less fees of $150,000. $1,000,000 of the purchase price was held by the buyer to cover
the Companys contingent obligations. The Company retained all accounts receivable for services provided prior to May 2009. Subsequent
to the transaction date, the buyer made certain claims, and in June 2010, the buyer and the Company
received a final
settlement payment of $500,000 to resolve these claims. This payment was recognized as an
additional gain on the sale during the six-month period ended September 30, 2010.
As of May 2009, the Company had sold all of its HHE operations.
Pharmacy Operations
On June 11, 2009, the Company entered into an Asset Purchase Agreement with a leading pharmacy
management company to sell substantially all of the assets of JASCORP, LLC (JASCORP) for proceeds
of $2,200,000, less fees of $185,000. $220,000 of the purchase price is being held back by the
buyer until December 2011 in order to cover the Companys contingent obligations. JASCORP operated
the retail pharmacy software business that the Company acquired in July 2007. As part of the
divestiture, the Company entered into a License and Services Agreement with the buyer which
provides the Company the right to continue to use the software for internal purposes.
Industrial Staffing Operations
On May 29, 2009, the Company finalized the sale of substantially all of the assets of its
industrial and non-medical staffing business for cash proceeds of $250,000, which was paid in five
equal installments through September 2009. Additionally, the Company is to receive 50% of the
future earnings of the business until the total payments equal $1,600,000. During fiscal 2010, the
Company received $72,000 in earn out payments. The Company received additional payments of
$132,000 and $259,000 in May and August 2010, respectfully. These payments were recorded as
additional gain on the sale transaction. The Company retained all accounts receivable for services
provided prior to May 29, 2009.
38
Liquidity and Capital Resources
The following summarizes the Companys cash flows for the six-month periods ended September 30, (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
Net cash used in operating activities
|
|
$
|
(8,284
|
)
|
|
$
|
(3,247
|
)
|
Net cash provided by investing activities
|
|
|
529
|
|
|
|
8,528
|
|
Net cash provided by (used in) financing activities
|
|
|
4,015
|
|
|
|
(6,803
|
)
|
Net change in cash and cash equivalents
|
|
|
(3,740
|
)
|
|
|
(1,522
|
)
|
Cash and cash equivalents, end of period
|
|
|
1,704
|
|
|
|
|
|
Availability under line of credit agreements
|
|
$
|
809
|
|
|
$
|
3,442
|
|
At September 30, 2010, the Company had $2,513,000 in cash and line of credit availability. The line
of credit balance fluctuates based on working capital needs. The line of credit availability is
based on the eligible accounts receivable within the Services segment.
Net cash used in operating activities was $8,284,000 for the six-month period ended September 30,
2010 compared to $3,247,000 for the same period of the prior year, which represents a change of
$5,037,000. The majority of this change was driven by changes in working capital. The net change
in operating assets and liabilities for the current period was $(3,484,000) compared to $1,483,000
in the prior year period, which represents a difference of $(4,967,000). Accounts receivable
account for $2,700,000 of this change. During the prior year period, the Company collected more
cash from receivables than during the current year due to two factors: 1. significant Services
segment collections compared to new billings during a period of declining revenue; and 2. the
collection of retained receivables subsequent to certain business divestitures.
Cash provided by investing activities of $529,000 for the six-month period ended September 30,
2010. This included $1,046,000 of additional cash payments received relating to the various
business divestitures that occurred during the fiscal first quarter 2009. These proceeds were
partially offset by $106,000 in cash payments for prior period business acquisitions and $411,000
in capital expenditures. Cash provided by investing activities was $8,528,000 for the six-month
period ended September 30, 2009. Total proceeds for the divestitures of the HHE, industrial
staffing and retail pharmacy software businesses were $9,320,000. This amount was offset by
$196,000 in cash payments relating to certain business acquisitions as well as $96,000 in capital
expenditures. Additionally, in conjunction with the Comerica Bank line of credit extension in July
2009, the Company invested $500,000 of restricted cash in order to collateralize the liability.
Cash provided by financing activities was $4,015,000 for the six-month period ended September 30,
2010. The Company drew $4,500,000 from the new H.D. Smith line of credit during the period, and an
additional $298,000 from the Comerica Bank line of credit. The Company paid off the
AmerisourceBergen Drug Corporation note payable balance of $750,000 in April 2010 and also paid
down a total of $34,000 in various capital lease obligations during the six-month period. Cash
used in financing activities of $6,803,000 for the six-month period ended June 30, 2009 included
$4,334,000 of debt payments primarily related to obligations subsequent to the various business
divestitures as well as a $4,610,000 reduction in the outstanding balance of the Comerica Bank line
of credit. The Company received $2,141,000 of proceeds from a short-term note payable in September
2009, and this balance was paid in full in November 2009.
On April 23, 2010, the Company executed a Line of Credit and Security Agreement with H.D. Smith
Wholesale Drug Co., its new primary supplier of pharmaceutical products. Under terms of the
agreement, the Company can borrow up to $5,000,000, including amounts payable under normal product
purchasing terms. Beginning April 1, 2011, borrowings under the agreement will be limited based
upon a borrowing base of the assets of the Pharmacy business. The debt accrues interest at the
greater of 7% and the prime rate plus 3%, and it matures on April 23, 2013. Interest during the
first 12 months of the agreement will be capitalized and then interest only payments are required
from May 2011 through April 2012. Beginning with May 2012, the Company will make monthly payments
of $75,000 plus interest. Borrowing may be prepaid at any time without penalty. The agreement
includes certain financial covenants beginning in fiscal 2012. In conjunction with the financing,
the Company issued H.D. Smith warrants to purchase common stock, and the warrant terms are more
fully described in Note 7 to the consolidated financial statements included in this report.
39
As of September 30, 2010, the Company had total debt obligations of $38,901,000, of which
$18,473,000 and $6,836,000 were payable to JANA and Vicis, respectively, and mature in April 2012.
Both JANA and Vicis own approximately 15% of the Companys outstanding common stock.
Additionally, the Company had outstanding balances of $8,072,000 due to Comerica Bank and
$4,533,000 due to H.D. Smith. See Notes 5 and 6 to the consolidated financial statements included
in this report for more detail on these debt agreements.
The debt agreements with JANA, Vicis and LSP Partners require the lenders consent for debt
transactions which are senior or pari passu to the debt due them. Additionally, the lenders also
require consent for equity transactions. The Company received the lenders consent in conjunction
with the H.D. Smith debt financing in April 2010 and with the equity financing finalized in October
2010 (See Note 13 Subsequent Event).
The Comerica Bank line of credit agreement includes certain financial covenants. These covenants
are specific to Arcadia Services, Inc., a wholly-owned subsidiary of the Company, which is the
legal entity that operates the Companys Services segment. As of September 30, 2010, the Company
was not in compliance with two financial covenants. On October 26, 2010, the Company and the bank
entered into an amendment and waiver agreement. This amendment reduced the revolving credit
commitment amount from $14 million to $11 million and extended the maturity date to April 1, 2010.
Additionally, the amendment waived the covenant violations and established new covenant
requirements. Specifically, subsequent to this amendment, the following financial covenants apply:
tangible effective net worth of $750,000 as of December 31, 2010 and gradually increasing on a
quarterly basis to $1.25 million by March 31, 2012; minimum quarterly net income of $400,000; and,
minimum subordination of indebtedness to Arcadia Resources, Inc. of $9.15 million. In the event of
default of any one of the financial covenants, the bank may declare all outstanding indebtedness
due and payable, and the bank shall not be obligated to make any further advances to Arcadia
Services, Inc. If this were to occur, the Company would need to obtain alternative financing, if
possible, and the terms of this alternative financing would presumably be less attractive than
those of the current line of credit agreement. Arcadia Services, Inc.s ability to meet its
minimum subordination of indebtedness covenant could be impacted by the parent companys available
cash necessary to fund the early stage Pharmacy operations.
The H.D. Smith line of credit agreement includes certain financial covenants specific to
PrairieStone Pharmacy, LLC, a wholly-owned subsidiary of the Company, which is the legal entity
that operates the Companys Pharmacy segment. Specifically, the financial covenants are as
follows: positive quarterly earnings before income tax, depreciation, and amortization (EBITDA)
and current assets divided by current liabilities of greater than .75. These financial covenants
do not take effect until the fiscal quarter ending March 31, 2012. The Companys ability to meet
these financial covenants in the future will depend on the Pharmacy segments ability to improve
its financial performance over the next seven fiscal quarters.
On November 2, 2010, the Company finalized an equity financing transaction whereby it raised
$5,000,000 in gross proceeds. Under the terms of the agreements with the investors, the Company
sold 15,625,000 shares of common stock for $0.32 per share. Expenses associated with the
transaction, which include a 7.0% placement fee, are estimated to be $450,000 resulting in net
proceeds of $4,550,000.
Net accounts receivable from continuing operations were $12,184,000 at September 30, 2010 compared
to $12,290,000 at March 31, 2010. The Services segment account for 87% and 90% at June 30, 2010
and March 31, 2010, respectively.
The Company has a limited number of customers with individually large amounts due at any given
balance sheet date. The Companys payer mix for the six-month period ended September 30, 2010 was
as follows:
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|
|
|
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Medicare
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0
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%
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Medicaid/other government
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|
|
30
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%
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Commercial insurance
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|
20
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%
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Institution/facilities
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|
|
28
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%
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Private pay
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|
|
22
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%
|
Recent Accounting Pronouncements
Please see Note 1 Description of Company and Recent Accounting Pronouncements of this Report for
recent accounting pronouncements that may have an impact on the Companys consolidated financial
statements.
40
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 Companys management on a timely basis to allow decisions regarding required disclosure.
As of September 30, 2010, the Companys management, including the Companys Chief Executive Officer
(CEO) and Chief Financial Officer (CFO), conducted an evaluation of the effectiveness of the
Companys 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
Companys disclosure controls and procedures are effective.
There has been no change in the Companys 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, 2010
that has materially affected, or is reasonably likely to materially affect, the Companys 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.
We have a history of operating losses and negative cash flow that may continue into the
foreseeable future.
We have a history of operating losses and negative cash flow. While we have achieved positive
cash flow from operations in some recent quarters, which was partially due to deferring certain
interest amounts, net cash flow has been negative, and we continue to follow a disciplined
approach to cash management. If we fail to execute our strategy to achieve and maintain
profitability in the future, investors could lose confidence in the value of our common stock,
which could cause our stock price to decline, adversely affect our ability to raise additional
capital, and adversely affect our ability to meet the financial covenants contained in our credit
agreements. Further, if we continue to incur operating losses and negative cash flow, we may have
to implement further significant cost cutting measures, which could include a substantial
reduction in work force, location closures, and/or the sale or disposition of certain assets or
subsidiaries. We cannot assure that any of the cost cutting measures we implement will be
effective or result in profitability or positive cash flow. To achieve profitability, we will
also need to, among other things, increase our revenue base, reduce our cost structure and
realize economies of scale. If we are unable to achieve and maintain profitability, our stock
price could be materially adversely affected.
41
Our indebtedness could adversely affect our financial condition and operations, prevent us from
fulfilling our debt service obligations and adversely affect our ability to operate our business.
Our indebtedness could have important consequences, including, but not limited to:
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|
We may be unable to obtain additional financing for working capital, capital
expenditures, acquisitions and general corporate or other purposes.
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|
We may be unable to plan for, or react to, changes in our business and general market
conditions.
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|
We may be more vulnerable in a volatile market and at a competitive disadvantage to less
leveraged competitors.
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Our operating flexibility is more limited due to financial and other restrictive
covenants, including restrictions on incurring additional debt, creating liens on our
properties, making acquisitions and paying dividends.
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|
We are subject to the risks that interest rates and our interest expense will increase.
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Our ability to use operating cash flow in other areas of our business may be limited
because we must dedicate a substantial portion of these funds to make principal and
interest payments on our indebtedness.
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|
Our ability to make investments or take other actions or borrow additional funds may be
limited based on the financial and other restrictive covenants in our indebtedness.
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|
The amount we are permitted to draw on our revolving credit facilities may be limited
and we may be unable to fund our early-stage pharmacy product and patient care services and
home care staffing business strategies.
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|
|
|
We may be forced to implement cost reductions, which could impact our product and
service offerings.
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|
|
We may be unable to successfully implement our growth strategy and spread our cost
structure over a larger revenue base and ultimately become profitable.
|
Due to our debt level, our history of operating losses and negative cash flows, and the current
conditions in the credit markets, we may not be able to increase the amount we can draw on our
revolving credit facility with Comerica Bank, or to obtain credit from other sources, to fund our
future needs for working capital, funding early-stage strategies and ongoing business operations,
or acquisitions.
Due to our debt level and the current conditions in the credit market, there is the risk that
Comerica Bank or other sources of credit may decline to increase the amount we are permitted to
draw on the revolving credit facilities or to lend additional funds for working capital, funding
our early-stage pharmacy product and patient care services and home care staffing business
strategies, making acquisitions and for other purposes. This
development could result in various consequences to the Company, ranging from implementation of
cost reductions, which could impact our product and service offerings, to the need to revise
managements business plan for fiscal 2011 that depends on improvements in profitability and a
disciplined approach to cash management, to the modification or abandonment of these strategies.
We may not be able to meet the financial covenants contained in our credit facilities, and we may
not be able to obtain waivers for any violations of those covenants should they occur.
Under certain of our existing credit facilities, we are required to adhere to certain financial
covenants. We were not in compliance with two financial covenants under our Comerica Bank line of
credit as of September 30, 2010, but we received a waiver of this non-compliance from the bank.
If there are future covenant violations, our lenders could declare a default under the applicable
credit facility and, among other actions, refuse to make additional advances, increase our
borrowing costs, further restrict our operations, take possession or control of any asset
(including our cash) and demand the immediate repayment of all amounts outstanding under the
credit facility. Any of these actions could have a material adverse affect on our financial
condition and liquidity. Based on our history of operating losses, we cannot guarantee that we
would be able to refinance our existing credit facility or obtain alternative financing.
42
In addition to the financial covenants, our existing credit facility with Comerica Bank includes
a subjective acceleration clause and requires the Company to maintain a lockbox. Currently, the
Company has the ability to control the funds in the deposit account and determine the amount
issued to pay down the line of credit
balance. The bank reserves the right under the security agreement to request that the
indebtedness be on a remittance basis in the future, whether or not an event of default has
occurred. If the bank exercises this right, then the Company would be forced to use its cash to
pay down this indebtedness rather than for other needs, including day-to-day operations,
expansion initiatives or the pay down of debt which accrues interest at a higher rate.
The terms of our credit agreements with various lenders subject us to the risk of foreclosure on
certain property.
Our wholly-owned subsidiary RKDA, Inc. granted Comerica Bank a first-priority security interest
in all of the issued and outstanding capital stock of its wholly-owned subsidiary, Arcadia
Services, Inc. and Arcadia Services, Inc. and its subsidiaries granted Comerica Bank security
interests in all of their assets. Effective April 2010, we granted H.D. Smith Wholesale Drug Co.
a first priority security interest in all of the issued and outstanding ownership interest of its
wholly-owned subsidiary PrairieStone Pharmacy, LLC, and PrairieStone granted H.D. Smith a
security interest in all of its assets. Additionally, PrairieStone provided our lenders, JANA
Master Fund, Ltd. (JANA), Vicis Capital Master Fund (Vicis), and LSP Partners, LP (LSP), a
subordinated security interest in its assets. If an event of default occurs under the applicable
credit agreements, each lender may, at its option, accelerate the maturity of the debt and
exercise its respective right to foreclose on the issued and outstanding capital stock and/or on
all of the assets of Arcadia Services, Inc. and its subsidiaries, and/or PrairieStone Pharmacy,
LLC and its subsidiaries. Any such default and resulting foreclosure would have a material
adverse effect on our financial condition and our ability to continue operations.
In order to fund operations, repay our debt obligations, or pursue our growth strategies, we may
seek additional equity financing, which could result in dilution to our security holders and
adversely affect our stock price.
On November 2, 2010, the Company sold certain institutional investors an aggregate of 15,625,000
shares of common stock. The Company raised $5 million in gross proceeds from this transaction.
Additionally, in November 2009, the Company finalized a similar equity financing transaction
whereby it raised $10.2 million through the sale of 15,857,141 shares of common stock and
7,135,713 warrants to purchase common stock. We may continue to raise additional financing
through the equity markets to repay debt obligations and to fund operations. We also plan to
continue to expand product and service offerings. Because of the capital requirements needed to
pursue our early-stage pharmacy growth strategies, we may access the public or private equity
markets whenever conditions appear to us to be favorable, even if we do not have an immediate
need for additional capital at that time. To the extent we access the equity markets, the price
at which we sell shares may be lower than the current market prices for our common stock. If we
obtain financing through the sale of additional equity or convertible debt securities, this could
result in dilution to our security holders by increasing the number of shares of outstanding
stock. We cannot predict the effect this dilution may have on the price of our common stock.
As part of a recapitalization or restructuring plan necessary to address the Companys
significant amount of outstanding debt, current and future shareholders could be substantially
diluted.
The Company intends to use a majority of the $4.5 million in net proceeds from the November 2010
equity raise to finance working capital needs. The Companys operating cash flow has generally
been negative in recent quarters, and generating positive cash flow is highly dependent on the
growth of Pharmacy segment revenues and improved profitability in that segment. The Company has
a significant amount of debt that matures within the next eighteen months, and it will not be
able to generate sufficient positive cash flow from operations in that timeframe to repay this
indebtedness. As a result, the Company will continue to explore options for dealing with these
debt maturities, which could include renegotiation of the terms of these debt instruments with
the current debt holders, raising additional capital (in the form of debt or equity) to refinance
the outstanding debt, selling assets and using the proceeds to repay debt, other restructuring or
recapitalization plans, or a combination thereof. Depending on the options pursued by the
Company, the result could be substantial dilution of current and future holders of the Companys
common stock. There can be no assurance that any such recapitalization or debt restructuring
plans will be successful.
43
To the extent we are unable to generate sufficient cash from operations or raise adequate funds
from the equity or debt markets, we would need to sell assets or modify or abandon our growth
strategy.
In addition to the $5 million of equity financing raised in November 2010, we finalized an
additional $5 million of debt financing with H.D. Smith in April 2010. The net proceeds from
these financing transactions, combined with our cash on hand and line of credit availability, may
not be adequate to satisfy our cash needs over the long-term. To the extent that we are unable to
generate sufficient cash from operations, or to raise additional funds from the equity or debt
markets, we may be required to sell assets or modify or abandon our growth strategy. Asset sales
and modification or abandonment of our growth strategy could negatively impact our profitability
and financial position, which in turn could negatively impact the price of our common stock.
Due to our operating losses during recent fiscal years, our stock could be at risk of being
delisted by the NYSE Amex Equities Exchange.
Our stock currently trades on the NYSE Amex Equities Exchange (Amex). The Amex, as a matter of
policy, will consider the suspension of trading in, or removal from listing of any stock when, in
the opinion of the Amex (i) the financial condition and/or operating results of an issuer of
stock listed on the Amex appear to be unsatisfactory, (ii) it appears that the extent of public
distribution or the aggregate market value of the stock has become so reduced as to make further
dealings on the Amex inadvisable, (iii) the issuer has sold or otherwise disposed of its
principal operating assets, or (iv) the issuer has sustained losses which are so substantial in
relation to its overall operations or its existing financial condition has become so impaired
that it appears questionable, in the opinion of the Amex, whether the issuer will be able to
continue operations and/or meet its obligations as they mature. We have sustained net losses, we
had a stockholders deficit as of March 31, 2010 and our stock has been trading at relatively low
prices. Delisting of our common stock would adversely affect the price and liquidity of our
common stock.
Changes in federal and state laws that govern our financial relationships with physicians and
other health care providers may impact potential or current referral sources.
We offer certain healthcare-related products and services that are subject to federal and state
laws restricting our relationship with physicians and other healthcare providers. Generally
referred to as anti-kickback laws, these laws prohibit certain direct and indirect payments or
other financial arrangements that are designed to encourage the referral of patients to a
particular medical services provider. In addition, certain financial relationships, including
ownership interests and compensation arrangements, between physicians and providers of designated
health services, such as our Company, to whom those physicians refer patients, are prohibited by
the federal physician self-referral prohibition, known as the Stark Law, and similar state
laws. Violations of these laws could lead to fines or sanctions that could have a material
adverse effect on our business. In addition, changes in healthcare law or new interpretations of
existing laws may have a material impact on our business and results of operations.
We are required to comply with laws governing the transmission of privacy of health information.
The Health Insurance Portability and Accountability Act of 1996, or HIPAA, requires us to comply
with standards for the exchange of health information within our Company and with third parties,
such as payers, business associates and consumers. These include standards for common health care
transactions, such as claims information, plan eligibility, payment information, the use of
electronic signatures, unique identifiers for providers, employers, health plans and individuals
and security, privacy and enforcement. New standards and regulations may be adopted governing the
use, disclosure and transmission of health information with which we may be required to comply.
We could be subject to criminal penalties and civil sanctions if we fail to comply with these
standards. In addition, compliance with new standards and regulations could increase our costs
and adversely affect our results of operations.
44
Because we depend on key management, the loss of the services or advice of any of these persons
could have a material adverse effect on our business and prospects.
Our success is dependent on our ability to attract and retain qualified and experienced
management and personnel. We do not presently maintain key person life insurance for any of our
personnel. There can be no
assurance that we will be able to attract and retain key personnel in the future, and our
inability to do so could have a material adverse effect on us. Our management team will need to
work together effectively to successfully develop and implement our business strategies and
financial operations. In addition, management will need to devote significant attention and
resources to preserve and strengthen relationships with employees, customers and the investor
community. If our management team is unable to achieve these goals, our ability to grow our
business and successfully meet operational challenges could be impaired.
We do not have long-term agreements or exclusive guaranteed order contracts with our home care,
hospital and healthcare facility clients.
The success of our Home Care and Medical Staffing business depends upon our ability to
continually secure new orders from home care clients, hospitals and other healthcare facilities
and to fill those orders with our temporary healthcare professionals. We do not have long-term
agreements or exclusive guaranteed order contracts with our home care, hospital and health care
facility clients. We rely on our agencies to establish and maintain positive relationships with
these clients. If we, or our agents, fail to maintain positive relationships with our home care,
hospital and healthcare facility clients, we may be unable to generate new temporary healthcare
professional orders and our business may be adversely affected. In addition, many of these
clients may have devised strategies to reduce the expenditures on temporary healthcare workers
and to limit overall agency utilization. If current pressures to control agency usage continue
and escalate, we will have fewer business opportunities, which could harm our business.
Sales and profitability in our Pharmacy segment depends on continued demonstration of the
effectiveness of our DailyMed business model, which is in its early stages of a broad market
roll-out.
The success of our Pharmacy segment is dependent on the viability and continued demonstration of
the effectiveness of the DailyMed
business model, which is in the early stages of market
roll-out. As an innovative, first to market pharmacy care model, DailyMed
is challenging the
approach of traditional community based retail pharmacies and others to providing pharmacy
products and services. It is providing a unique opportunity for at-risk payers to substantially
reduce health care costs. Market adoption and customer acceptance are key to continued growth in
revenues as is payer adoption of DailyMed
as part of efforts to
reduce overall health care spend. To date, competitive responses to DailyMed
have yet to evolve.
Our ability to grow revenue and receive compensation for the value-added services we provide are
keys to the long-term financial viability of the DailyMed
business model.
Our Pharmacy segment revenue is highly dependent upon our relationships with key state Medicaid
programs, managed care organizations, health plans and other payers.
A significant portion of our current Pharmacy segment revenue is generated from programs that we
have in place with several key state Medicaid programs, managed care organizations, health plans
and other payers, including Indiana Medicaid and WellPoint. The rate of growth in the Pharmacy
segment is highly dependent on maintaining our on-going relationships with these parties. While
we have contractual arrangements with some of these entities, including WellPoint, at present
these agreements may be terminated after a relatively short notice period. As a result, our
ability to grow revenue under these arrangements is dependent upon several factors, including the
rate of enrollment of their members into the program, the quality of our services and our ability
to help at-risk payers achieve health care cost containment and reduction. In addition, our
ability to grow revenue under these programs depends upon factors outside of our control,
including state appropriations and funding and changes in eligibility requirements. If we
provide the service levels and results we anticipate from the DailyMed
program, we would expect
to be able to enter into longer-term agreements with many of these payers that have the assurance
of substantial future revenue to the Company. However, our inability to maintain these
relationships, and specifically our agreement with WellPoint, would negatively impact current and
future Pharmacy segment revenue. There can be no assurance that the loss of these relationships
would be offset by relationships with new or additional payers.
Our operations subject us to risk of litigation.
Operating in the homecare industry exposes us to an inherent risk of wrongful death, personal
injury, professional malpractice and other potential claims or litigation brought by our
consumers and employees. These claims may include, for example, allegations that we did not
properly treat or care for a consumer or that we failed to follow internal or external procedures
that resulted in death or harm to a consumer.
45
In addition, regulatory agencies may initiate administrative proceedings alleging violations of
statutes and regulations arising from our services and seek to impose monetary penalties on us.
We could be required to pay substantial amounts to respond to regulatory investigations or, if we
do not prevail, damages or penalties arising from these legal proceedings. We also are subject to
potential lawsuits under the False Claims Act or other federal and state whistleblower statutes
designed to combat fraud and abuse in our industry. These lawsuits can involve significant
monetary awards or penalties which may not be covered by our insurance. If our third-party
insurance coverage and self-insurance reserves are not adequate to cover these claims, it could
have a material adverse effect on our business, results of operations and financial condition.
Even if we are successful in our defense, civil lawsuits or regulatory proceedings could distract
management from running our business or irreparably damage our reputation.
A significant decline in sales in our home care and staffing businesses would adversely impact
our revenue, operating income and cash flow and our ability to repay indebtedness and invest in
new products and services.
Our home care and medical staffing business has traditionally accounted for the majority of our
revenue, operating profit and cash flow. Our business strategy is premised upon continued growth
in this segment consistent with underlying market trends. While we believe we are well-positioned
to increase sales in this segment, there can be no assurance that we will do so. Failure to
achieve our sales targets in this market segment would adversely impact our revenue. While
operating expense reductions and other actions would be taken in response to a decline in
projected sales, such a reduction could adversely affect our projected operating income and cash
flow. If this were to occur, we would have less cash available to repay short-term and long-term
indebtedness. We may also have to reduce our investment in other segments of the business and
modify our business strategy.
Sales of certain of our services and products are largely dependent upon payments from
governmental programs and private insurance, and cost containment initiatives by these payers may
reduce our revenues, thereby harming our performance.
In the U.S., healthcare providers and consumers who purchase home care services, prescription
drug products and related products and services generally rely on third party payers, such as
Medicare and Medicaid, to reimburse all or part of the cost of the healthcare product or service.
Our sales and profitability are affected by the efforts of healthcare payers to contain or reduce
the cost of healthcare by lowering reimbursement rates, limiting the scope of covered services,
and negotiating reduced or capitated pricing arrangements. Any changes which lower reimbursement
levels under Medicare, Medicaid or private pay programs, including managed care contracts, could
reduce our future revenue. Furthermore, other changes in these reimbursement programs or in
related regulations could reduce our future revenue. These changes may include modifications in
the timing or processing of payments and other changes intended to limit or decrease the growth
of Medicare, Medicaid or third party expenditures. In addition, our profitability may be
adversely affected by any efforts of our suppliers to shift healthcare costs by increasing the
net prices on the products we obtain from them.
The markets in which we operate are highly competitive and we may be unable to compete
successfully against competitors with greater resources.
We compete in markets that are constantly changing, intensely competitive (given low barriers to
entry), highly fragmented and subject to dynamic economic conditions. Increased competition is
likely to result in price reductions, reduced gross margins, loss of customers, and loss of
market share, any of which could adversely affect our net revenue and results of operations. Many
of our competitors and potential competitors have more capital and marketing and technical
resources than we do. These competitors and potential competitors include large drugstore chains,
pharmacy benefits managers, on-line marketers, national wholesalers, and national and regional
distributors. Further, the Company may face a significant competitive challenge from alliances
entered into between and among its competitors, major HMOs or chain drugstores, as well as from
larger competitors created through industry consolidation. These potential competitors may be
able to respond more quickly than we can to emerging market changes or changes in customer needs.
To the extent competitors seek to gain or retain market share by reducing prices or increasing
marketing expenditures, we could lose revenues or clients. In addition, relatively few barriers
to entry exist in local healthcare markets.
As a result, we could encounter increased competition in the future that may increase pricing
pressure and limit our ability to maintain or increase our market share for our mail order
pharmacy and related businesses.
46
We cannot predict the impact that registration of shares may have on the price of our common
stock.
We cannot predict the impact, if any, that sales of, or the availability for sale of, shares of
our common stock by selling security holders pursuant to a prospectus or otherwise will have on
the market price of our securities prevailing from time to time. The possibility that substantial
amounts of our common stock might enter the public market could adversely affect the prevailing
market price of our common stock and could impair our ability to fund acquisitions or to raise
capital in the future through the sales of securities. Sales of substantial amounts of our
securities, including shares issued upon the exercise of options or warrants, or the perception
that such sales could occur, could adversely affect prevailing market prices for our securities.
The price of our common stock has been, and will likely continue to be, volatile, which could
diminish the ability to recoup an investment, or to earn a return on an investment, in our common
stock.
The market price of our common stock has fluctuated over a wide range, and it is likely that it
will continue to do so in the future. Limited demand for our common stock has resulted in limited
liquidity, and it may be difficult to dispose of our securities. Due to the volatility of the
price of our common stock, an investor may be unable to resell shares of our common stock at or
above the price paid for them, thereby exposing an investor to the risk that he may not recoup an
investment in our common stock or earn a return on such an investment. In the past, securities
class action litigation has been brought against companies following periods of volatility in the
market price of their securities. If we are the target of similar litigation in the future, we
would be exposed to incurring significant litigation costs. This would also divert managements
attention and resources, all of which could substantially harm our business and results of
operations.
Resale of our securities by any holder may be limited and affected by state blue-sky laws, which
could adversely affect the price of our securities and the holders investment in our Company.
Under the securities laws of some states, shares of common stock and warrants can be sold in such
states only through registered or licensed brokers or dealers. In addition, in some states,
warrants and shares of common stock may not be sold unless these shares have been registered or
qualified for sale in the state or an exemption from registration or qualification is available
and is complied with. The requirement of a seller to comply with
the requirements of state blue sky laws may lead to delay or inability of a holder of our
securities to dispose of such securities, thereby causing an adverse effect on the resale price
of our securities.
The issuance of our preferred stock could materially impact the market price of our common stock
and the rights of holders of our common stock.
We are authorized to issue 5,000,000 shares of serial preferred stock, par value $0.001. Shares
of preferred stock may be issued from time to time in one or more series as may be determined by
our Board of Directors. Except as otherwise provided in our Restated Articles of Incorporation,
the Board of Directors has the authority to fix by resolution adopted before the issuance of any
shares of each particular series of preferred stock, the designation, powers, preferences, and
relative participating, optional redemption and other rights, and the qualifications,
limitations, and restrictions of that series. The issuance of our preferred stock could
materially impact the price of our common stock and the rights of holders of our common stock,
including voting rights. The issuance of preferred stock could decrease the amount of earnings
and assets available for distribution to holders of common stock, and may have the effect of
delaying, deferring or preventing a change in control of our company, despite such change of
control being in the best interest of the holders of our common stock. The existence of
authorized but unissued preferred stock may enable the Board of Directors to render more
difficult or to discourage an attempt to obtain control of us by means of a merger, tender offer,
proxy contest or otherwise.
The exercise of common stock warrants and stock options may depress our stock price and may
result in dilution to our common security holders.
Warrants to purchase approximately 11.6 million shares of our common stock were issued and
outstanding as of September 30, 2010, and an additional 500,000 warrants may vest in March 2011.
Options to purchase approximately 8.3 million shares of our common stock were issued and
outstanding as of September 30, 2010. The Arcadia Resources, Inc. 2006 Equity Incentive Plan
(the Plan), as amended on October 14, 2009, allows
for the granting of additional incentive stock options, non-qualified stock options, stock
appreciation rights and restricted shares up to 15 million shares (5.0% of our authorized shares
of common stock as of the date the Plan was approved), of which the Company had available
approximately 5.1 million shares as of September 30, 2010 for future grants.
47
If the market price of our common stock is above the exercise price of some of the outstanding
warrants or options; the holders of those warrants or options may exercise their warrants or
options and sell the common stock they acquire upon exercise in the public market. Sales of a
substantial number of shares of our common stock in the public market may depress the prevailing
market price for our common stock and could impair our ability to raise capital through the
future sale of our equity securities. Additionally, if the holders of outstanding warrants
exercise those warrants, our common security holders will suffer dilution in their voting power.
The exercise price and the number of shares subject to the warrant or option is subject to
adjustment upon stock dividends, splits and combinations, as well as certain anti-dilution
adjustments as set forth in the respective common stock warrants.
We depend on our affiliated agencies and our internal sales force to sell our services and
products, the loss of which could adversely affect our business.
We rely upon our affiliated agencies and our internal sales force to sell our staffing and home
care services and our internal sales force to sell our pharmacy products and services. Arcadia
Services affiliated agencies are owner-operated businesses. The primary responsibilities of
Arcadia Services affiliated agencies include the recruitment and training of field staff
employed by Arcadia Services and generating and maintaining sales to Arcadia Services customers.
The arrangements with affiliated agencies are formalized through a standard contractual
agreement, which states performance requirements of the affiliated agencies. Our employees
provide the services to our customers, and the affiliated agents and internal sales force are
restricted by non-competition agreements. In the event of loss of our affiliated agents or
internal sales force personnel, we would recruit new sales and marketing personnel and/or
affiliated agents, which could cause our operating costs to increase and our sales to fall in the
interim.
Declines in prescription volumes may negatively affect our net revenues and profitability.
We dispense significant volumes of brand-name and generic drugs as part of our Pharmacy business,
which we expect to be a significant source of our net revenues and profitability. Demand for
prescription drugs can be negatively affected by a number of factors, including increased safety
risk problems, manufacturing issues,
regulatory action, and negative press or media coverage. Certain prescriptions may also be
withdrawn by their manufacturer or transition to over-the-counter products. A reduction in the
use of prescription drugs may negatively affect our volumes, net revenues, profitability and cash
flows.
The success of our business depends on maintaining a well-secured pharmacy operation and
technology infrastructure and failure to do so could adversely impact our business.
We depend on our infrastructure, including our information systems, for many aspects of our
business operations, particularly our pharmacy operations. A fundamental requirement for our
business is the secure storage and transmission of personal health information and other
confidential data and we must maintain our business processes and information systems, and the
integrity of our confidential information. Although we have developed systems and processes that
are designed to protect information against security breaches, failure to protect such
information or mitigate any such breaches may adversely affect our operations. Malfunctions in
our business processes, breaches of our information systems or the failure to maintain effective
and up-to-date information systems could disrupt our business operations, result in customer and
member disputes, damage our reputation, expose us to risk of loss or litigation, result in
regulatory violations, increase administrative expenses or lead to other adverse consequences.
Any additional impairment of goodwill and other intangible assets could negatively impact our
results of operations.
During fiscal 2010 and 2009, we wrote off an aggregate of $14.6 million and $23.5 million,
respectively, of goodwill and other intangible assets. As of September 30, 2010, we have $2.5
million of goodwill and $7.4 million of other intangible assets remaining on our balance sheet.
These intangibles are subject to an impairment test on an annual basis and are also tested
whenever events and circumstances indicate possible impairment. Any excess goodwill resulting
from the impairment test must be written off in the period of
determination. Intangible assets (other than goodwill) are generally amortized over the useful
life of such assets. In addition, from time to time, we may acquire or make an investment in a
business which will require us to record goodwill based on the purchase price and the value of
the acquired assets. We may subsequently experience unforeseen issues with such business which
adversely affect the anticipated returns of the business or value of the intangible assets and
trigger an evaluation of the recoverability of the recorded goodwill and intangible assets for
such business. Future determinations of significant write-offs of goodwill or intangible assets
as a result of an impairment test or any accelerated amortization of other intangible assets
could have a negative impact on our results of operations and financial condition.
48
Negative publicity or changes in public perception of our services may adversely affect our
ability to receive referrals, obtain new agreements and renew existing agreements.
Our success in receiving referrals, obtaining new agreements and renewing our existing agreements
depends upon maintaining our reputation as a quality service provider among governmental
authorities, physicians, hospitals, discharge planning departments, case managers, nursing homes,
rehabilitation centers, advocacy groups, consumers and their families, other referral sources and
the public. Negative publicity, changes in public perceptions of our services or government
investigations of our operations could damage our reputation and hinder our ability to receive
referrals, retain agreements or obtain new agreements. Increased government scrutiny may also
contribute to an increase in compliance costs and could discourage consumers from using our
services. Any of these events could have a negative effect on our business, financial condition
and operating results.
Several anti-takeover measures under Nevada law could delay or prevent a change of control,
despite such change of control being in the best interest of the holders of our common stock.
Several anti-takeover measures under Nevada law could delay or prevent a change of control,
despite such change of control being in the best interest of the holders of our common stock.
This could make it more difficult or discourage an attempt to obtain control of us by means of a
merger, tender offer, proxy contest or otherwise. This could negatively impact the value of an
investment in our common stock, by discouraging a potential suitor who may otherwise be willing
to offer a premium for shares of our common stock.
Delays in reimbursement due to state budget deficits or otherwise have decreased, and may in the
future further decrease, our liquidity.
There is generally a delay between the time that we provide services and the time that we receive
reimbursement or payment for these services. A majority of states are facing budget deficits and
other states may in the future delay reimbursement, which would adversely affect our liquidity.
From time to time, procedural issues require us to resubmit claims before payment is remitted,
which contributes to our aged receivables. Additionally, unanticipated delays in receiving
reimbursement from state programs due to changes in their policies or billing or audit procedures
may adversely impact our liquidity and working capital. Because we fund our operations primarily
through the collection of accounts receivable, any delays in reimbursement would result in the
need to increase borrowings under our credit facility.
We are subject to extensive government regulation. Changes to the laws and regulations governing
our business could negatively impact our profitability and any failure to comply with these
regulations could adversely affect our business.
The federal government and the states in which we operate regulate our industry extensively. The
laws and regulations governing our operations, along with the terms of participation in various
government programs, impose certain requirements on the way in which we do business, the services
we offer, and our interactions with consumers and the public. These requirements relate to:
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Licensure and certification;
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Adequacy and quality of health care services;
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qualifications and training of health care and support personnel;
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confidentiality, maintenance and security issues associated with medical records and claims processing;
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relationships with physicians and other referral sources;
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49
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Operating policies and procedures;
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addition of facilities and services; and
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These laws and regulations, and their interpretations, are subject to frequent change. These
changes could reduce our profitability by increasing our liability, increasing our administrative
and other costs, increasing or decreasing mandated services, forcing us to restructure our
relationships with referral sources and providers or requiring us to implement additional or
different programs and systems. Failure to comply could lead to the termination of rights to
participate in federal and state-sponsored programs, the suspension or revocation of licenses and
other civil and criminal penalties and a delay in our ability to bill and collect for services
provided.
On March 23, 2010, the President signed into law the Health Reform Law. The Health Reform Law is
broad, sweeping reform, and is subject to change, including through the adoption of related
regulations, the way in which its provisions are interpreted and the manner in which it is
enforced. We cannot assure you that such provisions of the Health Reform Law, will not adversely
impact our business, results of operations or financial results. We may be unable to mitigate any
adverse effects resulting from the Health Reform Act.
The HITECH Act established certain health information security breach notification requirements. A
covered entity must notify any individual whose protected health information is breached. While we
believe that we protect individuals health information, if our information systems are breached,
we may experience reputational harm that could adversely affect our business. In addition, failure
to comply with the HITECH Act could result in fines and penalties that could have a material
adverse effect on us.
We are subject to reviews, compliance audits and investigations that could result in adverse
findings that negatively affect our net service revenues and profitability.
As a result of our participation in Medicaid and other governmental programs, and pursuant to
certain of our contractual relationships, we are subject to various reviews, audits and
investigations by governmental authorities and other third parties to verify our compliance with
these programs and agreements as well as applicable laws, regulations and conditions of
participation. If we fail to meet any of the conditions of participation or coverage, we may
receive a notice of deficiency from the applicable surveyor or authority. Failure to institute a
plan of
action to correct the deficiency within the period provided by the surveyor or authority could
result in civil or criminal penalties, the imposition of fines or other sanctions, damage to our
reputation, cancellation of our agreements, suspension or revocation of our licenses or
disqualification from federal and state reimbursement programs. These actions may adversely affect
our ability to provide certain services, to receive payments from other payors and to continue to
operate. Additionally, actions taken against one of our locations may subject our other locations
to adverse consequences. Any termination of one or more of our locations from a government program
for failure to satisfy such programs conditions of participation could adversely affect our net
service revenues and profitability.
Payments we receive in respect of Medicaid can be retroactively adjusted after a new examination
during the claims settlement process or as a result of pre- or post-payment audits. Federal, state
and local government payors may disallow our requests for reimbursement based on determinations
that certain costs are not reimbursable because proper documentation was not provided or because
certain services were not covered or deemed necessary. In addition, other third-party payors may
reserve rights to conduct audits and make reimbursement adjustments in connection with or exclusive
of audit activities. Significant adjustments as a result of these audits could adversely affect our
revenues and profitability.
We are exposed to certain risks related to the frequency and rate of the introduction of generic
drugs and brand-name prescription products.
The profitability of retail and mail order pharmacy businesses are dependent upon the utilization
of prescription drug products. Utilization trends are affected by the introduction of new and
successful prescription pharmaceuticals as well as lower-priced generic alternatives to existing
brand-name products. Accordingly, a slowdown in the introduction of new and successful prescription
pharmaceuticals and/or generic alternatives (the sale of which normally yield higher gross profit
margins than brand-name equivalents) could adversely affect our business, financial position and
results of operations.
50
Item 4. Submission of Matters to a Vote of Security Holders.
None.
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.
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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.
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November 9, 2010
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By:
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/s/ Marvin R. Richardson
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Marvin R. Richardson
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Chief Executive Officer
(Principal Executive Officer) and Director
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November 9, 2010
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By:
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/s/ Matthew R. Middendorf
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Matthew R. Middendorf
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Treasurer and Chief Financial Officer
(Principal Financial and Accounting Officer)
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EXHIBIT INDEX
The following documents are filed as part of this report. Exhibits not required for this report
have been omitted. The Companys Commission file number is 000-32935.
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Exhibit
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No.
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Exhibit Description
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10.1
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Amendment dated October 31, 2010 to the Amended and Restated Credit Agreement by and
among Arcadia Services, Inc., Arcadia Health Services, Inc., Grayrose, Inc., Arcadia
Health Services of Michigan, Inc., Arcadia Employee Services, Inc. and Comerica Bank
dated July 13, 2009
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10.2
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Amendment dated October 31, 2010 to the Comerica Revolving Credit Note dated July 13, 2009
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31.1
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Certification of the Chief Executive Officer required by rule 13a 14(a) or rule 15d
14(a).
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31.2
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Certification of the Principal Accounting and Financial Officer required by rule 13a
14(a) or rule 15d 14(a).
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32.1
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Chief Executive Officer Certification Pursuant to 18 U.S.C. §1350, as Adopted Pursuant to
§906 of the Sarbanes Oxley Act of 2002.
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32.2
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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.
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