Edgar Filing: ARCADIA RESOURCES, INC

e10vq

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


þ		Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended June 30, 2006


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

Commission file number 000-31249

ARCADIA RESOURCES, INC.

(Exact name of registrant as specified in its charter)


NEVADA		88-0331369
(State of Incorporation)		(I.R.S. Employer I.D. Number)


26777 CENTRAL PARK BLVD., SUITE 200
SOUTHFIELD, MI		48076
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone no.: 248-352-7530

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 R No £

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


Large accelerated filer o		Accelerated filer o		Non-accelerated filer þ

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

As of August 10, 2006, 99,265,569 shares of common stock, $0.001 par value, of the Registrant were outstanding, of which 2,715,200 were subject to approval for listing by the American Stock Exchange.

Table of Contents


	Page No.
Part I: Financial Information
Item 1. Financial Statements		3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		19
Item 3. Quantitative and Qualitative Disclosures About Market Risk		28
Item 4. Controls and Procedures		28
Part II: Other Information
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds		30
Item 5: Other Information		30
Item 6. Exhibits		30
		31
Signatures
Asset Purchase Agreement
Description of Director, CFO and EVP Compensation Arrangements
Certification of the Chief Executive Officer required by rule 13a-14(a)
Certification of the Principal Accounting and Financial Officer by rule 13a-14(a)
Chief Executive Officer Certification to Section 906
Certification of the Principal Accounting and Financial Officer to Section 906

PART I: Financial Information

Item 1. Financial Statements

The financial statements included herein have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Although certain information normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America has been condensed or omitted, the Registrant believes that the disclosures are adequate to make the information presented not misleading. Readers are urged to carefully review and consider the various disclosures made by us in this quarterly report on Form 10-Q, our Current Reports on Form 8-Ks filed on July 21, 2006, July 18, 2006 and July 6, 2006 along with our annual report on Form 10-K as of and for the year ended March 31 2006, and our other filings with the Securities and Exchange Commission. These reports and filings attempt to advise interested parties of the risks and factors that may affect our business, financial condition and results of operation and prospects.

The unaudited consolidated financial statements included herein reflect all adjustments, consisting only of normal recurring items, which, in the opinion of management, are necessary to present a fair statement of the results for the interim periods presented.

The results for interim periods are not necessarily indicative of trends or results to be expected for a full year.

Arcadia Resources, Inc.
Consolidated Balance Sheets


	June 30,			March 31,
	2006			2006
Assets (Note 7)	(Unaudited)			(Audited)
Current Assets
Cash	$	1,933,132		$	530,344
Accounts receivable, net of allowance of $2,083,000 and $1,891,000, respectively		29,260,136			27,109,601
Inventory, net of allowance of $80,000		2,053,876			1,502,276
Prepaid expenses and other current assets		3,718,968			3,140,764
Income taxes receivable		39,238			39,238

Total Current Assets		37,005,350			32,322,223

Fixed Assets (Notes 2 and 8)
Equipment		6,281,950			5,883,779
Software		564,419			564,419
Furniture and fixtures		891,008			810,053
Vehicles		800,703			799,793
Leasehold improvements		394,021			391,588

		8,932,101			8,449,632
Accumulated depreciation and amortization		(2,692,669	)		(2,224,589	)

Net Fixed Assets		6,239,432			6,225,043

Other Assets (Notes 4 and 5)
Goodwill		31,837,974			28,263,208
Trade name, net of accumulated amortization of $578,000 and $511,000, respectively		7,422,223			7,488,889
Customer relationships, net of accumulated amortization of $1,315,000 and $1,128,000, respectively		9,666,678			9,854,012
Non-competition agreements, net of accumulated amortization of $195,000 and $152,000, respectively		665,371			708,386
Technology, net of accumulated amortization of $549,000 and $486,000, respectively		211,111			274,445
Deferred financing costs, net of accumulated amortization of $86,000 and $80,000, respectively		309,545			14,940

Total Other Assets		50,112,902			46,603,880

	$	93,357,684		$	85,151,146

Liabilities and Stockholders’ Equity
Current Liabilities
Line of credit, current portion (Note 7)	$	72,690		$	2,000,000
Accounts payable		1,903,321			1,912,860
Accrued expenses:
Compensation and related taxes		2,314,211			2,417,832
Commissions		316,946			279,262
Other		1,483,551			1,266,598
Accrued Interest		155,692			141,463
Payable to affiliated agencies, current portion (Note 6)		1,745,319			2,163,954
Long-term debt, current portion (Note 8)		4,373,254			2,405,866

Total Current Liabilities		12,364,984			12,587,835
Payable to affiliate, less current portion (Note 6)		138,942			152,750
Long-term debt, less current portion (Notes 8 and 14)		16,288,036			878,501
Line of credit, less current portion (Note 7)		6,182,302			14,487,967

Total Liabilities		34,974,264			28,107,053

Commitments and Contingencies (Notes 6, 7, 8, 9 and 13)
Stockholders’ Equity (Note 9, 10, 13 and 14)
Common stock $.001 par value, 150,000,000 shares authorized, 97,015,623 shares and 96,403,036 shares issued		97,016			96,403
Additional paid-in capital		71,052,326			69,555,678
Accumulated deficit		(12,765,922	)		(12,607,988	)
Preferred stock, $.001 par value, 5,000,000 shares authorized, none issued		—			—

Total Stockholders’ Equity		58,383,420			57,044,093

	$	93,357,684		$	85,151,146

See accompanying summary of accounting policies and notes to consolidated financial statements.

Arcadia Resources, Inc.

Consolidated Statements of Operations
(Unaudited)


	Quarter			Quarter
	Ended			Ended
	June 30, 2006			June 30, 2005
Net Sales (Note 15)	$	37,555,123		$	30,739,040
Cost of Sales		24,373,126			20,843,022

Gross Profit		13,181,997			9,896,018
General and Administrative Expenses		12,327,114			9,773,432
Depreciation and Amortization		568,889			414,975

Operating Income (Loss)		285,994			(292,389	)
Other Expenses:
Interest expense, net		405,127			474,895
Amortization of debt discount		—			423,781

Total Other Expenses		405,127			898,676

Net Loss Before Income Tax Expense		(119,133	)		(1,191,065	)
Income Tax Expense (Note 11)		38,800			60,000

Net Loss	$	(157,933	)	$	(1,251,065	)

Loss Per Share (Note 9):
Basic	$	(0.00	)	$	(0.02	)
Diluted	$	(0.00	)	$	(0.02	)
Weighted average number of shares (in thousands):
Basic		86,837			82,486
Diluted		86,837			82,486

See accompanying summary of accounting policies and notes to consolidated financial statements.

Arcadia Resources, Inc.

Consolidated Statements of Cash Flows
(Unaudited)


	Quarter			Quarter
	Ended			Ended
	June 30, 2006			June 30, 2005
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss	$	(157,933	)	$	(1,251,065	)
Adjustments to reconcile net loss to net cash provided by operating activities net of impact of acquisitions:
Provision for doubtful accounts		318,639			191,824
Depreciation and amortization		1,021,889			498,802
Amortization of debt discount and deferred financing costs		—			576,884
Issuance of stock for services		149,925			2,000
Accrual of stock option expense		7,000			87,612
Recording of expected release of stock from escrow		—			410,000
Changes in operating assets and liabilities:
Accounts receivable		(2,269,173	)		(981,908	)
Inventory		(454,071	)		(48,600	)
Prepaid expenses and other current assets		(678,205	)		(741,772	)
Income taxes receivable		—			(223,802	)
Accounts payable		(134,539	)		1,128,339
Accrued expenses and other current liabilities		(198,948	)		(250,980	)
Due to affiliated agencies		(244,570	)		(186,156	)

NET CASH (USED IN) OPERATING ACTIVITIES		(2,639,986	)		(788,822	)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of businesses		90,000			(2,429,058	)
Purchases of property and equipment		(380,592	)		(1,246,004	)

NET CASH (USED IN) INVESTING ACTIVITIES		(290,592	)		(3,675,062	)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of common stock warrants		100,000			—
Proceeds from issuance of note payable		15,000,000			5,000,000
Proceeds from issuance of common stock		—			1,980,065
Net payments on line of credit		(10,272,975	)		(382,576	)
Payments on acquisition debt		(310,612	)		(656,891	)
Payments on notes payable		(183,047	)		(157,971	)

NET CASH PROVIDED BY FINANCING ACTIVITIES		4,333,366			5,782,627

NET INCREASE IN CASH AND EQUIVALENTS		1,402,788			1,318,743
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		530,344			1,412,268

CASH AND CASH EQUIVALENTS, END OF PERIOD	$	1,933,132		$	2,731,011

Supplementary information:
Cash paid during the period for:
Interest paid	$	268,035		$	291,145
Income taxes		38,800			267,773
Non cash investing activities:
Issuance of common stock for the purchases of businesses	$	1,000,000		$	2,586,925
Issuance of note payable and purchase price payable on acquisition		3,000,000			—
Assumption of line of credit in purchase of a business		40,000			—
Non cash financing activities:
Deferred financing costs	$	300,000		$	618,323
Payment of purchase price payable with issuance of common stock		187,873			—
Exercise of cashless warrants		10,000			43,762
Release of shares from escrow		100,000			—
Payment of note payable with issuance of common stock		151,295			—

See accompanying summary of accounting policies and notes to consolidated financial statements.

Arcadia Resources, Inc. and Subsidiaries

Summary of Accounting Policies (Unaudited)

Principles of Consolidation and Segment Reporting — The audited consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All material intercompany balances and transactions have been eliminated in consolidation. The Company operates primarily in the home healthcare area of the health care industry by providing care to patients in their home, some of which is prescribed by a physician. The Company also utilizes its base of employees to provide staffing to institutions on a temporary basis. The Company began expanding into additional lines of business during its fiscal year ended March 31, 2005. Segment reporting is presented in a separate footnote herein.

Use of Estimates — The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements, and revenue and expenses during the reporting period. Actual results could differ from those estimates.

Cash and cash equivalents — For purposes of the Statements of Cash Flows, the Company considers cash in banks and all short-term investments with a maturity of three months or less to constitute cash and cash equivalents.

Revenue Recognition and Concentration of Credit Risk — Revenues for services are recorded in the period the services are rendered at rates established contractually or by other agreements made with the institution or patient prior to the services being performed. Revenues for products are recorded in the period delivered based on rental or sales prices established with the client or their insurer prior to delivery. Insurance entities generally determine their pricing schedules based on the regional usual and customary charges or based on contractual arrangements with their insureds. Revenues are recorded based on the expected amount to be realized by the Company. Federally-based Medicare and state-based Medicaid programs publish their pricing schedules periodically for covered products and services. Revenues reimbursed under arrangements with Medicare, Medicaid and other governmental-funded organizations were approximately 27% for the quarters ended June 30, 2006 and 2005 and 24%, 24% and 19% for the years ended March 31, 2006, 2005 and 2004, respectively. No customers represent more than 10% of the Company’s revenues for the periods presented.

Allowance for Doubtful Accounts — The Company reviews all accounts receivable balances and provides for an allowance for doubtful accounts based on historical analysis of its records. The analysis is based on patient and institutional client payment histories, the aging of the accounts receivable, and specific review of patient and institutional client records. Items greater than one year old are fully reserved. As actual collection experience changes, revisions to the allowance may be required. Any unanticipated change in customers’ credit worthiness or other matters affecting the collectibility of amounts due from customers could have a material effect on the results of operations in the period in which such changes or events occur. After all attempts to collect a receivable have failed, the receivable is written off against the allowance.

Inventories — Inventories are valued at acquisition cost utilizing the first in, first out (FIFO) method. Inventories include products and supplies held for sale at the Company’s individual locations. The home care and pharmacy operations of the Company possess the majority of the inventory. Inventories are evaluated at least annually for obsolescence and shrinkage.

Fixed Assets and Depreciation — Fixed assets are valued at acquisition cost and depreciated or amortized over the estimated useful lives of the assets (3-15 years) by use of the straight-line method. The majority of the Company’s fixed assets include equipment held for rental to patients in the home for which the related depreciation expense is included in cost of sales, and totals approximately $453,000 and $120,000 for the quarters ended June 30, 2006 and 2005, respectively.

See accompanying notes to consolidated financial statements.

Intangible Assets — The Company has acquired several entities resulting in the recording of intangible assets including goodwill, which represents the excess of purchase price over net assets of businesses acquired. The Company follows Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets.” Certain intangible assets have been identified and recorded as more fully described in Note 5. Goodwill is now tested for impairment annually in the fourth quarter, and between annual tests in certain circumstances, by comparing the fair value of each reporting unit to its carrying value. The other purchased intangibles are amortized on a straight-line basis over the estimated useful lives as follows: trade name over 30 years; customers and referral source relationships over 5 and 15 years (depending on the type of business purchased): technology over 3 years: and non-competition agreements over 5 years.

Impairment of Long-Lived Assets — The Company reviews its long-lived assets for impairment whenever changes in circumstances indicate that the carrying amount of an asset may not be recoverable. To determine if impairment exists, the Company compares the estimated future undiscounted cash flows from the related long-lived assets to the net carrying amount of such assets. Once it has been determined that an impairment exists, the carrying value of the asset is adjusted to fair value. Factors considered in the determination of fair value include current operating results, trends and the present value of estimated expected discounted future cash flows.

Earnings (Loss) Per Share — Basic earnings per share is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities, or other contracts to issue common stock, were exercised or converted into shares of common stock. Outstanding stock options and warrants to acquire shares of common stock have not been considered in the computation of dilutive losses per share since their effect would be antidilutive. Shares held in escrow pursuant to the agreements more fully described in Note 9 are not included in earnings per share until they are released. Outstanding stock options to acquire common shares, and outstanding warrants to acquire common shares, have not been considered in the computation of dilutive losses per share since their effect would be antidilutive for all applicable periods shown.

Income Taxes — Income taxes are accounted for in accordance with the provisions specified in SFAS No. 109, “Accounting for Income Taxes.” Accordingly, the Company provides deferred income taxes based on enacted income tax rates in effect on the dates temporary differences between the financial reporting and tax bases of assets and liabilities reverse. The effect on deferred tax assets and liabilities of a change in income tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets to amounts that are more likely than not to be realized. Prior to May 7, 2004, Arcadia Services elected to be taxed as a Subchapter S corporation with the individual stockholders reporting their respective shares of income on their income tax return. Accordingly, the Company has no deferred tax assets or liabilities recorded in the prior periods.

Stock-Based Compensation — The Company issues stock options and other stock-based awards to key employees and directors under stock based compensation plans. The Company’s stock-based compensation is described more fully in Note 10 to the Consolidated Financial Statements. In December 2004, the FASB issued SFAS No. 123R, “Share-Based Payment.” This statement replaces SFAS No. 123, “Accounting for Stock-Based Compensation,” and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS No 123R requires a company to measure the cost of employee services received in exchange for an award of equity instruments based on the grant date fair value of the award, based on the amount(s) that are ultimately estimated to vest. The cost will be recognized over the period during which the employee is required to provide service in exchange for the award (usually the vesting period). Adoption of SFAS No. 123R is required as of the beginning of the first annual reporting period that begins after June 15, 2005. Arcadia adopted SFAS No. 123R on April 1, 2005.

Reclassifications

Certain amounts presented in the prior periods have been reclassified to conform to the current period presentation.

Recent Accounting Pronouncements

In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes”, which amends and clarifies previous guidance on the accounting for deferred income taxes as presented in Statement on Financial Accounting Standards No. 109, “Accounting for Income Taxes”. The statement is effective for income taxes incurred during fiscal years beginning after December 15, 2006. Arcadia has not completed its analysis of the effect of FIN 48; however, does not expect the adoption of FIN 48 to have a material effect on the Company’s consolidated financial statements.

See accompanying notes to consolidated financial statements.

Arcadia Resources, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

NOTE 1 — BASIS OF PRESENTATION OF CONSOLIDATED FINANCIAL STATEMENTS AND DESCRIPTION OF BUSINESS

The accompanying consolidated financial statements as of June 30, 2006 and March 31, 2006 and the quarters ended June 30, 2006 and 2005, have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America. These interim financial statements include all adjustments which management considers necessary to make the financial statements not misleading. The results of operations for the quarter ended June 30, 2006 are not necessarily indicative of results that may be expected for any other interim period or for the remainder of the year. All significant intercompany balances and transactions have been eliminated in consolidation.

Effective July 3, 2006, the Company became listed on the American Stock Exchange and changed its stock symbol to KAD. Previously, the Company was not listed on an exchange and its stock symbol on the OTC Bulletin Board was ACDI.

This report should be read in conjunction with the consolidated financial statements of Arcadia Resources, Inc. and subsidiaries for the years ended March 31, 2006, 2005 and 2004 included in the Form 10-K as filed with the Securities and Exchange Commission on June 29, 2006.

DESCRIPTION OF BUSINESS

Arcadia is incorporated in Nevada and based in Southfield, Michigan. The Company is a national provider of staffing and home care services, respiratory and durable medical equipment and mail-order pharmaceuticals. The Company provides staffing by both medically-trained personnel and non-medical personnel. The Company’s medical staffing service includes registered nurses, travel nurses, licensed practical nurses, certified nursing assistants, respiratory therapists and medical assistants. The non-medical staffing service includes light industrial, clerical, and technical personnel. The home care services include personal care aides, home care aides, homemakers, companions, physical therapists, occupational therapists, speech pathologists and medical social workers. The Company markets and rents or sells medical products and durable medical equipment, such as wheelchairs and hospital beds and also provides oxygen and other respiratory therapy services and equipment. The Company provides staffing to institutions and facilities as well as providing staffing and other services and products to patients directly in the home. These services are contractually agreed upon with institutional and facilities clients and billed directly to the respective entity or other payor sources as determined and verified prior to the performance of the services. When providing services and products to patients in the home, the arrangements are determined case by case in advance of delivery, generally on a month-to-month basis, and are paid for by the clients directly or by their insurers, including commercial insurance companies, Medicare, state-based Medicaid programs and other governmental-funded entities.

NOTE 2 — LEASES

The Company leases office space under several operating lease agreements, which expire through 2011. Rent expense relating to these leases amounted to approximately $498,000 and $315,000 for the quarters ended June 30, 2006 and 2005, respectively. The following is a schedule of approximate future minimum rental payments, exclusive of real estate taxes and other operating expenses, required under operating leases that have initial or remaining non-cancelable lease terms in excess of one year, to which there has been no material change since March 31, 2006:


	Capital		Operating
	Leases		Leases
Year ending March 31:
2007	$	468,000	$	1,425,000
2008		416,000		963,000
2009		166,000		215,000
2010		8,000		58,000
2011		—		40,000

Total	$	1,058,000	$	2,701,000

Interest		96,000

Capital Lease Obligation Payable	$	962,000

The Company has entered into several capital leases covering computer operating systems, patient related equipment and other equipment with outstanding balances of $824,000 and $962,000 at June 30, 2006 and March 31, 2006, respectively. In the table above, the capital lease obligation payable relates to equipment acquired in 2006 with a lease term ranging from two to three years, monthly payments ranging from $121 to $4,840 and interest rates ranging from 4% to 18%. The capital lease interest expense is $16,000 and $1,000 for the quarters ended June 30, 2006 and 2005, respectively.

NOTE 3 — EMPLOYEE BENEFIT PLANS

The Company has a 401(k) defined contribution plan, whereby eligible employees may defer a percentage of compensation up to defined limits. The Company may make discretionary employer contributions. The Company made no contributions on the employees’ behalf for the quarters ended June 30, 2006 or 2005.

NOTE 4 — ACQUISITIONS

On June 30, 2006, the Company acquired the membership interests in Wellscripts, LLC, a pharmacy located in Florida. The purchase price of $4 million included 389,560 shares of the Company’s common stock valued at $1 million, $2 million cash, $1 million promissory note plus assumption of the outstanding operating liabilities of $125,000. The outstanding balance of $40,000 on the line of credit in place for Wellscripts, LLC was paid on July 5, 2006 as part of the acquisition. The cash payments were funded from proceeds of a promissory note issued to a third party. A one year promissory note was issued for $1 million, as more fully described in Note 8. In the event that certain future profit goals are met, an additional purchase price equal to twenty percent of the amount that earnings before interest, tax, depreciation and amortization exceeds $1 million in each of the four years following the acquisition could be paid to the seller in shares of the Company’s common stock.

The total amounts assigned to assets and liabilities related to the purchase described above are as follows at June 30, 2006:


	(in thousands)
Current Assets	$	540
Property and Equipment		80
Liabilities		(165	)
Goodwill		3,545

Total Consideration	$	4,000

See Note 13 for transactions subsequent to June 30, 2006 related to acquisitions.

NOTE 5 — GOODWILL AND OTHER INTANGIBLE ASSETS

The Company had total intangible assets of $3.6 million as of March 31, 2004. With the reverse merger and other 2005 Post-Merger Acquisitions described herein, the Company added $13.8 million in intangible assets and $12.8 million in goodwill. Additional intangible assets and goodwill resulting from the acquisitions completed during the year ended March 31, 2006 were $5.4 million and $13.3 million, respectively. The Company had net intangible assets of $50.1 million as of June 30, 2006. Goodwill related to asset purchases and intangible assets are amortizable over 15 years for tax purposes, while the remainder of the Company’s goodwill related to the purchase of common stock of corporations is not amortizable for tax purposes.

Amortization expense totaled approximately $360,000 and $213,000 for the quarters ended June 30, 2006 and 2005, respectively. The intangible assets are amortized over their expected useful lives as follows: trade name over 30 years, customer and referral source relationships over 5 years and 15 years (depending on the type of business purchased), technology over 3 years and non-competition agreements over 5 years.

Goodwill and intangible assets of $9.7 million are amortizable over 15 years for tax purposes, while the remainder of the Company’s goodwill and intangible assets are not amortizable for tax purposes as the acquisitions related to the purchase of common stock rather than of assets or net assets. The Company has made acquisitions to further its consolidation strategy in specific markets. The pricing of such transactions is market driven and results in goodwill and other intangible assets.

The following table presents goodwill by segment at June 30, 2006 and March 31, 2006 (in thousands):


	June 30, 2006		March 31, 2006
Services	$	13,953	$	13,953
Products		16,735		13,160
Retail		1,150		1,150

TOTAL GOODWILL	$	31,838	$	28,263

As a result of the finalization of certain purchase price allocations, $754,000 previously categorized as goodwill as of March 31, 2005, was reclassified to other intangible assets during the year ended March 31, 2006. The purchase price allocation of the intangible assets related to the Wellscripts acquisition, as more fully described in Note 4, has not been completed as of June 30, 2006.

Estimated annual amortization expense for each of the 5 years succeeding fiscal years is as follows:


	(in thousands)
Year ended:
2007	$	1,424
2008		1,177
2009		1,156
2010		1,156
2011		1,004

NOTE 6 — AFFILIATED AGENCIES PAYABLE

Arcadia Services, Inc. (Arcadia Services), a wholly-owned subsidiary of the Company, operates independently and through a network of affiliated agencies throughout the United States. These affiliated agencies are independently-owned, owner-managed businesses, which have been contracted by the Company to sell services under the Arcadia Services name. The arrangements with affiliated agencies are formalized through a standard contractual agreement. The affiliated agencies operate in particular regions and are responsible for recruiting and training field service employees and marketing their services to potential customers within the region. The field service employees are employees of Arcadia Services. Arcadia Services provides sales and marketing support to the affiliated agencies and develops and maintains operating manuals that provide suggested standard operating procedures.

The contractual agreements require a specific, timed, calculable flow of funds and expenses between the affiliated agencies and Arcadia Services. The net amounts due to affiliated agencies under these agreements include short-term and long-term net liabilities totaling $1,884,000 and $2,317,000 as of June 30 and March 31, 2006, respectively.

NOTE 7 — LINES OF CREDIT

Arcadia Services, a wholly-owned subsidiary, and four of its wholly-owned subsidiaries have an outstanding line of credit agreement with Comerica Bank. The credit agreement provides the borrowers with a revolving credit facility of up to $19 million. Advances under the credit facility shall be used primarily for working capital or acquisition purposes. The credit agreement provides that advances to the Company will not exceed the lesser of the revolving credit commitment amount 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 $3.0 million. The maturity date to September 1, 2007. Amounts outstanding under this agreement totaled $ 6.2 million at June 30, 2006.

RKDA granted Comerica Bank a first priority security interest in all of the issued and outstanding capital stock of Arcadia Services. Arcadia Services granted Comerica Bank a first priority security interest in all of its assets. The subsidiaries of Arcadia Services granted the bank security interests in all of their assets. RDKA is restricted from paying dividends to Arcadia Resources, Inc. RKDA executed a guaranty to Comerica Bank for all indebtedness of Arcadia Services and its subsidiaries.

Advances under the credit facility bear interest at the prime-based rate (as defined) or the Eurodollar based rate (as defined), at the election of borrowers. Currently the Company has elected the prime-based rate, effectively 8.25% at June 30, 2006. Arcadia Services agreed to various financial covenant ratios, to have any person who acquires Arcadia Services’ capital stock to pledge such stock to

Comerica Bank, and to customary negative covenants. As of June 30, 2006, the Company was in compliance with all financial covenants.

Trinity Healthcare of Winston-Salem, Inc. (“Trinity Healthcare”), a wholly-owned subsidiary, has a separate outstanding line of credit agreement with Comerica Bank which provides Trinity Healthcare with a revolving credit facility of up to $2,000,000 payable upon demand of Comerica Bank, bearing interest at prime + 1/2%, effectively 8.75% at June 30, 2006. The credit agreement provides that advances to Trinity Healthcare will not exceed the lesser of the revolving credit commitment amount or the aggregate principal amount of indebtedness permitted under the advance formula amount at any one time. The advance formula base is 80% of the eligible accounts receivable, subject to Comerica Bank’s adjustment to account for dilution of accounts receivable caused by customer credits, returns, setoffs, etc., plus 30% of eligible inventory. 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 Trinity Healthcare and on all of the assets of Trinity Healthcare and its subsidiaries. Any such default and resulting foreclosure would have a material adverse effect on our financial condition. There was $33,000 outstanding under this agreement at June 30, 2006. The Company was in compliance with all covenants at June 30, 2006.

Rite at Home, LLC, a wholly-owned subsidiary, has an outstanding line of credit agreement with Fifth Third Bank. The line of credit is for a maximum of $750,000, and matures on June 1, 2007. The outstanding balance under this agreement totaled approximately $591,000 at June 30, 2006, bearing interest at prime + 1/2%, effectively 8.75%.

On June 30, 2006, the Company purchased the outstanding membership interests of Wellscripts, LLC, which had an outstanding line of credit agreement with Bank of America. The Company paid the outstanding balance of approximately $40,000 on July 5, 2006 as a condition of the purchase agreement and terminated the line of credit.

The weighed average interest rate of borrowings under line of credit agreements as of June 30, 2006 was 8.25%.

NOTE 8 — LONG-TERM OBLIGATIONS

Long-term obligations at June 30, 2006 are summarized in the following table. Accrued interest payable is stated separately on the balance sheet and is not included in the table below.


	June 30, 2006
Note payable to Jana Master Fund, Ltd. dated June 29, 2006, bearing simple interest at the one year LIBOR rate plus 7.5%, effectively 13.27% at June 30, 2006, with interest payable quarterly beginning on September 30, 2006 and the principal due in full on December 26, 2007	$	15,000,000
Purchase price payable to the selling shareholder of Wellscripts, LLC paid on July 3, 2006		2,000,000
Purchase price payable to the selling shareholder of Wellscripts, LLC dated June 30, 2006, bearing simple interest of 8% per year payable in equal quarterly payments of principal and interest beginning September 30, 2006 with final payment due on June 30, 2007.		1,000,000
Purchase price payable to Remedy Therapeutics, Inc. dated January 27, 2006, bearing simple interest of 8% per year payable in equal quarterly payments of principal and interest beginning April 27, 2006 with final payment due on January 27, 2009.		666,666
Purchase price payable to the selling stockholders of Trinity Healthcare of Winston-Salem, Inc. (“Trinity”) dated September 23, 2004, bearing simple interest of 8% per year payable in 2 remaining equal quarterly payments of principal and interest due July 15, 2006 and October 15, 2006. The note payable is unsecured and interest began accruing on January 15, 2005.		198,218
Other purchase price payables (non-interest bearing) to be paid over time to the selling stockholders or selling entities of various acquired entities, due dates ranging from July 2006 to March 2007		502,606
Capital lease obligations due through 2012		750,921
Other interest-bearing obligations with interest charged at various rates ranging from 4% to 18% to be paid over time based on respective terms, due dates ranging from July 2006 to 2011		542,879

Total long term obligations		20,661,290
Less: Current portion of long-term obligations		(4,373,254	)

LONG-TERM DEBT OBLIGATIONS	$	16,288,036

The weighted average interest rate of outstanding debt as of June 30, 2006 was 10.83%.

NOTE 9 — STOCKHOLDERS’ EQUITY

During April 2006, 29,582 shares of Company common stock valued at $73,000 vested in compliance with outstanding restricted stock grant agreements as more fully described in Note 10. The Company also issued 15,000 shares valued at $44,000 to a contracted entity for achievement of a specified performance goal.

On May 2, 2006, the Company issued 54,034 shares of its common stock valued at $151,000 in lieu of a cash payment of the same amount on an outstanding note payable issued as a part of the January 2006 acquisition of Remedy Therapeutics, Inc.

On June 7, 2006, the Company issued 73,388 shares of its common stock valued at $188,000 and cash of $183,000, provided from operations, to pay its obligation to the shareholders of Home Health Professionals under the earn out provision of the respective purchase agreement dated April 29, 2005, which represents the final amount owed to the sellers.

On June 16, 2006, the Company’s Board of Directors appointed two independent directors to fill vacant director positions, whose terms will begin on July 1, 2006. The additional directors will each be compensated for service on the Board of Directors per the Company’s compensation arrangement for independent directors which consists of an annual retainer of $25,000, payable at the individual’s election in cash, options to purchase shares of the Company’s common stock or a combination thereof; and $1,000 per each Board meeting attended and $500 per each committee meeting attended, payable in shares of the Company’s common stock.

On June 20, 2006, due to failure of the purchasing entities to fund the transactions, the Company terminated an agreement made on November 28, 2005, to sell for placement with two European bank SICAV funds an aggregate of 2,222,222 shares of common stock for aggregate consideration totaling $5,000,000. Due to the delays experienced, the funds agreed on March 7, 2006 to increase the price per share to $2.55, therefore increasing the total subscription to $5,667,000.

On June 22, 2006, the Company granted a total of 225,000 restricted shares of the Company’s common stock to three officers. The individual grants vest ratably each quarter over four years, contain registration rights, are subject to acceleration upon certain events occurring and contingent upon continued employment through each vesting date. Pursuant to these agreements, 14,062 shares of Company common stock valued at $32,000 vested on June 22, 2006.

On June 22, 2006, the Company returned all outstanding treasury shares, totaling approximately 942,000, to the registrar to make them available for reissuance. The Company will account for cashless exercises of options and/or warrants on a net basis prospectively. Included in this amount are 80,000 shares returned from an escrow account to the treasury resulting from a change to an agreement with a third party during the quarter ended June 30, 2006.

During the quarter ended June 30, 2006, the Company issued an aggregate net 120,000 shares of its common stock through the exercise of stock warrant agreements. The Company also issued 108,000 shares of its common stock valued at $372,000 for services during the year ended March 31, 2006 and 652,000 shares of its common stock valued at $586,000 for the year ended March 31, 2005.

As of June 30, 2006, two officers and one former officer of the Company have escrowed 4,800,000, 3,200,000 and 1,600,000 shares of the Company’s common stock, respectively, pursuant to Escrow Agreements dated as of May 7, 2004 (collectively, the “Escrow Shares”). These shares represent eighty (80%) percent of the shares originally escrowed pursuant to the agreements. Fifty (50%) percent of these remaining Escrow Shares will be released from escrow in each fiscal 2007 and fiscal 2008, if RKDA, in the case of Messrs. Elliott and Kuhnert, and the Company, in the case of Mr. Bensol, meets the following milestones: for the 12 month period ending March 31, 2006, an Adjusted EBITDA (as defined) of $9,700,000 and for the 12 month period ending March 31, 2007, an Adjusted EBITDA of $12,500,000. In addition, for any of the Escrow Shares to be released pursuant to the foregoing thresholds, the Company’s, in the case of Mr. Bensol, and RKDA’s, in the case of Messrs. Elliott and Kuhnert, Debt to Adjusted EBITDA ratio must be 2.0 or less. Alternatively, the Escrow Shares shall be released in fiscal 2008 if RKDA, in the case of Messrs. Elliott and Kuhnert, and the Company, in the case of Mr. Bensol, obtains an Adjusted EBITDA for the 24 month period ending March 31, 2007 of at least $22,000,000. During the quarter ended June 30, 2006 and the year ended March 31, 2006, the Company determined it was unlikely to meet the targets described above and therefore, no amounts were accrued during the quarter ended June 30, 2006 or the year ended March 31, 2006. The shares held in escrow described herein are not included in the calculation of the weighted average shares outstanding for the respective periods.

See Note 4 for the discussion of issuance of 389,560 shares as consideration in acquisitions and Note 13 for transactions subsequent to June 30, 2006 related to stockholders’ equity.

NOTE 10 — STOCK-BASED COMPENSATION

As required to be disclosed under SFAS No. 148, “Accounting for Stock Based Compensation — Transition and Disclosure — an amendment of SFAS No. 123”, the following table presents pro forma net loss and basic and diluted loss per share as if the fair value-based method had been applied to all awards.


	For the Quarter
	Ended			For the Quarter Ended
	June 30, 2006			June 30, 2005
Net income (loss) as reported	$	(157,933	)	$	(1,251,065	)
Add: Stock-based employee compensation expense included in income, net of related tax effects		—			—
Less: Total stock-based employee compensation expense determined under the fair value method, net of related tax effects		—			—

Pro Forma net income (loss)	$	(157,933	)	$	(1,251,065	)

Net income (loss) per share:
Basic and diluted income (loss) per share as reported	$	(0.00	)	$	(0.02	)
Pro Forma basic and diluted income (loss) per share	$	(0.00	)	$	(0.02	)

On April 1, 2005, the Company adopted SFAS No. 123R. The adoption of this statement affected the accounting for shares held in escrow and outstanding options as described below for the quarter ended June 30, 2006.

4.8 million shares held in escrow could be released based on the results of operations for the year ending March 31, 2007 and another 4.8 million shares could be released based on the results of operations for the two years ending 2007.

On May 7, 2004, Messrs. Elliott and Kuhnert were each granted stock options to purchase 4 million shares of Common Stock exercisable at $0.25 per share. The options shall vest in six tranches provided certain adjusted EBITDA milestones are met through fiscal 2008, subject to acceleration upon certain events occurring. The options may be exercised by Messrs. Elliott and Kuhnert as long as they are employed by the Company and for one year from termination for any reason provided they have achieved the EBITDA milestones. The expense, if any, related to these options will be recognized in the period the milestones are achieved or are deemed likely to be achieved. The milestones and vesting for each party are as follows: fiscal 2006 EBITDA of $10.7 million will vest 500,000 options, if $11.0 million, an additional 500,000 options will vest; fiscal 2007 EBITDA of $13.5 million will vest 500,000 options, if $14.0 million, an additional 500,000 options will vest; fiscal 2008 EBITDA of $17.5 million will vest 1 million options, if $18.5 million, an additional 1 million options will vest. During the year ended March 31, 2006, and the quarter ended June 30, 2006, the Company determined it was unlikely to meet the targets described above and therefore, no amounts related to these options were accrued during the year. There is still a potential that the options related to the 2006 fiscal year could be re-activated in the event of a change of control.

OPTIONS
FISCAL 2007 ACTIVITY & ROLLFORWARD


													RANGE OF		RANGE OF
	3/31/2006								6/30/2006		PRICE		EXPIRATION		VESTING
	OUTSTANDING		GRANTS		FORFEITURES		EXERCISES		OUTSTANDING		PER SHARE		DATES		DATES
Issued to officers		8,323,343		0		0		0		8,323,343	$0.25 to $2.20			2012		2005-2008
Issued to other management		700,000		0		0		0		700,000	$	1.45		2011		2005
From prior entity		500,000		0		0		0		500,000	$	0.25		2014		2004

Total		9,523,343		0		0		0		9,523,343


As of March 31,	2004		2005		2006		2007		2008
Cumulative Vested Options		500,000		1,499,040		1,523,343		5,523,343		9,523,343

The fair value of each option award is estimated on the date of the grant using a Black-Scholes based option valuation model that uses the assumptions noted in the following table. Because Black-Scholes based option valuation models incorporate ranges of assumptions for inputs, those ranges are disclosed. Expected volatilities are based on implied volatilities from traded options on the Company’s stock, historical volatility of the Company’s stock and other factors. The expected term of option granted is derived from the output of the option valuation model and represents the period of time that options granted are expected to be outstanding. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.


	2006			2005
Expected volatility		45	%		45	%
Weighted-average volatility		45	%		45	%
Expected dividends		0	%		0	%
Expected terms (in years)		7			3 - 7
Risk-free rate		3.92	%		3.19% - 4.18	%

A summary of the Company’s options under the plan as of March 31, 2006, and changes to date during the quarter ended June 30, 2006 is presented below:


						Weighted Average		Aggregate
				Weighted Average		Remaining		Intrinsic
Options	Shares			Exercise Price		Contractual Term		Value
Outstanding at March 31, 2006		9,523,343		$	0.37
Granted		0		$	0.00
Exercised		(0	)	$	0.00
Forfeited or expired		0		$	0.00

Outstanding at June 30, 2006		9,523,343		$	0.37		5.7	$	24,244,232

Exercisable at June 30, 2006		1,523,343		$	1.03		5.7	$	2,884,232

The weighted-average grant-date fair value of options granted during the quarters ended June 30,2006 and 2005 were $0.00 and $0.00, respectively. The total intrinsic value of options exercised during the quarters ended June 30, 2006 and 2005 were $0 and $46,500, respectively.

A summary of the Company’s non-vested options as of March 31, 2006 and changes to date during the quarter ended June 30, 2006, is presented below:


				WEIGHTED AVERAGE
NON-VESTED SHARES	SHARES			GRANT-DATE FAIR VALUE
Outstanding at March 31, 2006		8,000,000		$	0.25
Granted		0			0.00
Vested		(0	)		0.00
Forfeited		0			0.00

Non-vested at June 30, 2006		8,000,000		$	0.25

In summary, during the quarter ended June 30, 2006, the Company had no compensation expense related to the adoption of FAS 123R. There was no cash effect from the adoption of SFAS No. 123R. There are no other unvested awards pending. As of June 30, 2006, there was no unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the Plan. No cost is expected to be recognized as the Company believes it unlikely that the requirements for vesting as described above will be met. The total fair value of shares vested during the quarters ended June 30, 2006 and 2005 were $0 and $81,000, respectively.

In 2006, the Company granted a total of 425,000 restricted shares of the Company’s common stock to eleven management employees. The individual grants vest ratably each quarter until expiration dates ranging from three to four years and contain registration rights. A total of 43,645 shares vested pursuant to these grants in the quarter ended June 30, 2006. See Note 13 for shares vested pursuant to these grants subsequent to June 30, 2006. The Company recorded $106,000 in related compensation expense during the quarter ended June 30, 2006.

NOTE 11 — INCOME TAXES

Although the Company experienced a loss for the quarter ended June 30, 2006, the Company recognized income tax expense related to state income taxes as a result of the Company’s multi-state locations. The Company has state and federal income tax refunds pending and amounts on deposit totaling approximately $39,000 as of June 30, 2006.

As of June 30, 2006, the Company has net federal operating loss carryforwards (“NOLs”) of $1.2 million, which may be available to reduce taxable income if any, which expire through 2024. These NOLs are as calculated for those payments due to the Internal Revenue Service on behalf of the consolidated taxpayer; Arcadia Resources, Inc. and Subsidiaries. However Internal Revenue Code Section 382 rules limit the utilization of these NOLs upon a change in control of a company. It has been determined that a subsequent change in control has taken place. Since the change in control has taken place utilization of the Company’s NOLs will be subject to severe limitations in future periods, which could have an effect of eliminating substantially all the future income tax benefits of the NOLs. The Company has an additional $6.0 million in NOLs that are not subject to the limitations described above, which expire in 2026.

FAS 109 requires that a valuation allowance be established when it is “more likely than not” that all or a portion of deferred tax assets will not be realized. A review of all available positive and negative evidence needs to be considered, including a company’s

performance, the market environment in which the company operates, the length of carryback and carryforward periods, and expectation of future profits, etc. FAS 109 further states that forming a conclusion that a valuation allowance is not needed is difficult when there is negative evidence such as the cumulative losses in recent years. Therefore, cumulative losses weigh heavily in the overall assessment. The Company will provide a full valuation allowance on future tax benefits until it can sustain a level of profitability that demonstrates its ability to utilize the assets, or other significant positive evidence arises that suggests the Company’s ability to utilize such assets.

Tax benefits of net deferred tax assets will be recorded at such time and to such extent, that they are more likely than not to be realized. As such, the resulting estimated net deferred tax assets of approximately $5.0 million as of June 30, 2006 have been offset by a corresponding valuation allowance.

NOTE 12 — COMMITMENTS AND CONTINGENCIES

The Company plans to spend up to $1 million on information systems over the next year in the form of hardware, software and related implementation and training costs.

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.

NOTE 13 — SUBSEQUENT EVENTS

On July 5, 2006, 43,645 shares vested pursuant to the stock grants more fully described in Note 10.

On July 12, 2006, the Company purchased substantially all of the assets of Alliance Oxygen and Medical Equipment, Inc. The purchase price of $8.68 million included $5.2 million cash, funded with proceeds from its promissory note to a third party, a one year promissory note to the seller of $2 million bearing interest at 8%, plus assumption of the outstanding liabilities of $1.48 million. In the event that certain future growth goals are met, an additional purchase price of up to $5.9 million could be paid over four years to the seller in shares of the Company’s common stock. The 2.1 million shares related to this additional purchase price have registration rights, are subject to approval by the American Stock Exchange and will be held in escrow by the Company until the performance goals can be measured and the shares disbursed accordingly.

The Company received and processed a cashless warrant exercise request on July 19, 2006 to exercise 10,000 Class A Warrants in exchange for 8,084 shares of common stock.

See Note 14 for subsequent events concerning related party transactions.

NOTE 14— RELATED PARTY TRANSACTIONS

The Company issued a promissory note to Jana Master Fund, Ltd. on June 29, 2006 for $15 million, proceeds of which were received on that date. Jana Master Fund, Ltd. holds 17% of the outstanding shares of Company common stock on June 30, 2006. The note bears simple interest at the one year LIBOR rate plus 7.5%, effectively 13.27% at June 30, 2006, with interest payable quarterly beginning on September 30, 2006 and the principal due in full on December 26, 2007. In July 2006, the Company paid $300,000 in finder’s fees related to this loan; $150,000 in cash and 60,000 shares of its common stock valued at $150,000. These shares are subject to approval by the American Stock Exchange.

As of August 4, 2006, the independent members of the board of directors, as a group, were granted stock options to purchase a total of 18,026 shares at an exercise price of $2.92 per share and paid $3,125 and related to their service for the quarter ending September 30, 2006. They were also granted a total of 1,938 shares of common stock as compensation for their attendance at the June 2006 and August 2006 meetings of the Company’s Board of Directors and Audit Committee. Additionally, the Company agreed that the annual period for all independent director retainers for Board and Audit Committee service, pursuant to existing independent director compensation agreements, will coincide with the election of directors at annual shareholder meetings. These shares are subject to approval by the American Stock Exchange.

NOTE 15 — SEGMENT INFORMATION

For financial reporting purposes, our branch offices are aggregated into three reportable segments, Services, Products and Retail, which are managed separately based on their predominant line of business. Our Services Division consists primarily of a national provider of home care and staffing services currently operating in 20 states through its 76 locations. The Services Division operates primarily in the home health care area of the health care industry by providing care to patients in their home, some of which is prescribed by a physician. The Company also utilizes its base of employees to provide staffing to institutions on a temporary basis.

Our Products Division consists primarily of respiratory and durable medical equipment operations, which service patients in 12 states through its 24 locations. For the benefit of all of our patients, we also operate a full service mail-order pharmacy.

The Retail Division consists of six retail sites within Sears stores in the Detroit, Michigan metropolitan market and a home health-oriented mail-order catalog and related website. The catalog and website were acquired in May 2005. The retail sites opened in September 2005.

The accounting policies of the operating segments are the same as those described in the Summary of Significant Accounting Policies (See Note 1). We evaluate performance based on profit or loss from operations, excluding corporate, general and administrative expenses. The two companies, predecessor and successor, are combined in the following presentation to provide comparability between all periods presented below (in thousands):


	Quarter Ended			Quarter Ended
	June 30, 2006			June 30, 2005
Net Sales:
Services	$	29,918		$	26,750
Products Rentals		4,061			2,153
Products Sales		2,596			1,376
Retail		980			460

Total Sales		37,555			30,739
Operating Income (Loss):
Services		1,105			1,230
Products		720			254
Retail		(387	)		98
Unallocated Corporate Overhead		(1,152	)		(1,874	)

Total Operating Income (Loss)		286			(292	)
Interest Expense (Income)		405			475
Amortization of Debt Discount		—			424

Net Income (Loss) before Income Tax Expense		(119	)		(1,191	)
Income Tax Expense (Benefit)		39			60

Net Income (Loss)	$	(158	)	$	(1,251	)

Assets:
Services	$	48,032		$	49,010
Products		38,387			13,900
Retail		2,209			1,896
Unallocated Corporate Assets		4,730			4,276

Total Assets	$	93,358		$	69,082

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 F-1 of this report and the subsection captioned “Statements Regarding Forward-Looking Information” above. Historical results set forth in Selected Consolidated Financial Information and the Financial Statements beginning on page F-1 and this section should not be taken as indicative of our future operations.

We caution you that statements contained in this report on Form 10-Q (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.

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 financing; (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 be listed on a national securities exchange or quotation system; (13) our ability to adapt to economic, political and regulatory conditions affecting the health care industry; and (14) other unforeseen events that may impact our business.

Overview

Arcadia Resources, Inc. provides home health care services and products through its subsidiaries’ 108 operating locations in 24 states. Arcadia Services, a wholly-owned subsidiary of Arcadia Resources, Inc., is a national provider of home care and staffing services currently operating in 19 states through its 76 locations, referred to herein as the Services Division. The Products Division includes Arcadia HOME (home oxygen and medical equipment), which provides respiratory and durable medical equipment to patients in 11 states through its 26 locations, including a full-service mail-order pharmacy operated for the benefit of all of our patients. Our Retail Division consists of six retail operations, a home health-oriented mail order catalog and a related retail website.

Results of Operations

Quarter Ended June 30, 2006 Compared to Quarter Ended June 30, 2005

Arcadia Resources, Inc.
Consolidated Statements of Income
(In thousands)


	Quarter			Quarter
	Ended			Ended
	June 30, 2006			June 30, 2005
Net Sales	$	37,555		$	30,739
Cost of Sales		24,373			20,843

Gross Profit		13,182			9,896
General and Administrative Expenses		12,327			9,773
Depreciation and Amortization		569			415

Operating Income (Loss)		286			(292	)
Oher Expenses
Interest Expense, Net		405			475
Amortization of Debt Discount					424

Total Other Expenses		405			899

Net Income (Loss) Before Income Tax Expense		(119	)		(1,191	)
Income Tax Expense		39			60

Net Income (Loss)	$	(158	)	$	(1,251	)

Loss per Share — Basic and Diluted	$	(0.00	)	$	(0.02	)
Weighted average number of shares — Basic and Diluted		86,837			82,486

Net sales were $37.6 million for the quarter ended June 30, 2006 compared to $30.7 million for the quarter ended June 30, 2005, representing an increase of 22%. During the quarter ended June 30, 2006, the Company generated internal growth from existing operations of 9.3% of the increase in sales compared to the quarter ended June 30, 2005. During the quarter ended June 30, 2006, the Company recorded $3.9 million in revenues from entities acquired during or after the quarter ended June 30, 2005. There were no material changes in sales prices from the quarter ended June 30, 2005 to the quarter ended June 30, 2006, net of pharmacy-related pricing reductions, to contribute to the improvement in revenues.

The Company generated the following tabular progression of net sales by quarter since the merger. There were no material changes in sales prices from the quarter ended March 31, 2005 to the quarter ended June 30, 2006 to contribute to the improvement in revenues. See Results of Operations and Liquidity and Capital Resources.


			Increase from prior			Increase from same
Net sales by quarter:	(in millions)		Quarter			quarter prior year

First quarter ended June 30, 2004*	$	23.1		11.5	%		26.9	%
Second quarter ended September 30, 2004		25.5		10.4	%		30.5	%
Third quarter ended December 31, 2004		28.1		10.2	%		41.4	%
Fourth quarter ended March 31, 2005		28.6		1.8	%		38.1	%
First quarter ended June 30, 2005		30.7		7.4	%		33.0	%
Second quarter ended September 30, 2005		32.7		6.5	%		28.2	%
Third quarter ended December 31, 2005		33.3		1.8	%		18.5	%
Fourth quarter ended March 31, 2006		34.2		2.7	%		19.6	%
First quarter ended June 30, 2006		37.6		9.9	%		22.5	%

The Company’s consolidated gross profit margin was 35.1% for the quarter ended June 30, 2006 compared to 32.2% for the quarter ended June 30, 2005. The Company’s acquisition and expansion into pharmacy and durable medical equipment operations in May 2004, addition of a mail-order catalog operation in May 2005 and initiation of its retail store concept in September 2005 has and is expected to continue to drive changes to the consolidated gross profit margin of the Company. The Services’ Division revenues for the quarter ended June 30, 2006 were $29.9 million and yielded a gross margin of 26.6% compared to $26.8 million at a gross margin of 27.4% for the quarter ended June 30, 2005. The reduction in gross margin is due to a higher mix of lower margin services being rendered by the Services Division in quarter ended June 30, 2006 compared to the quarter ended June 30, 2005. The Products’ Division revenues for the quarter ended June 30, 2006 were $6.7 million at a gross margin of 70% compared to revenues for the quarter ended June 30, 2005 of $3.5 million at a gross margin of 69%. Cost of sales for Services are primarily employee costs, while cost of sales for Products and Retail represents the cost of products and medications sold to patients and supplies used in the delivery of other rental products and services to patients, including the related depreciation of the equipment rented to patients. The components of the Retail Division were acquired or opened during the year ended March 31, 2006 and generated revenues of $1.0 million for the quarter ended June 30, 2006 compared to $460,000 for the quarter ended June 30, 2005, at a 57% gross margin for both periods.

General and administrative expenses for the quarter ended June 30, 2006 were $12.3 million or 32.8% of revenues versus $9.8 million or 31.8% of revenues for the quarter ended June 30, 2005. The 25.5% increase is due primarily to changes in the Company’s changing mix of business to include more revenues from the Products Division, which has a higher gross margin but also a higher cost of general and administrative expenses due to the cost of delivering and maintaining equipment and the cost of documentation and billing required to receive reimbursement for the products being sold or rented to patients. The general and administrative expenses for the Services, Products and Retail Divisions were 22%, 56% and 90% of revenues for the quarter ended June 30, 2006, respectively as compared to 22%, 63% and 14% for the quarter ended June 30, 2005). The Company recorded $2.1 million in non-cash expenses during the quarter ended June 30, 2006, of which $1.04 million are included in general and administrative expenses compared to total non-cash expenses of $1.6 million for the quarter ended June 30, 2005. The Company continues to incur expenses toward building an

infrastructure for the Products Division and bolstering the existing Services Division infrastructure to accommodate recent and expected acquisitions, most of which are personnel and information systems related. The Company’s investment in its retail store concept incurred general and administrative expenses of $385,000 during the quarter ended June 30, 2006, compared to $27,000 for the same period in the prior year during which it was created.

Total depreciation and amortization expense was approximately $1.02 million for the quarter ended June 30, 2006 compared to $535,000 for the quarter ended June 30, 2005. Depreciation expense related to equipment rented to patients of approximately $453,000 is included as a component of cost of sales for the quarter ended June 30, 2006 compared to $120,000 in the quarter ended June 30, 2005. The increase in depreciation expense relates primarily to the increase in the Company’s fleet of vehicles and equipment held for rental to patients, additional information systems technology and equipment benefiting the entire Company. Other intangibles were amortized based on their expected useful lives (3 to 30 years) which resulted in amortization expense of $360,000 for the quarter ended June 30, 2006 compared to $213,000 recorded in the quarter ended June 30, 2005. Amortizable net intangibles, other than goodwill, were $18.3 million at June 30, 2006 compared to $13.1 million at June 30, 2005.

Interest expense was $405,000 for the quarter ended June 30, 2006 compared to $475,000 for the quarter ended June 30, 2005. Total interest-bearing borrowings were $26.9 million at June 30, 2006 at rates ranging from 8.25% to 13.27% per annum compared to $29 million at interest rates at rates ranging from 6.25% to 12% at June 30, 2005.

Amortization of deferred debt discount was $933,000 for the quarter ended June 30, 2005 compared to none for the quarter ended June 2006. These discounts were generated by the attachment of warrants to two notes payable and a conversion feature attached to a third note payable as explained in Notes to the Consolidated Financial Statements. The Company fully amortized all of its outstanding debt discounts as of September 30, 2005 upon repayment of the related promissory notes, all of which were paid in full as of September 30, 2005.

The Company had income tax expense of $39,000 for the quarter ended June 30, 2006 compared to $60,000 for the quarter ended June 30, 2005, primarily related to state income tax expenses. The Company has total net operating loss carryforwards for tax purposes of $7.2 million that expire at various dates through 2026.

The Company’s net loss for the quarter ended June 30, 2006 was $158,000 compared to $1.3 million for the quarter ended June 30, 2005. The Company incurred total non-cash expenses of $1.5 million in the quarter ended June 30, 2006 compared to $1.6 million for the quarter ended June 30, 2005.

Quarter Ended June 30, 2005 Compared to Quarter Ended June 30, 2004


	Successor			Successor			Predecessor
				Period From			Period From
	Quarter			May 10, 2004			April 1, 2004
	Ended			To			To
Consolidated Statements of Operations (in thousands)	June 30, 2005			June 30, 2004			May 9, 2004

Net Sales	$	30,739		$	13,621		$	9,487
Cost of Sales		20,843			9,699			6,906

Gross Profit		9,896			3,922			2,581
General and Administrative Expenses		9,773			3,819			2,102
Impairment of Goodwill		0			—			16
Depreciation and Amortization		415			—			—

Operating Income (Loss)		(292	)		103			463
Other Expenses Other (Income)
Interest Expense (Income), Net		475			244			—
Amortization of Debt Discount		424			35			—

Total Other Expenses		899			279			—

Net Income (Loss) Before Income Tax Expense		(1,191	)		(176	)		463
Income Tax Expense (Benefit)		60			(60	)		—

Net Income (Loss)	$	(1,251	)	$	(116	)	$	463

Net sales were $30.7 million for the quarter ended June 30, 2005 compared to $23.1 million for the quarter ended June 30, 2004, representing an increase of 33%. The Company generated revenues from operations acquired since June 30, 2004 totaling 82.7% of the increase in sales, while internal growth of existing operations represented 17.3% of the increase in sales or a 5.7% internal growth rate compared to the same quarter in the prior year. There were no material changes in sales prices from the quarter ended June 30, 2004 to the quarter ended June 30, 2005 to contribute to the improvement in revenues. The Company’s consolidated gross profit margin was 32.2% for the quarter ended June 30, 2005 compared to 28.1% for the quarter ended June 30, 2004. The Company’s acquisition and expansion into pharmacy and durable medical equipment operations in May 2004 as well as the addition of a mail-order catalog operation in May 2005 has and is expected to continue to drive changes to the consolidated gross profit margin of the Company. The Services’ division revenues for the quarter ended June 30, 2005 were $26.8 million and yielded a gross margin of 27.4%, while the Products’ divisional revenues resulted in $3.5 million at a gross margin of 69.0%. Cost of sales for Services are primarily employee costs, while cost of sales for Products represents the cost of products and medications sold to patients and supplies used in the delivery of other rental products and services to patients. The Service division’s gross margins were negatively affected in the quarter ended June 30, 2005 compared to the quarter ended June 30, 2004 due to the business climate and customer mix of institutional customers, increases in workers’ compensation insurance costs and a demand for lower margin service staffing in the facilities. The components of the Retail Division were acquired or opened during the quarter ended June 30, 2005 and generated revenue of $460,000 and yielded a gross margin of 57%.

Corporate general and administrative expenses for the quarter ended June 30, 2005 were $9.8 million or 32% of revenues versus $5.9 million or 26% of revenues for the quarter ended June 30, 2004. The 65% increase is due primarily to changes in the Company’s mix of business, costs related to changing the structure of the business from a privately-held organization to a publicly-held company, and additional general and administrative expenses related to the merged entities as discussed in the notes to the consolidated financial statements. The general and administrative expenses for the Services, Products and Retail divisions were 22%, 64% and 14% of revenues, respectively as compared to 23%, 111% and 0% for the same period last year. The Company recorded $1.8 million in non-cash expenses during the quarter ended June 30, 2005, of which $689,000 are included in general and administrative expenses with no corresponding comparable items in the prior year with the exception for bad debt expense of $67,000 for the quarter ended June 30, 2004. The Company continues to incur expenses toward building an infrastructure for the Products Division and bolstering the existing Services Division infrastructure to accommodate recent and expected acquisitions, most of which are personnel and information systems related. The post-merger transaction costs of registering securities issued in the offering are considered an expense for accounting purposes. Due to the complex nature of the business combination and the time schedule required, those costs have been significant to the Company for the year ended March 31, 2005 and will continue to be until the registration is effective. Such related costs include primarily external professional fees for legal, accounting and auditing services along with internal costs of preparing and filing the required documents with the Securities and Exchange Commission. The Company estimates its external costs were $90,000 for the quarter ended June 30, 2005.

The Company recognized no impairment of goodwill for the quarter ended June 30, 2005 compared to $16,000 for the quarter ended June 30, 2004. Total net intangible assets were $37.0 million of which $24.0 million was goodwill as of June 30, 2005 as compared to $22.5 million of goodwill as of June 30, 2004, prior to the purchase price allocation of the merged entities. The increase in the Company’s intangibles relates primarily to our acquisition strategy.

Depreciation and amortization expense was $415,000 for the quarter ended June 30, 2005 yet the Company had no depreciation or amortization in the quarter ended June 30, 2004. Additional depreciation expense related to equipment rented to patients of $120,000 is included as a component of cost of sales for the quarter ended June 30, 2005 compared to none recorded in the quarter ended June 30, 2004. The increase in depreciation expense relates to the increase in the Company’s fleet of vehicles, equipment held for rental to patients, pharmacy equipment and office furnishings and equipment required to service the patients and additional information systems technology and equipment benefiting the entire Company. Other intangibles were amortized based on their expected useful lives (3 to 30 years) which resulted in amortization expense of $213,000 for the quarter ended June 30, 2005 compared to none recorded in the quarter ended June 30, 2004. Amortizable net intangibles, other than goodwill, were $13.1 million at June 30, 2005.

Interest expense was $475,000 for the quarter ended June 30, 2005 compared to $244,000 for the quarter ended June 30, 2004. The increase in interest expense is a result of borrowings resulting from the expansion of Products along with acquisitions of the various entities as discussed in the Notes to the Consolidated Financial Statements. Total interest-bearing borrowings were $29.0 million at June 30, 2005 at rates ranging from 6.25% to 12% per annum compared to $14.6 million at similar interest rates at June 30, 2004.

Amortization of deferred debt discount was $424,000 for the quarter ended June 30, 2005 generated by the attachment of warrants to two notes payable and a conversion feature attached to a third note payable. The warrants relate to the initial merger of the organization and accounted for $315,000 for the quarter ended June 30, 2005 versus $35,000 for the same period last year. The

deferred debt discount is the fair value of stock options, warrants and conversion features granted to certain note holders as explained in Notes to the Consolidated Financial Statements. The deferred debt discount is being amortized over the life of the respective promissory notes.

The Company’s predecessor reported no income tax expense for the period from April 1, 2004 to May 9, 2004 as it was a Subchapter S taxpayer. However, the successor Company had income tax expense of $185,000 for the period from May 10, 2004 to March 31, 2005, primarily related to state income tax expenses. The Company had significant permanent and timing differences between book income and taxable income resulting in combined net deferred tax assets of $2.7 million to be utilized by the Company for which an offsetting valuation allowance has been established for the entire amount. The Company has a net operating loss carryforward for tax purposes of $4.9 million that expires at various dates through 2025.

The Company’s net loss for the quarter ended June 30, 2005 was $1.3 million compared to net income of $347,000 for the quarter ended June 30, 2004. The costs responsible for this reduction in net income are: those costs related to being a separate publicly-held entity versus a subsidiary of a privately-held entity, debt discount amortization and related interest expense, public offering registration expenses, infrastructure building and related improvements, higher workers’ compensation costs, and costs related to the release of escrowed shares and stock options pursuant to SFAS No. 123R.

Liquidity and Capital Resources

The Company’s primary needs for liquidity and capital resources are the funding of operating and administrative expenses related to the management of the Company and its subsidiaries. Secondarily, the Company began executing its long-term strategic growth plan in May 2004, which includes plans for complementary acquisitions, internal growth at existing locations, expanded product offerings and synergistic integration of the Company’s types of businesses.


	Quarter			Quarter
SUMMARY CONSOLIDATED	Ended			Ended
STATEMENTS OF CASH FLOWS (in millions)	June 30, 2006			June 30, 2005
Net loss	$	(0.2	)	$	(1.3	)
Net cash (used in) operating activities	$	(2.6	)	$	(0.8	)
Net cash (used in) investing activities	$	(0.3	)	$	(3.7	)
Net cash provided by financing activities	$	4.3		$	5.8
Net increase in cash and cash equivalents	$	1.4		$	1.3
Cash and cash equivalents at the end of the period	$	1.9		$	2.7

Prior to undertaking the Company’s long-term strategic growth plan, the operating company was generating significant cash flows from operations and pre-tax income of 5% of revenues. Management has shown the ability to raise funds sufficient to provide for the cash flow needs of the Company in pursuit of its long-term strategic growth plan, as evidenced by the $48 million raised in equity instruments after the merger through June 30, 2006 (including the conversion of notes payable into common stock). The Company also has in place long-term lines of credit, a short-term line of credit and has used notes payable to sellers and shares of its common stock as a means of financing some acquisitions.

On June 29, 2006, the Company issued a promissory note to an investor for $15 million. The Company used these funds to pay down $10.3 million against its outstanding lines of credit and to $2 million complete an acquisition on July 3, 2006. The note bears simple interest at the one year LIBOR rate plus 7.5%, effectively 13.27% at June 30, 2006, with interest payable quarterly beginning on September 30, 2006 and the principal due in full on December 26, 2007. The Company used the proceeds to reduce the amounts outstanding under its lines of credit and other accounts payable on June 30, 2006 and to fund the $2 million cash portion of the purchase price of Wellscripts, LLC on July 3, 2006.

During the quarter ended June 30, 2006, the Company made one acquisition with a combination of $3.0 million in notes or purchase price payable ($2 million paid on July 3, 2006), assumption of certain liabilities totaling $165,000 and 390,000 million shares of its common stock valued at $1.0 million. The Company had $21.8 million available as of June 30, 2006 through its various lines of credit with the potential of an additional $12.5 million available, based on borrowing base calculations.

The Company has been successful in using notes payable and common stock as part of its consideration paid for acquisitions. The Company paid $311,000 in post-acquisition related payments in cash and $339,000 with its common stock. In the event the Company is unable to continue to obtain financing through the sale of additional common stock or increased borrowings, management will reduce the amount of acquisitions and investments in related infrastructure and focus on the performance of the operations of the Company, until it can once again resume its strategic plans.

The Company’s cash position as of June 30, 2006 was $1.9 million. The Company’s total debt to equity ratio was 0.60 to 1 and its current ratio was 2.99 to 1 at June 30, 2006.

Gross accounts receivable at June 30, 2006 of approximately $31.4 million represent accounts receivable from operations and from acquired entities. As of June 30, 2006, the Company’s net accounts receivable represented 70 days sales outstanding, compared to 67 days sales outstanding as of June 30, 2005. By type of revenue, as of June 30, 2006, the days sales outstanding for Services Division revenues were 62 and the days sales outstanding on Products Division revenues were 114 days. The Retail Division has minimal accounts receivable as its sales are primarily via charges to customers’ credit cards. The integration of billing related to acquisitions of Products Division operations during the year ended March 31, 2006 has affected the related collection process due to the required reworking of licensure and provider numbers with payors after a change in ownership. This can be a 30 to 120 day process depending on the laws and licensure requirements in the state of operations and the various payors involved. Additional computer hardware, software and support staff have been added to improve the results in fiscal 2007 and to integrate acquired entities faster than in fiscal 2006. The Company was not in the Products business until August 2004 and opened a regional billing center in January 2005 to consolidate the billing of the local operations. The Company calculates its days sales outstanding as accounts receivable less acquired accounts receivable, net of the related allowance for doubtful accounts, divided by the average daily net sales for the preceding three months. The Company has a limited number of customers with individually large amounts due at any given balance sheet date. The Company’s payor mix for the quarter ended June 30, 2006 was as follows:


Government-funded	27	%
Institutions	44	%
Commercial Insurance	11	%
Private Pay	18	%

Financing Transactions

On April 26, 2005, the Company sold an aggregate 1,212,121 shares of its common stock valued at $1.65 per share, for net aggregate consideration of $1.86 million, in a private transaction to an accredited investor as defined in Rule 501(a) of Regulation D.

The Company received $100,000 from the exercise of stock warrants during the quarter ended June 30, 2006.

On June 20, 2006, the Company terminated two agreements made in November 2005 to sell 2,222,222 shares of common stock for aggregate consideration totaling $5.7 million for failure of the investors to fund the transactions.

Management believes that cash from operations will be sufficient to repay short-term debt obligations. The Company used net cash from operating activities of $2.6 million during the quarter ended March 31, 2006, compared to negative net cash from operations in three of the four preceding quarters. However, cash from operations alone may not be sufficient to pursue management’s strategy of growth through acquisition. Management anticipates that the sources of funds for the reduction of long-term debt obligations and for acquisitions will be primarily from the equity market. As of June 30, 2006, the Company’s interest-bearing debt totals approximately $4.4 million classified as current and approximately $22.5 million classified as long-term for a total of approximately $26.9 million. During fiscal years 2005 and 2006 and the quarter ended June 30, 2006, the Company raised $48 million from the equity markets (including the conversion of notes payable into common stock) in accordance with its plan and has retired short term debt, reduced borrowings on its lines of credit, funded internal growth and financed 22 acquisitions. In the short term, the Company anticipates raising additional debt or equity funding for selected acquisitions. Raising capital through equity will result in dilution to our holders of Common Stock. The Company expects to incur additional debt to fund the growth of its durable medical equipment and respiratory business. Vendor-based financing is available in the form of short term notes payable or capital leases for medical and information systems equipment. The Company does not have any material commitments for capital expenditures, but does intend to spend up to $1 million related to information systems technology.

The Company also plans to expand into certain new start-up locations related to retail DME and walk-in medical clinics, as well as to continue to expand product and service offerings in its existing sites. Cash flow from operations is expected to fund these efforts, the scope of which may be determined by the Company’s ability to generate cash flow or to secure additional new funding.

To the extent that we do not successfully raise funds from the equity markets to finance new acquisitions, we may seek debt financing, which reduces available cash for operations by the amount of interest expense and repayments. Alternatively, we may choose to modify or postpone our strategy to grow through acquisition or may choose to eliminate certain product or service offerings. Higher financing costs, modification of our growth strategy, or the elimination of product or service offerings could negatively impact our profitability and financial position. Given the Company’s net proceeds from financing activities during the twenty-one months ended March 31, 2006, the changes in the Company’s operational and financial position that have occurred during this period, and assuming no material decline in our revenues, management does not anticipate that the Company will be unsuccessful in its efforts to raise funds from the equity markets, although there is no guarantee that the Company will successfully raise such funds.

The revolving credit commitment amount on the original Comerica Bank credit facility has been increased four times since its May 7, 2004 inception. In August 2005, the credit agreement was amended to in the credit commitment amount to $19 million and to extend the maturity date to September 1, 2007. The Company is permitted to draw on the revolving credit facility to finance working capital or staffing business acquisitions. Factors that have bearing on whether we may require additional credit include our ability to assimilate our acquired businesses by reducing operating costs through economies of scale, our ability to increase revenues through internal growth based on our existing cost structure, and our ability to generate cash from operations sufficient to service our debt level and operating costs. There is always 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 facility or to lend additional funds for working capital or acquisition 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 modification or abandonment of our present business strategy.

Contractual Obligations and Commercial Commitments

As of March 31, 2006, the Company had contractual obligations, in the form of non-cancelable operating leases and employment agreements as follows, in thousands. The presentation of debt maturities and interest expense has been adjusted for the effect of $15 million promissory note issued on June 29, 2006:


	Payments due by March 31,
	Total		2007		2008		2009		2010		2011
Operating Leases	$	2,701	$	1,425	$	963	$	215	$	58	$	40
Debt Maturities		22,772		2,406		19,992		242		75		57
Employment Agreements		1,257		867		390		—		—		—
Interest Expense		4,219		2,158		2,031		30		—		—

Total	$	30,949	$	6,856	$	23,376	$	487	$	133	$	97

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 limited to our investment portfolio and 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 this 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.

Disclosure Controls and Procedures. Our chief executive officer and our chief financial officer, after evaluating our “disclosure controls and procedures” (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) have concluded that as of June 30, 2006, our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that information is accumulated and communicated to our management, including our chief executive officer and our chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Controls. During our fiscal quarter ended June 30, 2006, there was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Additional resources in the accounting and finance departments of the Company have been added to accommodate the Company’s growth through acquisitions. The Company intends to implement a newly-acquired management information system during the next 12 months to bolster timeliness and standardization of internal information processing as well as continuing to improve existing systems currently in use.

Part II: Other Information

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

On July 19, 2006, the Company issued 8,084 shares of common stock upon the exercise of outstanding Class A Warrants for consideration of 1,916 shares of common stock surrendered on conversion. The Company agreed on July 21, 2006, to issue 60,000 shares of common stock, valued at $150,000, in consideration of services furnished by an accredited investor,. The Company agreed on August 4, 2006, to issue to the Company’s three independent directors options to purchase an aggregate of 18,026 shares of the Company’s common stock, at an exercise price of $2.92 per share, per the terms of existing director compensation agreements for attendance at board and audit committee meetings from July 1, 2006 through September 30, 2006. The Company agreed on August 4, 2006 to issue an aggregate of 1,938 shares of common stock to independent directors for Board and Audit Committee meeting attendance through August 4, 2006, per the terms of existing director compensation agreements. The Company’s agreement to issue the securities reported above is contingent on compliance with all approvals and other requirements of the American Stock Exchange. Each transaction reported is exempt from registration pursuant to Section 4(2) of the Securities Act of 1933 and Rule 506 of Regulation D if applicable, as not involving a public offering. Shares issued on the conversion of warrants are additionally exempt from registration on the basis of Section 3(a)(9) of the Securities Act of 1933, and shares surrendered on conversion are accounted for by the Company on a net issuance basis. Each transaction was made without general solicitation or advertising and was not underwritten. Each security certificate will bear a legend providing, in substance, that the securities have been acquired for investment only and may not be sold, transferred, or assigned in the absence of an effective registration statement or an opinion of the Company’s counsel that registration is not required under the Securities Act of 1933. The shares of common stock carry registration rights.

Item 5. Other Information.

On August 4, 2006, the Company granted discretionary compensation increases to the Chairman of the Audit Committee, the Chief Financial Officer and the Executive Vice President, in accordance with their respective compensation agreements, as more fully described in Exhibit 10.2.

Item 6. Exhibits.

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

SIGNATURES

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


August 10, 2006	By:	/s/ John E. Elliott, II

		John E. Elliott, II Chairman and Chief Executive Officer (Principal Executive Officer)

August 10, 2006	By:	/s/ Rebecca R. Irish

		Rebecca R. Irish Secretary, Treasurer and Chief Financial Officer (Principal Financial and Accounting Officer)

EXHIBIT INDEX

The following documents are filed as part of this report. Exhibits not required for this report have been omitted. Arcadia Resource’s Commission file number is 000-31249.


Exhibit
No.		Exhibit Description
10.1		Asset Purchase Agreement for Alliance Oxygen & Medical Equipment, Inc. dated July 12, 2006.

10.2		Description of Director, Chief Financial Officer and Executive Vice President Compensation Arrangements approved August 4, 2006.

31.1		Certification of the Chief Executive Officer required by rule 13a — 14(a) or rule 15d — 14(a).

31.2		Certification of the Principal Accounting and Financial Officer required by rule 13a — 14(a) or rule 15d — 14(a).

32.1		Chief Executive Officer Certification Pursuant to 18 U.S.C. §1350, as Adopted Pursuant to §206 of the Sarbanes — Oxley Act of 2002.

32.2		Principal Accounting and Financial Officer Certification Pursuant to 18 U.S.C. §1350, as Adopted Pursuant to §206 of the Sarbanes — Oxley Act of 2002.