e10vq
UNITED STATES SECURITIES AND EXCHANGE
COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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þ |
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Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended September 30, 2007
OR
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o |
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Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the Transition period from to
Commission file number 001-32935
ARCADIA RESOURCES, INC.
(Exact name of registrant as specified in its charter)
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NEVADA
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88-0331369 |
(State of Incorporation)
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(I.R.S. Employer I.D. Number) |
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9229 DELEGATES ROW, SUITE 260 |
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INDIANAPOLIS, IN
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46240 |
(Address of principal executive offices)
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(Zip Code) |
Registrants telephone no.: (317) 569-8234
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, 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 þ Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
As of November 7, 2007, 126,214,000 shares of common stock, $0.001 par value, of the Registrant
were outstanding.
PART I. FINANCIAL INFORMATION
Item 1. Unaudited Consolidated Financial Statements
ARCADIA RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
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September 30, |
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March 31, |
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2007 |
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2007 |
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(Unaudited) |
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(Audited) |
ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
1,748,027 |
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$ |
2,994,322 |
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Accounts receivable, net of allowance of $8,672,000 and $8,310,000,
respectively |
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31,852,146 |
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33,427,284 |
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Inventories, net |
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1,653,746 |
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2,732,533 |
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Prepaid expenses and other current assets |
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2,780,470 |
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2,768,231 |
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Total current assets |
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38,034,389 |
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41,922,370 |
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Property and equipment, net |
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7,230,047 |
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12,606,480 |
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Assets held for sale |
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210,819 |
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Goodwill |
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33,894,693 |
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33,335,921 |
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Acquired intangible assets, net |
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25,680,369 |
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28,982,628 |
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Other assets |
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195,760 |
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380,374 |
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Total assets |
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$ |
105,246,077 |
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$ |
117,227,773 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current liabilities: |
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Lines of credit, current portion |
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$ |
1,648,035 |
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$ |
2,612,996 |
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Accounts payable |
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3,189,274 |
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6,861,262 |
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Accrued expenses: |
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Compensation and related taxes |
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4,939,889 |
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4,462,726 |
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Commissions |
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416,560 |
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359,401 |
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Accrued interest |
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659,423 |
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818,655 |
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Other |
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1,394,175 |
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1,049,065 |
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Liabilities of operations held for sale |
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793,419 |
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Payable to affiliated agencies, current portion |
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1,863,246 |
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1,548,827 |
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Long-term obligations, current portion |
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16,823,308 |
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21,320,198 |
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Capital lease obligations, current portion |
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76,736 |
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1,020,421 |
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Deferred revenue |
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326,080 |
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659,258 |
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Total current liabilities |
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32,130,145 |
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40,712,809 |
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Other liabilities |
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457,161 |
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457,161 |
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Lines of credit, less current portion |
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16,429,789 |
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20,342,796 |
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Payable to affiliated agencies, less current portion |
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37,848 |
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Long-term obligations, less current portion |
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373,596 |
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896,870 |
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Capital lease obligations, less current portion |
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143,357 |
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696,787 |
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Total liabilities |
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49,534,048 |
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63,144,271 |
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Commitments and contingencies |
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STOCKHOLDERS EQUITY |
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Preferred stock, $.001 par value, 5,000,000 shares authorized, none outstanding |
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Common stock, $.001 par value, 200,000,000 shares authorized; 126,126,685
shares and 121,059,177 shares issued and outstanding, respectively |
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126,127 |
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121,059 |
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Additional paid-in capital |
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128,569,059 |
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110,342,704 |
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Accumulated deficit |
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(72,983,157 |
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(56,380,261 |
) |
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Total stockholders equity |
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55,712,029 |
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54,083,502 |
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Total Liabilities and Stockholders Equity |
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$ |
105,246,077 |
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$ |
117,227,773 |
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See accompanying notes to these condensed consolidated financial statements.
ARCADIA RESOURCES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
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Three-Month Period Ended |
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Six-Month Period Ended |
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September 30, |
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September 30, |
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2007 |
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2006 |
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2007 |
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2006 |
Revenues, net |
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$ |
38,721,330 |
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$ |
38,323,885 |
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$ |
77,852,181 |
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$ |
74,302,920 |
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Cost of revenues |
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26,473,563 |
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26,281,586 |
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52,990,111 |
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50,335,068 |
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Gross profit |
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12,247,767 |
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12,042,299 |
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24,862,070 |
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23,967,852 |
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Selling, general and administrative |
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14,830,748 |
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12,075,238 |
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29,202,376 |
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23,417,698 |
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Depreciation and amortization |
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989,507 |
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601,469 |
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1,949,276 |
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1,083,169 |
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Total operating expenses |
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15,820,255 |
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12,676,707 |
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31,151,652 |
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24,500,867 |
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Operating loss |
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(3,572,488 |
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(634,408 |
) |
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(6,289,582 |
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(533,015 |
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Other expenses: |
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Interest expense, net |
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963,239 |
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912,529 |
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2,122,500 |
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1,317,656 |
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Total other expenses |
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963,239 |
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912,529 |
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2,122,500 |
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1,317,656 |
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Loss from continuing operations before
income taxes |
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(4,535,727 |
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(1,546,937 |
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(8,412,082 |
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(1,850,671 |
) |
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Current income tax expense |
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6,914 |
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44,650 |
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22,602 |
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83,450 |
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Loss from continuing operations |
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(4,542,641 |
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(1,591,587 |
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(8,434,684 |
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(1,934,121 |
) |
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Discontinued operations: |
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(Loss) earnings from discontinued operations |
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(2,472,939 |
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855,968 |
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(6,008,500 |
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1,040,569 |
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Net loss on disposal |
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(2,159,712 |
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(2,159,712 |
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(4,632,651 |
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855,968 |
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(8,168,212 |
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1,040,569 |
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NET LOSS |
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$ |
(9,175,292 |
) |
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$ |
(735,619 |
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$ |
(16,602,896 |
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$ |
(893,552 |
) |
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Weighted average number of common shares
outstanding |
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123,455,814 |
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90,130,314 |
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119,249,723 |
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88,238,312 |
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Basic and diluted net loss per share: |
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Loss from continuing operations |
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$ |
(0.03 |
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$ |
(0.02 |
) |
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$ |
(0.07 |
) |
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$ |
(0.02 |
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(Loss) earnings from discontinued operations |
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(0.04 |
) |
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0.01 |
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(0.07 |
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0.01 |
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$ |
(0.07 |
) |
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$ |
(0.01 |
) |
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$ |
(0.14 |
) |
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$ |
(0.01 |
) |
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See accompanying notes to these condensed consolidated financial statements.
ARCADIA RESOURCES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
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Six-Month Period Ended |
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September 30, |
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2007 |
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2006 |
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Cash provided by (used in) operating activities: |
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Net loss for the period |
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$ |
(16,602,896 |
) |
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$ |
(893,552 |
) |
Adjustments to reconcile net loss to net cash used in operating
activities: |
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Provision for doubtful accounts |
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1,272,240 |
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745,952 |
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Amortization and depreciation of property and equipment |
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2,732,739 |
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1,530,472 |
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Gain on early retirement of debt and amortization of debt
discount |
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(121,057 |
) |
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52,045 |
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Loss on business disposals |
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2,159,712 |
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Amortization of intangible assets |
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1,484,967 |
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804,705 |
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Impairment of long-lived assets |
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1,900,387 |
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Reduction in expense due to return of common stock previously
issued |
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(246,400 |
) |
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Stock-based compensation expense |
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2,131,517 |
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301,189 |
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Changes in operating assets and liabilities, net of acquisitions: |
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Accounts receivable |
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1,096,046 |
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(6,427,061 |
) |
Inventories |
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(361,797 |
) |
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(1,047,539 |
) |
Other assets |
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(42,546 |
) |
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(826,883 |
) |
Accounts payable |
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(3,702,761 |
) |
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1,217,531 |
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Accrued expenses |
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450,535 |
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|
240,322 |
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Due to affiliated agencies |
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276,571 |
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(244,746 |
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Deferred revenue |
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(438,148 |
) |
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Net cash used in operating activities |
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(8,010,891 |
) |
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(4,547,565 |
) |
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Cash provided by (used in) investing activities: |
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Business acquisitions, net of cash acquired |
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(383,904 |
) |
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(7,064,875 |
) |
Proceeds from business disposals |
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5,751,332 |
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Purchases of property and equipment |
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(1,078,839 |
) |
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(1,629,462 |
) |
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Net cash provided by (used in) investing activities |
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4,288,589 |
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(8,694,337 |
) |
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Cash provided by (used in) financing activities: |
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Proceeds from issuance of note payable |
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15,000,000 |
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Proceeds from issuance of common stock, net of fees |
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12,442,082 |
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Proceeds from exercise of stock options/warrants |
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|
274,590 |
|
Net advances (payments) on line of credit |
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(4,877,968 |
) |
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|
1,719,475 |
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Payments on notes payable and capital lease obligations |
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(5,088,107 |
) |
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(2,682,772 |
) |
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Net cash provided by financing activities |
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|
2,476,007 |
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|
14,311,293 |
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Net change in cash and cash equivalents |
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(1,246,295 |
) |
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|
1,069,391 |
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Cash and cash equivalents, beginning of period |
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|
2,994,322 |
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|
530,344 |
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Cash and cash equivalents, end of period |
|
$ |
1,748,027 |
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|
$ |
1,599,735 |
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|
See accompanying notes to these condensed consolidated financial statements.
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Six-Month Period Ended |
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September 30, |
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2007 |
|
2006 |
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Supplementary information: |
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Cash paid during the period for: |
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Interest |
|
$ |
2,281,732 |
|
|
$ |
353,419 |
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Non-cash investing / financing activities: |
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Payments on note payable with issuance of common stock |
|
$ |
1,280,692 |
|
|
$ |
339,168 |
|
Common stock issued in conjunction with JASCORP, LLC
acquisition |
|
|
1,800,364 |
|
|
|
|
|
DME cost of disposal paid in common stock |
|
|
875,875 |
|
|
|
|
|
Contingent consideration relating to prior year
acquisition settled with issuance of notes payable |
|
|
714,688 |
|
|
|
|
|
See accompanying notes to these condensed consolidated financial statements.
ARCADIA RESOURCES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 Description of Company and Significant Accounting Policies
Description of Company
Arcadia Resources, Inc. (Arcadia or the Company) is a national provider of in-home health care
and retail / employer health care services. The Companys operations included three segments:
In-Home Health Care Services (Services); Durable Medical Equipment (DME); and Retailer and
Employer Services. In August 2007, the Company discontinued its non-emergency medical care clinic
initiative. The In-Home Health Care Services segment is a national provider of medical staffing
services, including home healthcare and medical staffing, as well as light industrial, clerical and
technical staffing services. Based in Southfield, Michigan, the In-Home Health Care Services
segment provides its staffing services through a network of affiliate and company-owned offices
throughout the United States. The Durable Medical Equipment segment markets, rents and sells
products and equipment across the United States. The DME segment also sells various medical
equipment offerings through a catalog out-sourcing and product fulfillment business. The Retailer
and Employer Services segment primarily includes the operations of PrairieStone Pharmacy, LLC
(PrairieStone). PrairieStone provides pharmacy services to grocery pharmacy retailers nationally
and offers DailyMed, the patented and patent pending compliance packaging medication system, to
at-home patients and senior living communities. In addition, PrairieStone offers pharmacy services
to employers through a contracted relationship with a large pharmacy benefits manager. Services
offered to grocers and employers include staffing, pharmacy management, pharmacy dispensing and
billing software, DailyMed, an exclusive retail pharmacy benefit network, and a 420 square foot
automated pharmacy footprint that allows its customers to reduce space needs and improve labor
efficiencies.
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.
Unaudited Interim Financial Information
The accompanying consolidated balance sheet as of September 30, 2007, the consolidated statements
of operations for the three-month and six-month periods ended September 30, 2007 and 2006, and the
consolidated statements of cash flows for the six-month periods ended September 30, 2007 and 2006
are unaudited but include all adjustments (consisting of normal recurring adjustments) that are, in
the opinion of management, necessary for a fair presentation of our financial position at such
dates and the results of operations and cash flows for the periods then ended, in conformity with
accounting principles generally accepted in the United States (GAAP). The consolidated balance
sheet as of March 31, 2007 has been derived from the audited consolidated financial statements at
that date but, in accordance with the rules and regulations of the United States Securities and
Exchange Commission (SEC), does not include all of the information and notes required by GAAP for
complete financial statements. Operating results for the three-month and six-month periods ended
September 30, 2007 are not necessarily indicative of results that may be expected for the entire
fiscal year. The financial statements should be read in conjunction with the financial statements
and notes for the fiscal year ended March 31, 2007 included in the Companys Form 10-K filed with
the SEC on June 29, 2007.
Principles of Consolidation
The consolidated financial statements include the accounts of Arcadia Resources, Inc. and its
wholly-owned subsidiaries. The earnings of the subsidiaries are included from the dates of
acquisition. All intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with 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. Changes in these estimates and assumptions may have a material impact on the
financial statements and accompanying notes.
Cash and Cash Equivalents
The Company considers cash in banks and all highly liquid investments with terms to maturity at
acquisition of three months or less to be cash and cash equivalents.
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 creditworthiness or other matters affecting the collectibility of amounts due
from customers could have a material affect 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 stated at the lower of cost or market utilizing the first in, first out (FIFO)
method. Inventories include products and supplies held for sale at the Companys individual
locations. The durable medical equipment and pharmacy operations account for the majority of the
inventory. Inventories are evaluated periodically for obsolescence and shrinkage.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization are provided using the
straight-line method over the estimated useful lives of the assets (3 to 15 years). The majority of
the Companys property and equipment includes equipment held for rental to patients in the home for
which the related depreciation expense is included in cost of revenues and totaled approximately
$611,000 and $485,000 for the three-month periods ended September 30, 2007 and 2006, respectively,
and $1,240,000 and $874,000 for the six-month periods ended September 30, 2007 and 2006,
respectively.
Goodwill and Acquired Intangible Assets
The Company has acquired several entities resulting in the recording of intangible assets,
including goodwill, which represents the excess of the purchase price over the net assets of
businesses acquired. The Company follows Statement of Financial Accounting Standards (SFAS) No.
142, Goodwill and Other Intangible Assets. Goodwill is tested for impairment
annually in the fourth quarter and between annual tests in certain circumstances, by comparing the
estimated fair value of each reporting unit to its carrying value. Fair value is determined by
estimating the future cash flows for each reporting unit.
Acquired intangible assets are amortized using the economic benefit method when reliable
information regarding future cash flows is available and the straight-line method when this
information is unavailable. The estimated useful lives are as follows:
|
|
|
|
|
Trade name |
|
30 years |
Customers and referral source relationships (depending on
the type of business purchased) |
|
5 and 20 years |
Acquired technology |
|
3 to 5 years |
Non-competition agreements (length of agreement) |
|
5 years |
Impairment of Long-Lived Assets
The Company reviews its long-lived assets (except goodwill, as described previously) 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. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment
charge is recognized for the amount by which the carrying amount of the asset exceeds the estimated
fair value of the asset, generally determined by discounting the estimated future cash flows.
Payables to Affiliated Agencies
Arcadia Services, Inc. (Arcadia Services) 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.
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 and tax credit carryforwards are
utilized. 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.
Revenue Recognition and Concentration of Credit Risk
Revenues for services are recorded in the period the services are rendered. Revenues for products
are recorded in the period delivered based on rental or sales prices established with the client or
their insurer prior to delivery.
Net patient service revenues are recorded at net realizable amounts estimated to be paid by the
customers and third-party payers. A provision for contractual adjustments is recorded as a
reduction to net patient services revenues and consists of: a) the difference between the payers
allowable amount and the customary billing rate; and b) services for which payment is denied by
governmental or third-party payors or otherwise deemed non-billable. The Company records the
provision for contractual adjustments based on a percentage of revenue using historical data. Due
to the complexity of many third-party billing arrangements, adjustments are sometimes made to
amounts originally recorded. These adjustments are typically identified and recorded upon cash
remittance or claim denial.
Revenues recognized under arrangements with Medicare, Medicaid and other governmental-funded
organizations were approximately 27% for both the six-month periods ended September 30, 2007 and
2006, respectively. No customers represent more than 10% of the Companys revenues for the periods
presented.
Business Combinations and Valuation of Intangible Assets
The Company accounts for business combinations in accordance with SFAS No. 141, Business
Combinations (SFAS No. 141). SFAS No. 141 requires business combinations to be accounted for
using the purchase method of accounting and includes specific criteria for recording intangible
assets separate from goodwill. Results of operations of acquired businesses are included in the
financial statements of the Company from the date of acquisition. Net assets of the acquired
company are recorded at their estimated fair value at the date of acquisition.
Earnings (Loss) Per Share
Basic earnings per share is computed by dividing net income (loss) available to common stockholders
by the weighted average number of common shares outstanding for the period. Diluted earnings per
share reflects the potential dilution that could occur if securities, or other contracts to issue
common stock, were exercised or converted into shares of common stock. Shares that are contingently
issuable upon a future outcome are not included in earnings per share until they are released.
Outstanding stock options and warrants to acquire common shares and escrowed shares have not been
considered in the computation of dilutive losses per share since their effect would be antidilutive
for all applicable periods shown. As of September 30, 2007 and 2006, there were approximately
30,179,000 and 47,337,000 potentially dilutive shares outstanding, respectively.
Stock-Based Compensation
Effective April 1, 2005, the Company adopted SFAS No. 123R, Share-Based Payment (SFAS No.
123R), which replaced SFAS No. 123 and superseded APB 25, using the modified prospective
transition method. Under the modified prospective transition method, the fair value accounting and
recognition provisions of SFAS No. 123R are applied to stock-based awards granted or modified
subsequent to the date of adoption. Prior periods presented are not restated. In addition, for
awards granted prior to the effective date, the unvested portion of the awards are recognized in
periods subsequent to the effective date based on the grant date fair value determined for pro
forma disclosure purposes under SFAS No. 123.
Fair Value of Financial Instruments
The carrying amounts of the Companys financial instruments, including cash and cash equivalents,
accounts receivable, accounts payable, and accrued expenses, approximate their fair values due to
their short maturities. Based on borrowing rates currently available to the Company for similar
terms, the carrying value of the lines of credit, capital lease obligations, and long-term
obligations approximate fair value.
Advertising Expense
Advertising costs are expensed as incurred. Advertising expenses included in continuing operations
were approximately $164,000 and $180,000 for the three-month periods ended September 30, 2007 and
2006, respectively, and $381,000 for both the six-month periods ended September 30, 2007 and 2006.
Reclassifications
Certain amounts presented in prior periods have been reclassified to conform to current period
presentation.
Recent Accounting Pronouncements
In June 2006, the FASB issued FASB Interpretation (FIN) No. 48, Accounting for Uncertainty in
Income Taxes (FIN 48), which amends and clarifies previous guidance on the accounting for
deferred income taxes as presented in SFAS No. 109. The statement is effective for fiscal years
beginning after December 15, 2006. Effective April 1, 2007, the Company adopted the provisions of
FIN 48, and there was no material effect to the consolidated financial statements. As a result,
there was no cumulative effect related to the adoption of FIN 48.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which defines fair
value, establishes a framework for measuring fair value in generally accepted accounting principles
and expands disclosure about fair value measurements. The statement is effective for financial
statements issued for fiscal years beginning after November 15, 2007, and interim periods within
those years. Management is currently evaluating the statement to determine what, if any, impact it
will have on the Companys consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities, which permits companies to make a one-time election to carry eligible types
of financial assets and liabilities at fair value, even if measurement is not required by GAAP. The
statement is effective for fiscal years beginning after November 15, 2007. Management is currently
evaluating the statement to determine what, if any, impact it will have on the Companys
consolidated financial statements.
Note 2 Managements Plan
Our independent auditors report on the consolidated financial statements and schedule for the year
ended March 31, 2007 contains an explanatory paragraph regarding the Companys ability to continue
as a going concern. The accompanying consolidated financial statements for the six-month period
ended September 30, 2007 have been prepared on a going concern basis, which contemplates the
realization of assets and the settlement of liabilities in the normal course of business and the
continuation of the Company as a going concern. The Company has experienced operating losses and
negative cash flows since its inception and currently has an accumulated deficit. These factors
raise substantial doubt about the Companys ability to continue as a going concern. Liquidation
values may be substantially different from carrying values as shown and these consolidated
financial statements do not give effect to adjustments, if any, that would be necessary to the
carrying values and classification of assets and liabilities should the Company be unable to
continue as a going concern.
The Company has grown primarily through acquisition since the reverse merger in May 2004 and has
incurred operating losses since that time. For the years ended March 31, 2007 and 2006, the Company
incurred net losses of $43.8 million and $4.7 million, respectively, and for the six-month period
ended September 30, 2007, the Company incurred an additional net loss of $16.6 million. During the
six-month period ended September 30, 2007, the Company used approximately $8.0 million of cash in
operations and had approximately $1.7 million in cash and cash equivalents at September 30, 2007.
Additionally, certain of the Companys debt agreements include subjective acceleration clauses and
other provisions that allow lenders, in their sole discretion, to determine that the Company has
experienced a material adverse change, which, in turn, would be an event of default.
Our continuation as a going concern is dependent upon several factors, including our ability to
generate sufficient cash flow to meet our obligations on a timely basis. Managements current cash
projections indicate significant improvement in the cash generated from operations during the
remainder of fiscal 2008.
Management has prepared projections for fiscal 2008 that anticipate an increase in revenue and
reductions in monthly operating expenses. After a period of growth through acquisition, management
intends to focus its efforts on improving operating efficiencies and reducing selling, general and
administrative expenses while growing the developing businesses. The Company recently hired
in-house counsel and expects a significant decrease in legal fees beginning in the third fiscal
quarter. The first step in this process includes
certain restructuring initiatives, which the Board of Directors approved and the Company announced
in March 2007. Management anticipates significant improvements in cash flows from operations during
fiscal 2008 compared to fiscal 2007. Management anticipates strong growth in revenues from the
Retailer and Employer Services segment as well as continued steady growth in the In-Home Health
Services segment. Management believes the significant cost reductions can be realized with certain
administrative expenses, including accounting/consulting fees, legal costs, and facility costs.
Management is committed to reducing costs to appropriate levels if the projected revenue increases
do not materialize.
In May 2007, the Company raised $13 million through the sale of common stock (see Note 9
Stockholders Equity). In June 2007, the Company restructured a significant portion of its
outstanding debt, which included the extension of the maturity date to June 30, 2008.
The Company sold its durable medical equipment operations in Florida and Colorado for total cash
proceeds of $7.7 million (see Note 3 Discontinued Operations) in September 2007, which were
considered non-strategic assets based on managements analysis. Additionally, the Company closed
Care Clinics and certain Retail Operations due to unfavorable performance of these lines of
business. These locations did not complement our existing and future strategic direction.
Medicare requires supplier numbers to obtain reimbursement for certain durable medical and
respiratory equipment. The Company resolved certain licensure issues related to various durable
medical accounts receivables during the quarter and has now been authorized to collect on these
receivables. It is the Companys opinion that the resolution of these issues will improve our
liquidity and financial position in the short-term.
Also in September 2007, the Company entered into a new revolving credit agreement with a potential
borrowing capacity of $5 million (see Note 7 Lines of Credit). Management believes that these
events have substantially improved the Companys cash position since March 31, 2007. Management
continues to consider various other alternatives for raising additional capital, if necessary,
including further divestitures of non-strategic businesses and seeking new debt or equity
financing.
Although management believes that its efforts in obtaining additional financing will be successful,
there can be no assurance that its efforts will ultimately be successful.
Note 3 Discontinued Operations
Sears Retail Operations
On July 31, 2007, the Company entered into an Asset Purchase Agreement with an entity controlled by
a former employee of the Company. Based on the terms of the agreement, the Company sold the retail
operations located within certain Sears stores for $215,587. $25,000 of the purchase price was
paid with a deposit previously received by the Company, and the remaining $190,587 is to be paid
with a 12-month promissory note, which bears interest at an annual rate of 8%.
The Sears retail operations were part of the Durable Medical Equipment segment.
Care Clinic, Inc.
In December 2006, Care Clinic, Inc., a subsidiary of the Company, entered into a Staffing and
Support Services Agreement with Metro Health Basic Care (Metro) to operate non-emergency health
care clinics in Michigan and Indiana. Under the agreement, Metro provided medical management
services to the clinics, including the oversight of physician credentialing and employment, as well
as clinic licensing. Care Clinic, Inc. provided staffing and support services, including the
oversight of billing, collections, and third-party contract negotiations, as well as the
credentialing and employment of non-physician practitioners and other administrative personnel. The
initial term of the agreement was five years, although either party could terminate without cause
on 180 days written notice.
On August 10, 2007, the Company provided notice that it was terminating the agreement. In October
2007, the Company and Metro finalized a settlement relating to the Companys early termination of
the agreement. As of September 30, 2007, the Company accrued approximately $660,000 relating to
the settlement.
Care Clinic, Inc. was a separate reporting segment.
Florida Durable Medical Equipment Operations (Beacon Respiratory Services, Inc.)
On September 10, 2007, the Company completed the sale of its ownership interest in Beacon
Respiratory Services, Inc. (Beacon Respiratory) to Aerocare Holdings, Inc. for cash proceeds of
$6,500,000, less fees of $457,500. $750,000 of the purchase price will be held back for up to
twelve months to cover the Companys obligations. The Company retained all accounts receivable for
services provided prior to August 17, 2007. Beacon Respiratory was the Companys durable medical
equipment operations in Florida.
The agreement includes a clawback provision whereby if the federal government enacts legislation
which reduces the Medicare rental oxygen reimbursement time period to less than 36 months in
calendar years 2008 or 2009, the purchase price will be retroactively reduced, and the Company will
be obligated to pay the buyer cash in the applicable amount within 30 days from the date the
legislation is enacted. The potential purchase price adjustment depends on which calendar year the
legislation is enacted and the number of months that the new legislation would provide for
reimbursement. The maximum amount would be $1,000,000 if the number of months is reduced to 18
months or lower during 2008.
Beacon Respiratory Services, Inc. was part of the Durable Medical Equipment segment.
Colorado Durable Medical Equipment Operations (Beacon Respiratory Services of Colorado,
Inc.)
On September 10, 2007, the Company completed the sale of substantially all of the assets of Beacon
Respiratory Services of Colorado, Inc. (Beacon Colorado) to an affiliate of AeroCare Holdings,
Inc. for cash proceeds of $1,200,000, less fees of $83,000. The Company retained all accounts
receivable for services provided prior to August 16, 2007. Beacon Colorado was the Companys
durable medical equipment operations in Colorado.
Beacon Respiratory Services of Colorado, Inc. was part of the Durable Medical Equipment segment.
The results of operations for the Sears retail operations, Care Clinic, Inc., Beacon Respiratory,
and Beacon Colorado are reported in discontinued operations through the dates of disposition in the
accompanying consolidated statement of operations, and the prior period consolidated statement of
operations have been recast. The segment results in Note 14 also reflect the reclassification of
the discontinued operations. The discontinued operations do not reflect the costs of certain
services provided to these operations by the Company. Such costs, which were not allocated by the
Company to the various operations, included legal fees, insurance, external audit fees, payroll
processing, human resources services and information technology support. The Company uses a
centralized approach to the cash management and financing of its operations, and, accordingly, debt
and the related interest expense were also not allocated specifically to these operations. The
consolidated statements of cash flows do not separately report the cash flows of the discontinued
operations.
The components of the earnings/(loss) from discontinued operations are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month Period Ended |
|
Six-Month Period Ended |
|
|
September 30, |
|
September 30, |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
|
|
Revenues, net: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sears retail operations |
|
$ |
48,024 |
|
|
$ |
131,126 |
|
|
$ |
209,218 |
|
|
$ |
277,785 |
|
Care Clinic, Inc. |
|
|
63,865 |
|
|
|
|
|
|
|
201,666 |
|
|
|
|
|
Beacon Respiratory |
|
|
808,501 |
|
|
|
2,676,872 |
|
|
|
3,355,410 |
|
|
|
3,892,658 |
|
Beacon Colorado |
|
|
266,281 |
|
|
|
287,522 |
|
|
|
649,547 |
|
|
|
493,488 |
|
|
|
|
|
|
|
1,186,671 |
|
|
|
3,095,520 |
|
|
|
4,415,841 |
|
|
|
4,663,931 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sears retail operations |
|
|
(24,495 |
) |
|
|
(197,425 |
) |
|
|
(165,768 |
) |
|
|
(556,663 |
) |
Care Clinic, Inc. |
|
|
(1,733,725 |
) |
|
|
(169,867 |
) |
|
|
(5,644,230 |
) |
|
|
(169,867 |
) |
Beacon Respiratory |
|
|
(777,430 |
) |
|
|
1,156,022 |
|
|
|
(412,646 |
) |
|
|
1,684,436 |
|
Beacon Colorado |
|
|
62,711 |
|
|
|
67,238 |
|
|
|
214,144 |
|
|
|
82,663 |
|
|
|
|
|
|
|
(2,472,939 |
) |
|
|
855,968 |
|
|
|
(6,008,500 |
) |
|
|
1,040,569 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on disposal: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sears retail operations |
|
|
(13,167 |
) |
|
|
|
|
|
|
(13,167 |
) |
|
|
|
|
Care Clinic, Inc. |
|
|
(770,215 |
) |
|
|
|
|
|
|
(770,215 |
) |
|
|
|
|
Beacon Respiratory |
|
|
(2,070,942 |
) |
|
|
|
|
|
|
(2,070,942 |
) |
|
|
|
|
Beacon Colorado |
|
|
694,612 |
|
|
|
|
|
|
|
694,612 |
|
|
|
|
|
|
|
|
|
|
|
(2,159,712 |
) |
|
|
|
|
|
|
(2,159,712 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from discontinued operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sears retail operations |
|
|
(37,662 |
) |
|
|
(197,425 |
) |
|
|
(178,935 |
) |
|
|
(556,663 |
) |
Care Clinic, Inc. |
|
|
(2,503,940 |
) |
|
|
(169,867 |
) |
|
|
(6,414,445 |
) |
|
|
(169,867 |
) |
Beacon Respiratory |
|
|
(2,848,372 |
) |
|
|
1,156,022 |
|
|
|
(2,483,588 |
) |
|
|
1,684,436 |
|
Beacon Colorado |
|
|
757,323 |
|
|
|
67,238 |
|
|
|
908,756 |
|
|
|
82,663 |
|
|
|
|
|
|
$ |
(4,632,651 |
) |
|
$ |
855,968 |
|
|
$ |
(8,168,212 |
) |
|
$ |
1,040,569 |
|
|
|
|
Note 4 Business Acquisition
On July 11, 2007, the Company acquired 100% of the membership interests of JASCORP, LLC
(JASCORP). JASCORP provides a range of retail pharmacy management services and systems,
including dispensing and billing software. The primary reason for the acquisition was to improve
the software offered to retailers through the pharmacy licensed service model. The total purchase
price of $2,219,962 included cash payments of $383,904 and the issuance of 1,814,883 shares of
common stock. The value of the common stock takes into consideration the fact that the Company has
guaranteed the share price of $0.99 and that additional shares or cash, at the Companys
discretion, are to be issued at the one-year anniversary date if the share price is below this
price. The consolidated financial statements herein include the results of operations of JASCORP
from July 12, 2007. The acquired business is included in the Retailer and Employer Services
segment.
The following summarizes the preliminary purchase price allocation relating to the JASCORP
acquisition:
|
|
|
|
|
Share consideration |
|
$ |
1,800,364 |
|
Cash consideration |
|
|
383,904 |
|
Acquisition costs |
|
|
35,694 |
|
|
|
|
|
Total purchase price |
|
$ |
2,219,962 |
|
|
|
|
|
|
|
|
|
|
Current assets |
|
$ |
501,727 |
|
Fixed assets |
|
|
229,473 |
|
Liabilities |
|
|
(236,340 |
) |
Intangible assets: |
|
|
|
|
Customer relationships |
|
|
345,483 |
|
Acquired technology |
|
|
863,707 |
|
Goodwill |
|
|
515,912 |
|
|
|
|
|
Total net identifiable assets |
|
$ |
2,219,962 |
|
|
|
|
|
Note 5 Goodwill and Acquired Intangible Assets
The following table presents the detail of the changes in goodwill by segment for the six-month
period ended September 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In-Home |
|
Durable |
|
Retailer |
|
|
|
|
Health |
|
Medical |
|
& Employer |
|
|
|
|
Care Services |
|
Equipment |
|
Services |
|
Total |
|
|
|
Goodwill at March 31, 2007 |
|
$ |
13,922,354 |
|
|
$ |
2,771,982 |
|
|
$ |
16,641,585 |
|
|
$ |
33,335,921 |
|
Acquisitions during the period |
|
|
|
|
|
|
|
|
|
|
515,912 |
|
|
|
515,912 |
|
Disposals during the period |
|
|
|
|
|
|
(702,601 |
) |
|
|
|
|
|
|
(702,601 |
) |
Contingent consideration |
|
|
|
|
|
|
|
|
|
|
714,688 |
|
|
|
714,688 |
|
Purchase price allocation adjustments |
|
|
108,758 |
|
|
|
(54,388 |
) |
|
|
(23,597 |
) |
|
|
30,773 |
|
|
|
|
Goodwill at September 30, 2007 |
|
$ |
14,031,112 |
|
|
$ |
2,014,993 |
|
|
$ |
17,848,588 |
|
|
$ |
33,894,693 |
|
|
|
|
On September 10, 2007, the Company entered into two separate note payable agreements totaling
$714,688 with two former executives of PrairieStone Pharmacy, LLC, which was acquired by the
Company in February 2007. According to the terms of the PrairieStone purchase agreement, these two
executives were to sell a predetermined number of shares of the Companys common stock received in
conjunction with the acquisition in order to cover their estimated income tax liabilities. The
proceeds from these sales were less than the estimated income tax liability amounts, and consistent
with the terms of the purchase agreement, the Company was required to make up the difference. This
difference represents additional contingent consideration, which increased the goodwill relating to
the PrairieStone acquisition by $714,688. The two former PrairieStone executives are currently
executives of the Company (see Note 13 Related Party Transactions).
Goodwill of approximately $8.3 million is amortizable over 15 years for tax purposes while the
remainder of the Companys goodwill is not amortizable for tax purposes as the acquisitions related
to the purchase of common stock rather than of assets or net assets.
Acquired intangible assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007 |
|
|
March 31, 2007 |
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
Accumulated |
|
|
|
Cost |
|
|
Amortization |
|
|
Cost |
|
|
Amortization |
|
|
|
|
Trade name |
|
$ |
8,000,000 |
|
|
$ |
537,042 |
|
|
$ |
8,000,000 |
|
|
$ |
445,987 |
|
Customer relationships |
|
|
22,776,514 |
|
|
|
5,747,389 |
|
|
|
27,941,031 |
|
|
|
7,098,834 |
|
Non-competition agreements |
|
|
674,362 |
|
|
|
311,353 |
|
|
|
874,360 |
|
|
|
309,054 |
|
Acquired technology |
|
|
1,623,707 |
|
|
|
798,430 |
|
|
|
760,000 |
|
|
|
738,888 |
|
|
|
|
|
|
|
33,074,583 |
|
|
$ |
7,394,214 |
|
|
|
37,575,391 |
|
|
$ |
8,592,763 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less accumulated amortization |
|
|
(7,394,214 |
) |
|
|
|
|
|
|
(8,592,763 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net acquired intangible assets |
|
$ |
25,680,369 |
|
|
|
|
|
|
$ |
28,982,628 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense for acquired intangible assets included in continuing operations was $614,000
and $421,000 for the three-month periods ended September 30, 2007 and 2006, respectively, and
$1,187,000 and $763,000 for the six-month periods ended September 30, 2007 and 2006, respectively.
The estimated amortization expense related to acquired intangible assets in existence as of
September 30, 2007 is as follows:
|
|
|
|
|
Remainder of fiscal 2008 |
|
$ |
967,000 |
|
Fiscal 2009 |
|
|
1,940,000 |
|
Fiscal 2010 |
|
|
1,951,000 |
|
Fiscal 2011 |
|
|
1,747,000 |
|
Fiscal 2012 |
|
|
1,567,000 |
|
Thereafter |
|
|
17,508,000 |
|
|
|
|
|
Total |
|
$ |
25,680,000 |
|
|
|
|
|
Note 6 Impairment of Long-Lived Assets
The clinics initiative suffered significant operating losses from the time it was launched in
mid-fiscal 2007. In August 2007, management decided that the clinic model should be offered as part
of its licensed service model to retailers on a fee for service basis and that the Company could
not continue to sustain the cash flow needs and losses being incurred by the clinics. The Company
provided notice that it was terminating the agreement relating to the operations of 18 previously
opened clinics. The Company recognized an impairment expense of $1,900,387 in June 2007. The
expense primarily related to the write-down of computer software and leasehold improvements to
their estimated fair values. The estimated fair value of the long-lived assets was based on
managements estimates of the liquidation value of these clinic assets. For the three and six
month periods ended September 30, 2007, the impairment expense is included in loss from
discontinued operations in the accompanying consolidated statement of operations.
Note 7 Lines of Credit
Arcadia Services, Inc., a wholly-owned subsidiary of the Company, and four of Arcadia Services,
Inc.s wholly-owned subsidiaries have an outstanding line of credit agreement with Comerica Bank.
The credit agreement, as amended, provides the borrowers with a revolving credit facility of up to
$19,000,000. Advances under the credit facility are to 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
$3,000,000. The maturity date is October 1, 2008. The line of credit agreement contains a
subjective acceleration clause and requires the Company to maintain a lockbox. However, the Company
has the ability to control the funds in the deposit account and to determine the amount used to pay
down the line of credit balance. As such, the line of credit is classified as a long-term liability
in the consolidated balance sheet. Amounts outstanding under this agreement totaled $13,979,789 and
$17,892,796 at September 30, 2007 and March 31, 2007, respectively.
RKDA, Inc. (RKDA), a wholly-owned subsidiary of Arcadia Resources, Inc. and the holding company
of Arcadia Services, Inc. and Arcadia Products, Inc., granted Comerica Bank a first priority
security interest in all of the issued and outstanding capital stock of Arcadia Services, Inc.
Arcadia Services, Inc. granted Comerica Bank a first priority security interest in all of its
assets. The subsidiaries of Arcadia Services, Inc. granted the bank security interests in all of
their assets. RDKA is restricted from paying dividends to Arcadia Resources, Inc. RKDA executed a
guaranty to Comerica Bank for all indebtedness of Arcadia Services, Inc. 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 the borrowers. Currently, the Company has
elected the prime-based rate, effectively 7.75% at September 30, 2007. Arcadia Services, Inc.
agreed to various financial covenant ratios, to have any person who acquires Arcadia Services,
Inc.s capital stock to pledge such stock to Comerica Bank, and to customary negative covenants. If
an event of default occurs, Comerica Bank may, at its option, accelerate the maturity of the debt
and exercise its right to foreclose on the issued and outstanding capital stock of Arcadia
Services, Inc. and on all of the assets of Arcadia Services, Inc. and its subsidiaries.
Any such default and resulting foreclosure would have a material adverse effect on our financial
condition. As of September 30, 2007, the Company was in compliance with all financial covenants.
The Arcadia Services, Inc. line of credit agreement was amended in October 2006 for a short term to
include an over formula advance of $1,000,000. The Arcadia Services over formula advance was due
and paid June 2007.
Trinity Healthcare of Winston-Salem, Inc. (Trinity Healthcare), a wholly-owned subsidiary, had a
separate outstanding line of credit agreement with Comerica Bank which provided Trinity Healthcare
with a revolving credit facility of up to $2,000,000 payable upon demand of Comerica Bank, bearing
interest at prime plus 0.5%. As of March 31, 2007, there was $2,000,000 outstanding under this
agreement. The line of credit was paid in full in June 2007.
Rite at Home, LLC, a wholly-owned subsidiary, had an outstanding line of credit agreement with
Fifth Third Bank. The line of credit was for a maximum of $750,000. The agreement originally
matured on June
1, 2007 but was extended until September 1, 2007. On September 1, 2007, the agreement was amended
whereby the balance was reduced to $550,000 and the maturity was extended until October 15, 2007.
The line bears interest at prime plus 0.5% through August 1, 2007, prime plus 1.5% from August 1,
2007 through August 31, 2007, and prime plus 2.5% from September 1, 2007 until its maturity date.
As of September 30, 2007, the effective interest rate was 10.25%. The outstanding balance under
this agreement totaled $472,996 and $612,996 at September 30, 2007 and March 31, 2007,
respectively. The line of credit was paid in full in October 2007.
In connection with the acquisition of PrairieStone in February 2007, PrairieStone entered into a
line of credit agreement with one of the previous owners of PrairieStone for a maximum of
$4,000,000. The line of credit had an outstanding balance of $750,000 at the time the acquisition
closed. The amount that PrairieStone may borrow against the line of credit will gradually increase
from $2,500,000 to $4,000,000 after September 30, 2007. Draws against the line of credit must be
made in $250,000 increments, are subject to PrairieStone satisfying certain borrowing base
requirements, and beginning June 30, 2007, are subject to PrairieStone achieving certain EBITDA
targets. The line of credit is secured by a security interest in all of the assets of PrairieStone
and SSAC, LLC, a wholly-owned subsidiary of the Company, and is guaranteed by the Company. The line
of credit bears annual interest at the prime rate plus 2%, effectively 9.75% at September 30, 2007,
and the agreement ends in September 2010. Amounts outstanding under this agreement totaled
$2,450,000 at September 30, 2007 and March 31, 2007.
On September 26, 2007, Arcadia Products, Inc., a wholly-owned subsidiary of the Company, and
Arcadia Products subsidiaries entered into a line of credit with Presidential Healthcare Credit
Corporation (Presidential). The credit agreement provides the borrowers with a revolving credit
facility of up to $5,000,0000. Advances under the credit facility are to be used to support
business operations and for other general business needs. The credit agreement provides that the
Company may request advances up to 85% of the eligible DME receivables minus any amounts reserved
pursuant to the agreement, if applicable. The maturity date is September 26, 2010. The line of
credit agreement requires the Company to maintain a lockbox account. Advances under the credit
facility bear interest at the prime rate plus 1.75% per annum, an effective rate of 9.5% at
September 30, 2007. The line of credit agreement is secured by the Companys accounts receivable
and is guaranteed by Arcadia Resources, Inc. Amounts outstanding under this agreement totaled
$1,175,039 at September 30, 2007.
The Presidential line of credit agreement includes various covenants, including a financial
covenant for minimum EBITDA requirements. The minimum EBITDA is 75% of the EBITDA projected by the
Company in the financial statement projections provided by the Company and approved in advance by
Presidential.
The weighted average interest rate of borrowings under line of credit agreements as of September
30, 2007 and March 31, 2007 was 8.15% and 8.52%, respectively.
Note 8 Long-Term Obligations
Long-term obligations consist of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
March 31, |
|
|
2007 |
|
2007 |
|
|
|
Note payable to Jana Master Fund, Ltd.
originally dated November 30, 2006 and
amended June 25, 2007 with unpaid accrued
interest and the principal due in full on
June 30, 2008. 50% of the accrued unpaid
interest is payable on the following dates: |
|
|
|
|
|
|
|
|
September 30, 2007, December 31, 2007 and
March 31, 2008. The original interest rate
was the one-year LIBOR rate plus 7.5%.
Starting on February 1, 2007, the interest
rate increased 1.0% on the first day of each
month for five months. On July 1, 2007, the
interest rate changed to the one-year LIBOR
rate plus 8%. When the total amount
outstanding under the note is less than
$8,500,000, the interest rate will be
reduced to the one-year LIBOR rate plus 4%.
At September 30, 2007, the effective
interest rate was 13.24%. The note payable
includes various loan covenants, all of
which the Company was in compliance as of
September 30, 2007. |
|
$ |
15,646,287 |
|
|
$ |
17,000,000 |
|
Notes payable to two executives dated
September 10, 2007 bearing interest at 4%
per year payable in monthly payments of
principal and interest with the final
payments due on April 10, 2008. |
|
|
630,406 |
|
|
|
|
|
Note payable to Jana Master Fund, Ltd. dated
March 20, 2007 bearing interest at the one-
year LIBOR rate plus 7.5%. The note payable
was paid in full in April 2007. |
|
|
|
|
|
|
2,564,103 |
|
Purchase price payable to the selling
shareholder of Alliance Oxygen & Medical
Equipment, Inc., dated July 12, 2006,
bearing simple interest of 8% per year
payable in equal quarterly payments of
principal and interest. The final payment
was made in July 2007. |
|
|
|
|
|
|
1,019,800 |
|
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 with the final
payment due on January 27, 2009. |
|
|
331,617 |
|
|
|
617,455 |
|
Other purchase price payables to be paid
over time to the selling shareholders or
selling entities of various acquired
entities, due dates ranging from September
2007 to March 2008. |
|
|
20,000 |
|
|
|
187,606 |
|
Other long-term obligations with interest
charged at various rates ranging from 4% to
18% to be paid over time based on respective
terms, due dates ranging from October 2007
to November 2011. |
|
|
568,594 |
|
|
|
828,104 |
|
|
|
|
Total long-term obligations |
|
|
17,196,904 |
|
|
|
22,217,068 |
|
Less current portion of long-term obligations |
|
|
(16,823,308 |
) |
|
|
(21,320,198 |
) |
|
|
|
Long-term obligations, less current portion |
|
$ |
373,596 |
|
|
$ |
896,870 |
|
|
|
|
As of September 30, 2007, future maturities of long-term obligations are as follows:
|
|
|
|
|
Remainder of fiscal 2008: |
|
$ |
357,000 |
|
Fiscal 2009: |
|
|
16,685,000 |
|
Fiscal 2010: |
|
|
96,000 |
|
Fiscal 2011: |
|
|
50,000 |
|
Fiscal 2012: |
|
|
9,000 |
|
|
|
|
|
Total |
|
$ |
17,197,000 |
|
|
|
|
|
The weighted average interest rate of outstanding long-term obligations as of September 30, 2007
and March 31, 2007 was 12.5% and 11.9%, respectively.
Note 9 Stockholders Equity
General
On June 22, 2006, the Company returned all outstanding treasury shares to the registrar to make
them available for re-issuance.
On September 26, 2006, the Companys shareholders approved an amendment to the Companys Articles
of Incorporation to increase the number of authorized shares of the Companys common stock to
200,000,000, $0.001 par value per share from 150,000,000, $0.001 par value per share.
Escrow Shares
In conjunction with the merger and recapitalization of the Company in May 2004, the former CEO,
former COO and another former officer of the Company entered into escrow agreements. As of March
31, 2007, the former CEO, former COO and the other former officer of the Company had 4,800,000,
3,200,000 and 1,600,000 shares of the Companys common stock, respectively, held in escrow. These
shares represented 80% of the shares originally escrowed pursuant to the agreements and were to be
released upon the Company meeting certain EBITDA targets for fiscal 2006 and 2007. The other 20% of
the shares were released from escrow pursuant to the agreements in February 2005 due to the average
closing stock price of the Companys common stock being at least $1.00 for a 20 consecutive-day
period. The Company did not meet the EBITDA targets for either fiscal 2006 or 2007, and the
9,600,000 shares of common stock were returned to the Company and cancelled in July 2007. The
shares held in escrow described herein are not included in the calculation of the weighted average
shares outstanding for any periods.
Common Stock Transactions
In April and July 2007, the Company issued a total of 850,456 shares of common stock as
consideration for the quarterly debt payments due on April 12, 2007 and July 12, 2007 totaling
$1,050,495 related to the acquisition of Alliance Oxygen & Medical Equipment. The shares were
valued as of the dates of the debt payment agreements.
In May and August 2007, the Company issued a total of 279,099 shares of common stock as
consideration for the quarterly debt payments due on January 27, 2007, April 27, 2007, July 27,
2007 and October 27, 2007 totaling $302,591 related to the acquisition of Remedy Therapeutics, Inc.
The shares were valued as of the dates of the debt payment agreements.
In May 2007, the Company issued an aggregate of 11,018,905 shares of common stock at $1.19 per
share and warrants to purchase 2,754,726 shares of common stock at an exercise price of $1.75 per
share in a private placement resulting in aggregate proceeds of $13,112,497. The fair value of the
warrants was estimated using the Black-Scholes pricing model and was determined to be $2,163,428.
The assumptions used were as follows: risk free interest rate of 4.79%, expected dividend yield of
0%, expected volatility of 63%, and expected life of 7 years. In the future, if the Company sells
shares of stock at a price less than $1.19 per share, then the exercise price of the warrants will
decrease to the new offering price, and the number of warrants will increase such that the total
aggregate exercise price remains unchanged. This warrant re-pricing provision excludes certain
common stock offerings, including offerings under the Companys equity incentive plan, previously
existing shareholder rights, and stock spits. Under the accompanying registration rights
agreements, the Company agreed to file, within 60 days of closing, a registration statement to
register the resale of the shares and use its best efforts to cause the registration statement to
be declared effective within 120 days after the registration statement is filed. The registration
statement was filed on July 6, 2007 and was declared effective on July 13, 2007, which was within
the required time-period.
In conjunction with the private placement, the Company paid fees totaling $670,415.
On June 26, 2007, the Company entered into a Securities Redemption Agreement with the minority
interest
holders of Pinnacle EasyCare, LLC (Pinnacle). Pursuant to the agreement, the Company sold its 75%
interest in Pinnacle, which was originally acquired in November 2006, to the minority interest
holders for the return of 200,000 shares of the Companys common stock valued at $252,000 that were
issued to the minority interest holders as partial consideration in the original transaction. The
shares were returned to the Company and cancelled.
On September 10, 2007 and simultaneous with the Companys sale of its Florida and Colorado durable
medical equipment businesses, the Company released 1,068,140 shares of common stock to the former
owners of Alliance Oxygen & Medical Equipment, Inc., an entity acquired by the Company in July
2006. The release of the shares was consistent with the terms of an Escrow Release Agreement
entered into on July 19, 2007. The value of the shares of $875,875 was determined based on the
stock price on September 10, 2007. The release of the shares increased the loss on the disposal of
the DME operations.
Stock Price Guarantees
In conjunction with two recent business acquisitions as well as with certain other equity
transactions, the Company guaranteed that its stock price would meet or exceed various target
prices in the future. If the guaranteed stock prices are not met, the Company will be required to
issue additional shares of common stock or cash or a combination thereof, at the Companys
discretion, to make up the difference.
Warrants
The following represents warrants outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
Description |
|
Exercise Price |
|
Granted |
|
Expiration |
|
2007 |
|
March 31, 2007 |
Class A |
|
$0.50 |
|
May 2004 |
|
May 2011 |
|
|
5,749,036 |
|
|
|
5,749,036 |
|
Class B-1 |
|
$0.001 |
|
September 2005 |
|
September 2009 |
|
|
8,990,277 |
|
|
|
8,990,277 |
|
Class B-2 |
|
$2.25 |
|
September 2005 |
|
September 2009 |
|
|
4,711,110 |
|
|
|
4,711,110 |
|
May 2007 Private Placement |
|
$1.75 |
|
May 2007 |
|
May 2014 |
|
|
2,754,726 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Warrants Outstanding |
|
|
|
|
|
|
|
|
|
|
22,205,149 |
|
|
|
19,450,423 |
|
|
|
|
|
|
|
|
|
|
|
|
The outstanding warrants have no voting rights and provide the holder with the right to convert one
warrant for one share of the Companys common stock at the stated exercise price. The majority of
the outstanding warrants have a cashless exercise feature.
No warrants were exercised during the six-month period ended September 30, 2007.
During the six-month period ended September 30, 2006, a total of 610,211 warrants were exercised
resulting in the issuance of 554,523 shares of common stock. Of the total warrants exercised,
362,531 were exercised on a cashless basis resulting in the issuance of 306,843 shares of common
stock. The Company received $223,840 in cash proceeds from the exercise of warrants.
Note 10 Contingencies
As a health care provider, the Company is subject to extensive federal and state government
regulation, including numerous laws directed at preventing fraud and abuse and laws regulating
reimbursement under various government programs. The marketing, billing, documenting and other
practices of health care companies are all subject to government scrutiny. To ensure compliance
with Medicare and other regulations, audits may be conducted, with requests for patient records and
other documents to support claims submitted for payment of services rendered to customers,
beneficiaries of the government programs. Violations of federal and state regulations can result in
severe criminal, civil and administrative penalties and sanctions, including disqualification from
Medicare and other reimbursement programs.
The Company is subject to various legal proceedings and claims which arise in the ordinary course
of
business. The Company does not believe that the resolution of such actions will materially affect
the Companys business, results of operations or financial condition.
Note 11 Stock-Based Compensation
On August 18, 2006, the Board of Directors unanimously approved the Arcadia Resources, Inc. 2006
Equity Incentive Plan (the 2006 Plan), which was subsequently approved by the stockholders on
September 26, 2006. The 2006 Plan provides for grants of incentive stock options, non-qualified
stock options, stock appreciation rights and restricted shares. The 2006 Plan will terminate and no
additional awards will be granted after August 2, 2016, unless terminated by the Board of Directors
sooner. The termination of the 2006 Plan will not affect previously granted awards. The total
number of shares of common stock that may be issued pursuant to awards under the 2006 Plan may not
exceed an aggregate of 2.5% of the Companys authorized and unissued shares of common stock as of
the date the 2006 Plan was approved by the shareholders or 5,000,000 shares. All non-employee
directors, executive officers and employees of the Company and its subsidiaries are eligible to
receive awards under the 2006 Plan. As of September 30, 2007, approximately 3,380,000 shares were
available for grant under the 2006 Plan.
Prior to the approval of the 2006 Plan, certain officers, directors and members of management were
granted stock options and restricted shares of the Companys common stock with varying terms.
Stock Options
Prior to the adoption of the 2006 Plan, stock options were granted to certain members of management
and the Board of Directors. The terms of these options vary depending on the nature and timing of
the grant. The maximum contractual term for the options granted to date is seven years. A
significant number of stock options granted prior to the adoption of the 2006 Plan were awarded to
two former executives and were contingent on the meeting of certain financial milestones. These
options are more fully described below.
The fair value of each stock option award is estimated on the date of the grant using the
Black-Scholes option valuation model that uses the assumptions noted in the following table.
Expected volatilities are based on historic volatility. The expected term of options granted
represents the period of time that options granted are expected to be outstanding. The risk-free
interest rate is based on the U.S. Treasury yield curve in effect at the time of grant.
Following are the specific valuation assumptions used for each respective period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month Period Ended |
|
Six-Month Period Ended |
|
|
September 30, |
|
September 30, |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
Weighted-average
expected volatility |
|
|
64 |
% |
|
|
20 |
% |
|
|
64 |
% |
|
|
20 |
% |
Expected dividend yields |
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
Expected terms (in years) |
|
|
7 |
|
|
|
7 |
|
|
|
7 |
|
|
|
7 |
|
Risk-free interest rate |
|
|
4.67 |
% |
|
|
5.11 |
% |
|
|
4.67 |
% |
|
|
5.11 |
% |
Stock option activity for the six-month period ended September 30, 2007 is summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
Weighted- |
|
Average |
|
|
|
|
|
|
|
|
Average |
|
Remaining |
|
Aggregate |
|
|
|
|
|
|
Exercise |
|
Contractual |
|
Intrinsic |
Options |
|
Shares |
|
Price |
|
Term (Years) |
|
Value |
Outstanding at March 31, 2007 |
|
|
7,431,653 |
|
|
$ |
0.42 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
23,275 |
|
|
|
1.38 |
|
|
|
|
|
|
|
|
|
Forfeited or expired |
|
|
(1,000,000 |
) |
|
|
0.25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2007 |
|
|
6,454,928 |
|
|
$ |
0.45 |
|
|
|
1.4 |
|
|
$ |
3,135,000 |
|
|
|
|
Exercisable at September 30, 2007 |
|
|
6,454,928 |
|
|
$ |
0.45 |
|
|
|
1.4 |
|
|
$ |
3,135,000 |
|
|
|
|
The weighted-average grant-date fair value of options granted during the six-month periods ended
September 30, 2007 and 2006 was $0.92 and $1.08, respectively.
The Company recognized $738,539 and $19,375 in stock-based compensation expense relating to stock
options during the three-month periods ended September 30, 2007 and 2006, respectively, and
$766,768 and $26,375 during the six-month periods ended September 30, 2007 and 2006, respectively.
No stock options were exercised during the six-month period ended September 30, 2007. During the
six-month period ended September 30, 2006, 35,000 options were exercised.
On May 7, 2004, the former CEO and former COO were granted stock options to purchase a total of
8,000,000 shares of common stock exercisable at $0.25 per share. The options were to vest annually
provided certain EBITDA milestones were met through fiscal 2008 and were subject to acceleration
upon certain events occurring. On February 28, 2007, the former COOs employment with the Company
ended. Consistent with his stock option agreement and severance and release agreement, 3,000,000
stock options vested upon his departure. The related expense of $1,106,000 was recognized during
the three-month period ended March 31, 2007. The stock options expire on the one-year anniversary
of his departure. On July 12, 2007, the former CEOs employment with the Company ended.
Consistent with his stock option agreement and severance and release agreement, 2,000,000 stock
options vested upon his departure. The Company recognized $707,000 in related expense in July
2007. The stock options expire on March 15, 2008.
Restricted Stock Arcadia Resources, Inc.
Restricted stock is measured at fair value on the date of the grant, based on the number of shares
granted and the quoted price of the Companys common stock. The value is recognized as compensation
expense ratably over the corresponding employees specified service period. Restricted stock vests
upon the employees fulfillment of specified performance and service-based conditions.
The following table summarizes the activity for restricted stock awards during the six-month period
ended September 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Grant Date |
|
|
|
|
|
|
Fair Value |
|
|
Shares |
|
per Share |
Unvested at March 31, 2007 |
|
|
2,732,542 |
|
|
$ |
2.75 |
|
Granted |
|
|
560,795 |
|
|
|
1.04 |
|
Vested |
|
|
(776,300 |
) |
|
|
2.76 |
|
Forfeited |
|
|
(1,223,663 |
) |
|
|
2.90 |
|
|
|
|
Unvested at September 30, 2007 |
|
|
1,293,374 |
|
|
$ |
1.86 |
|
|
|
|
During the three-month periods ended September 30, 2007 and 2006, the Company recognized $886,997
and $168,788, respectively, of stock-based compensation expense related to restricted stock.
During the six-month periods ended September 30, 2007 and 2006, the Company recognized $1,322,749
and $290,486, respectively, of stock-based compensation expense related to restricted stock.
During the six-month period ended September 30, 2007, the total fair value of restricted stock
vested was $2,143,913. During the six-month period ended September 30, 2006, the total fair value
of restricted stock
vested was $211,601.
As of September 30, 2007, total unrecognized stock-based compensation expense related to unvested
restricted stock awards was $2,116,725, which is expected to be expensed over a weighted-average
period of 2.4 years.
Note 12 Income Taxes
The Company incurred state and local tax expense of $6,914 and $44,650 during the three-month
period ended September 30, 2007 and 2006, respectively, and $22,602 and $83,450 during the
six-month period ended September 30, 2007 and 2006, respectively.
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 companys performance, the market environment
in which the company operates, the length of carryback and carryforward periods, and expectation of
future profits. 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 Companys ability to utilize such assets.
Effective April 1, 2007, the Company adopted FIN 48. Upon adoption and the conclusion of the
initial evaluation of the Companys uncertain tax positions (UTPs) under FIN 48, no adjustments
were recorded in the accounts. Consistent with past practice, the Company recognizes interest and
penalties related to unrecognized tax benefits through interest and operating expenses,
respectively. No amounts were accrued as of June 30, 2007. The Company is subject to filing
requirements in the United States Federal jurisdiction and in many states for numerous consolidated
and separate entity income tax returns. As of the date of adoption of FIN 48, the Companys
aggregate consolidated unrecognized tax benefit (UTB) was determined to be zero.
In the major jurisdictions in which the Company operates, which includes the United States and
various individual states therein, returns for various tax years from 2003 forward remain subject
to audit. The Company is not currently under examination for federal or state income tax purposes.
In July 2007, the State of Michigan enacted a substantial change to its corporate tax structure.
The tax law change includes the elimination of the Single Business Tax (SBT) and the creation of an
income tax and a modified gross receipts tax. The new taxes will be effective January 1, 2008.
Management does not anticipate that these new laws will have a material impact to the Company in
future periods.
Note 13 Related Party Transactions
The Company entered into an Amended and Restated Promissory Note dated June 25, 2007 with Jana
Master Fund, Ltd. for $17,000,000 (see details in Note 6 Lines of Credit). Jana Master Fund, Ltd.
held greater than 10% of the outstanding shares of Company common stock on September 30, 2007. The
Company incurred interest expense relating to this note payable of $558,000 and $1,304,000 during
the three-month and six-month periods ended September 30, 2007, respectively.
PrairieStone has a line of credit agreement with a former owner of PrairieStone, which was issued
shares of the Companys common stock as part of the purchase price consideration. At September 30,
2007, the outstanding balance of the line of credit was $2,450,000 (see details in Note 6 Lines
of Credit). The former owner held approximately 3% of the outstanding shares of Company common
stock on September 30, 2007. The Company incurred interest expense relating to this line of credit
of $63,000 and $126,000 during the three-month and six-month periods ended September 30, 2007,
respectively.
On September 10, 2007, the Company entered into a note payable with the Companys Chief Executive
Officer for $433,452 and a separate note payable with an Executive Vice President for $281,236.
Both of
these individuals were former executive officers and owners of PrairieStone. Pursuant to the
PrairieStone purchase agreement, these two individuals sold a predetermined number of shares of the
Companys common stock, which they received as consideration for the sale of their interests in
PrairieStone, in order to cover their estimated personal tax liabilities resulting from the sale of
PrairieStone to the Company. The proceeds from these common stock sales were less than the
estimated tax liabilities. The purchase agreement obligates the Company to reimburse them the
difference. The notes payable bear annual interest of 4% and mature on April 10, 2008. Principal
and interest payments totaling $90,000 are due on a monthly basis with a final payment of $98,596
due on April 10, 2008. At September 30, 2007, the combined balance of these notes payable is
$630,406. The Company incurred interest expense relating to these notes payable of $5,718 during
the three-month period ended September 30, 2007.
One of the members of the Board of Directors of the Company has minority ownership interests in
each of Lunds, Inc. and LFHI Rx, LLC and serves as the Chairman and CEO of Lunds, Inc. These two
entities held an ownership interest in PrairieStone prior to its acquisition by the Company. Lunds,
Inc. and LFHI Rx, LLC received 2,400,000 shares of Company common stock at the closing of the
transaction and may be entitled to receive additional shares under the terms of the purchase
agreement. Immediately prior to Arcadias acquisition of PrairieStone, PrairieStone closed on the
sale of the assets of fifteen retail pharmacies located within grocery stores owned and operated by
Lunds, Inc. and Byerlys, Inc. to Lunds, Inc., which transaction included execution of a five-year
Management Services Agreement and a five-year Licensed Services Agreement between Lunds, Inc. and
PrairieStone. Under the terms of the Management Services Agreement, PrairieStone will provide such
services that are appropriate for the day-to-day management of the pharmacies. PrairieStone will
receive a $600,000 management fee for the first year of the agreement. In conjunction with these
two agreements, the Company recognized $183,000 and $365,000 in revenue during the three-month and
six-month periods ended September 30, 2007, respectively.
The Companys Chief Executive Officer, an Executive Vice President, Lunds, Inc. and LFHI Rx all
received shares of the Companys common stock upon the acquisition of PrairieStone in February
2007. As discussed in Note 8 Stockholders Equity, the Company has guaranteed the former
shareholders of PrairieStone a stock price of at least $2.50 per share at the one-year anniversary
date of the acquisition. If the stock price is less than the guaranteed price, then these
shareholders will receive either cash, common stock or a combination thereof equal to the
difference.
Another member of the Board of Directors of the Company is the Director of Private Equity of CMS
Companies. Entities affiliated with CMS Companies purchased 4,201,681 shares of the Companys
common stock for $5,000,000 as part of the May 2007 private placement discussed in Note 8
Stockholders Equity. In addition, these entities received 1,050,420 warrants to purchase shares
of common stock at $1.75 per share for a period of seven years.
On September 24, 2007, the Company hired an Executive Vice President of In-Home Health Care and
Staffing. This individual beneficially has an ownership interest of an entity contracted to a Company
subsidiary and thereby has an interest in the entitys transactions with the Companys subsidiary,
including the payments of commissions to the entity based on a specified percentage of gross
margin. The entity is responsible to pay its selling, general and administrative expenses. For
the three-month and six-month periods ended September 30, 2007, the commissions totaled $390,000
and $846,000, respectively. In addition, the Company has an agreement with this entity, which is terminable under certain circumstances, to purchase
the business under certain events, but in no event later than 2011.
Note 14 Segment Information
The Company reports net revenue from continuing operations and operating income/(loss) from
continuing operations by reportable segment. Reportable segments are components of the Company for
which separate financial information is available that is evaluated on a regular basis by the chief
operating decision maker in deciding how to allocate resources and in assessing performance.
During the three-month period ended June 30, 2007, the Company reorganized its operations into four
segments: In-Home Health Care Services; Durable Medical Equipment; Retailer and Employer Services;
and Clinics. During the three-month period ended September 30, 2007, the Company ceased the Clinics
operations. Each segment is managed separately based on its predominant line of business. Prior
period segment information has been reclassified in order to conform to the current period
presentation.
The In-Home Health Care Services segment (Services segment) consists primarily of a national
provider of home care and staffing services currently operating in 19 states through its 73
locations. This segment 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.
The Durable Medical Equipment segment consists primarily of respiratory and durable medical
equipment operations. In addition, this segment includes a home-health oriented mail-order catalog
and related website and sells durable medical equipment at retail host sites.
The Retailer and Employer Services segment primarily includes the operations of PrairieStone, which
was acquired in February 2007. PrairieStone provides pharmacy services to grocery pharmacy
retailers nationally and offers DailyMed, a patented and patent pending compliance packaging
medication system, to at-home patients and senior living communities. In addition, PrairieStone
offers pharmacy services to employers through a contracted relationship with a large pharmacy
benefits manager. Pharmacy services to grocers and employers include staffing, pharmacy management,
pharmacy dispensing and billing software, DailyMed, a preferred retail pharmacy benefit network,
and a 420 square foot automated pharmacy footprint that allows its customers to reduce space needs
and improve labor efficiencies.
The accounting policies of each of the reportable segments are the same as those described in the
Summary of Significant Accounting Policies. We evaluate performance based on profit or loss from
operations, excluding corporate, general and administrative expenses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-Month Period Ended |
|
Six-Month Period Ended |
|
|
September 30, |
|
September 30, |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
|
|
Revenue, net: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services |
|
$ |
31,164,216 |
|
|
$ |
30,729,256 |
|
|
$ |
62,377,779 |
|
|
$ |
60,633,558 |
|
Durable Medical Equipment |
|
|
4,809,536 |
|
|
|
4,896,785 |
|
|
|
9,778,171 |
|
|
|
10,185,166 |
|
Retailer and Employer Services |
|
|
2,747,578 |
|
|
|
2,697,844 |
|
|
|
5,696,231 |
|
|
|
3,484,196 |
|
|
|
|
Total revenue |
|
|
38,721,330 |
|
|
|
38,323,885 |
|
|
|
77,852,181 |
|
|
|
74,302,920 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income/(loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services |
|
$ |
843,156 |
|
|
$ |
1,294,648 |
|
|
$ |
1,911,440 |
|
|
$ |
2,393,728 |
|
Durable Medical Equipment |
|
|
(983,648 |
) |
|
|
(473,675 |
) |
|
|
(1,927,214 |
) |
|
|
(163,870 |
) |
Retailer and Employer Services |
|
|
(521,620 |
) |
|
|
(150,183 |
) |
|
|
(907,645 |
) |
|
|
(305,822 |
) |
Unallocated corporate overhead |
|
|
(2,910,376 |
) |
|
|
(1,305,198 |
) |
|
|
(5,366,163 |
) |
|
|
(2,457,051 |
) |
|
|
|
Total operating income/(loss) |
|
|
(3,572,488 |
) |
|
|
(634,408 |
) |
|
|
(6,289,582 |
) |
|
|
(533,015 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest, net |
|
|
963,239 |
|
|
|
912,529 |
|
|
|
2,122,500 |
|
|
|
1,317,656 |
|
|
|
|
Net loss before income tax expense |
|
|
(4,535,727 |
) |
|
|
(1,546,937 |
) |
|
|
(8,412,082 |
) |
|
|
(1,850,671 |
) |
Income tax expense |
|
|
6,914 |
|
|
|
44,650 |
|
|
|
22,602 |
|
|
|
83,450 |
|
|
|
|
Net loss from continuing operations |
|
$ |
(4,542,641 |
) |
|
$ |
(1,591,587 |
) |
|
$ |
(8,434,684 |
) |
|
$ |
(1,934,121 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization (continuing
operations): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services |
|
$ |
307,484 |
|
|
$ |
291,441 |
|
|
$ |
640,891 |
|
|
$ |
583,423 |
|
Durable Medical Equipment cost of revenue |
|
|
610,886 |
|
|
|
485,211 |
|
|
|
1,240,123 |
|
|
|
873,612 |
|
Durable Medical Equipment operating
expense |
|
|
338,303 |
|
|
|
213,213 |
|
|
|
695,566 |
|
|
|
384,491 |
|
Retailer and Employer Services |
|
|
171,207 |
|
|
|
38,303 |
|
|
|
298,185 |
|
|
|
48,233 |
|
Corporate |
|
|
172,512 |
|
|
|
58,511 |
|
|
|
314,635 |
|
|
|
67,021 |
|
|
|
|
Total depreciation and amortization |
|
$ |
1,600,392 |
|
|
$ |
1,086,679 |
|
|
$ |
3,189,400 |
|
|
$ |
1,956,780 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007 |
|
March 31, 2007 |
|
|
|
Assets: |
|
|
|
|
|
|
|
|
Services |
|
$ |
50,397,544 |
|
|
$ |
51,068,493 |
|
Durable Medical Equipment |
|
|
20,176,032 |
|
|
|
30,377,088 |
|
Retailer and Employer Services |
|
|
33,796,451 |
|
|
|
33,217,909 |
|
Clinics |
|
|
301,931 |
|
|
|
|
|
Unallocated corporate assets |
|
|
574,119 |
|
|
|
2,564,283 |
|
|
|
|
Total assets |
|
$ |
105,246,077 |
|
|
$ |
117,227,773 |
|
|
|
|
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cautionary Statement Concerning Forward-Looking Statements
The MD&A should be read in conjunction with the other sections of this report on Form 10-Q,
including the consolidated financial statements and notes thereto beginning on page 2 of this
report. Historical results set forth in the financial statements beginning on page 2 and this
section should not be taken as indicative of our future operations.
We caution you that statements contained in this report (including our accompanying consolidated
financial statements, notes thereto and 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, implied or forecasted in
forward-looking statements due to a number of important factors, including, but not limited to,
the following: (1) Relocating our corporate headquarters to Indianapolis, Indiana may result in
temporary instability as personnel, records, and equipment are transitioned to our new location ;
(2) We may not be able to attract and retain the key management employees and other skilled workers
needed to meet our hiring goals; (3) We may not succeed in executing the plan to increase the
Retailer and Employer Services segment revenue; (4) The assumptions used to predict revenue growth
within the Retailer and Employer Services segment may not be accurate; (5) Due to our history of
operating losses and negative cash flows, we cannot be certain that we will be able to generate
sufficient cash flow, including obtaining additional debt or equity financing, to meet our
obligations on a timely basis. An inability to raise sufficient capital to fund our operations
would have a material adverse effect on our business and would raise substantial doubt about our
ability to continue as a going concern; (6) We may be unable to execute and implement our growth
strategy; (7) Changes in economic, political and regulatory conditions, including governmental
regulations, may force us to alter or abandon certain plans and initiatives; (8) Our management
team is relatively new and may not be able to successfully pursue its business plan; (9) The
Company may be required to enact restructuring measures in addition to those announced on March 30,
2007 and thereafter; (10) Other unforeseen events may impact our business. and thereafter; and
(11) the risks, uncertainties and other factors described in Part II, Item 1A of this report which
are incorporated herein by this reference.
Overview
Arcadia Resources, Inc. (Arcadia or the Company) is a national provider of in-home health care
and retail / employer health care services. The Companys operations include three segments:
In-Home Health Care Services (Services); Durable Medical Equipment (DME); and Retailer and
Employer Services. The In-Home Health Care Services segment is a national provider of medical
staffing services, including home healthcare and medical staffing, as well as light industrial,
clerical and technical staffing services. Based in Southfield, Michigan, the In-Home Health Care
Services segment provides its staffing services through a network of affiliate and company-owned
offices throughout the United States. The Durable Medical Equipment segment markets, rents and
sells products and equipment across the United States. The DME segment also sells various medical
equipment offerings through a catalog out-sourcing and product fulfillment business. The Retailer
and Employer Services segment primarily includes the operations of
PrairieStone Pharmacy, LLC (PrairieStone). PrairieStone provides pharmacy services to grocery
pharmacy retailers nationally and offers DailyMed, the patented and patent pending compliance
packaging medication system, to at-home patients and senior living communities. In addition,
PrairieStone offers pharmacy services to employers through a contracted relationship with a large
pharmacy benefits manager. Services offered to grocers and employers include staffing, pharmacy
management, pharmacy dispensing and billing software, DailyMed, an exclusive retail pharmacy
benefit network and a 420 square foot automated pharmacy footprint that allows its customers to
reduce space needs and improve labor efficiencies.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally accepted
in the United States requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Identified below are some of the more significant accounting policies followed by Arcadia in
preparing the accompanying consolidated financial statements. For further discussion of our
accounting policies see Note 1 Description of Company and Significant Accounting Policies in
the notes to consolidated financial statements.
Revenue Recognition
In general, the Company recognizes revenue when all revenue recognition criteria are met, which
typically is when:
|
|
|
Evidence of an arrangement exists |
|
|
|
|
Services have been provided or goods have been delivered |
|
|
|
|
The price is fix or determinable |
|
|
|
|
Collection is reasonably assured. |
Revenues for services are recorded in the period the services are rendered. Revenues for products
are recorded in the period delivered based on rental or sales prices established with the client or
their insurer prior to delivery.
Net patient service revenues are recorded at net realizable amounts estimated to be paid by the
customers and third-party payers. A provision for contractual adjustments is recorded as a
reduction to net patient services revenues and consists of: a) the difference between the payers
allowable amount and the customary billing rate; and b) services for which payment is denied by
governmental or third-party payors or otherwise deemed non-billable. The Company records the
provision for contractual adjustments based on a percentage of revenue using historical data. Due
to the complexity of many third-party billing arrangements, adjustments are sometimes made to
amounts originally recorded. These adjustments are typically identified and recorded upon cash
receipts or claim denial.
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. 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.
Goodwill and Intangible Assets
Goodwill is assessed for impairment on an annual basis, or more frequently if circumstances
warrant, in accordance with the Statement of Financial Accounting Standards (SFAS) No. 142,
Goodwill and Other Intangible Assets(SFAS No. 142). We assess goodwill related to reporting
units for impairment and write down the carrying amount of goodwill as required.
SFAS No. 142 requires that a two-step impairment test be performed on goodwill. In the first step,
we compare the estimated fair value of each reporting unit to its carrying value. We determine the
estimated fair value of each reporting unit using a combination of the income approach and the
market approach. Under the income approach, we estimate the fair value of a reporting unit based on
the present value of estimated future cash flows. Under the market approach, we estimate the fair
value based on market multiples of revenues or earnings for comparable companies. If the fair value
of the reporting unit exceeds the carrying value of the net assets assigned to that unit, goodwill
is not impaired and we are not required to perform further testing. If the carrying value of the
net assets assigned to the reporting unit exceeds the fair value of the reporting unit, then we are
required to perform the second step to determine the implied fair value of the reporting units
goodwill and compare it to the carrying value of the reporting units goodwill. If the carrying
value of a reporting units goodwill exceeds its implied fair value, then we must record an
impairment loss equal to the difference.
SFAS No. 142 also requires that the fair value of intangible assets with indefinite lives be
estimated and compared to the carrying value. We estimate the fair value of these intangible assets
using the income approach. We recognize an impairment loss when the estimated fair value of the
intangible asset is less than the carrying value. Intangible assets with finite lives are amortized
using the estimated economic benefit method over the useful life.
The income approach, which we use to estimate the fair value of our reporting units and intangible
assets, is dependent on a number of factors including estimates of future market growth and trends,
forecasted revenue and costs, expected periods the assets will be utilized, appropriate discount
rates and other variables. We base our fair value estimates on assumptions we believe to be
reasonable but which are unpredictable and inherently uncertain. Actual future results may differ
from those estimates. In addition, we make certain judgments about the selection of comparable
companies used in the market approach in valuing our reporting units, as well as certain
assumptions to allocate shared assets and liabilities to calculate the carrying values for each of
our reporting units.
Income Taxes
Income taxes are accounted for under the asset and liability method. Accordingly, deferred tax
assets and liabilities are recognized currently for the future tax consequences attributable to the
temporary differences between the financial statement carrying amounts of assets and liabilities
and their respective tax bases, as well as for tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates in effect for the year in which those temporary
differences are expected to be recovered or settled. A valuation allowance is recorded to reduce
the carrying amounts of deferred tax assets if it is more likely than not that such assets will not
be realized.
We consider all available evidence, both positive and negative, to determine whether, based on the
weight of that evidence, a valuation allowance is needed for some portion or all of a net deferred
tax asset. Judgment is used in considering the relative impact of negative and positive evidence.
In arriving at these judgments, the weight given to the potential effect of negative and positive
evidence is commensurate with the extent to which it can be objectively verified. We record a
valuation allowance to reduce our deferred tax assets and review the amount of such allowance
periodically. When we determine certain deferred tax assets are more likely than not to be
utilized, we will reduce our valuation allowance accordingly. Realization of deferred tax assets is
dependent on future earnings, if any, the timing and amount of which
are uncertain.
Internal Revenue Code Section 382 rules limit the utilization of net operating losses following a
change in control of a company. It has been determined that a change in control of Arcadia has
taken place. Therefore, Arcadias ability to utilize certain net operating losses generated 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 respective net operating losses. Tax
benefits from the utilization of net operating loss carryforwards will be recorded at such time as
they are considered more likely than not to be realized.
Three-Month Period Ended September 30, 2007 Compared to Three-Month Period Ended September 30, 2006
Results of Operations Continuing Operations
|
|
|
|
|
|
|
|
|
|
|
Three-Month Period |
|
|
Ended September 30, |
|
|
2007 |
|
2006 |
|
|
|
Revenues, net |
|
$ |
38,721,000 |
|
|
$ |
38,324,000 |
|
Cost of revenues |
|
|
26,473,000 |
|
|
|
26,282,000 |
|
|
|
|
Gross profit |
|
|
12,248,000 |
|
|
|
12,042,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses |
|
|
14,831,000 |
|
|
|
12,075,000 |
|
Depreciation and amortization |
|
|
989,000 |
|
|
|
601,000 |
|
|
|
|
Total operating expenses |
|
|
15,820,000 |
|
|
|
12,676,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
|
(3,572,000 |
) |
|
|
(634,000 |
) |
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
|
963,000 |
|
|
|
913,000 |
|
|
|
|
Net loss before income tax expense |
|
|
(4,535,000 |
) |
|
|
(1,547,000 |
) |
Income tax expense |
|
|
7,000 |
|
|
|
45,000 |
|
|
|
|
Net loss from continuing operations |
|
$ |
(4,542,000 |
) |
|
$ |
(1,592,000 |
) |
|
|
|
Weighted average number of shares basic and diluted |
|
|
123,455,814 |
|
|
|
90,130,314 |
|
Net loss from continuing operations per share basic and diluted |
|
$ |
(0.03 |
) |
|
$ |
(0.01 |
) |
|
|
|
Revenues, Cost of Revenues and Gross Profits
The following summarizes revenues, cost of revenues and gross profits by segment for the
three-month periods ended September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Total |
|
|
|
|
|
% of Total |
|
|
2007 |
|
Revenue |
|
2006 |
|
Revenue |
Revenues, net: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In-Home Health Care Services |
|
$ |
31,164,000 |
|
|
|
80.5 |
% |
|
$ |
30,729,000 |
|
|
|
80.2 |
% |
Durable Medical Equipment |
|
|
4,809,000 |
|
|
|
12.4 |
% |
|
|
4,897,000 |
|
|
|
12.8 |
% |
Retailer and Employer Services |
|
|
2,748,000 |
|
|
|
7.1 |
% |
|
|
2,698,000 |
|
|
|
7.0 |
% |
|
|
|
|
|
|
|
|
38,721,000 |
|
|
|
100.0 |
% |
|
|
38,324,000 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In-Home Health Care Services |
|
|
23,064,000 |
|
|
|
|
|
|
|
22,516,000 |
|
|
|
|
|
Durable Medical Equipment |
|
|
1,619,000 |
|
|
|
|
|
|
|
1,563,000 |
|
|
|
|
|
Retailer and Employer Services |
|
|
1,790,000 |
|
|
|
|
|
|
|
2,203,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,473,000 |
|
|
|
|
|
|
|
26,282,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
Gross |
|
|
|
|
|
|
Margin % |
|
|
|
|
|
Margin % |
Gross margins: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In-Home Health Care Services |
|
|
8,100,000 |
|
|
|
26.0 |
% |
|
|
8,213,000 |
|
|
|
26.7 |
% |
Durable Medical Equipment |
|
|
3,190,000 |
|
|
|
66.3 |
% |
|
|
3,334,000 |
|
|
|
68.1 |
% |
Retailer and Employer Services |
|
|
958,000 |
|
|
|
34.9 |
% |
|
|
495,000 |
|
|
|
18.4 |
% |
|
|
|
|
|
|
|
$ |
12,248,000 |
|
|
|
31.6 |
% |
|
$ |
12,042,000 |
|
|
|
31.4 |
% |
|
|
|
|
|
Net revenue was $38,721,000 for the three-month period ended September 30, 2007 compared to
$38,324,000 for the three-month period ended September 30, 2006, an increase of $397,000 or 1.0%.
Cost of revenues for the three-month period ended September 30, 2007 was $26,474,000 resulting in a
gross profit of $12,248,000 or 31.6% of revenues. Cost of revenues for the three-month period ended
September 30, 2006 was $26,282,000 resulting in a gross profit of $12,042,000 or 31.4% of revenues.
With the expansion of the DME operations and the pharmacy operations during fiscal 2007, the
revenue mix has changed and will continue to change, but the In-Home Health Services segment
revenue remains the largest revenue source for the Company and totals approximately 80.5% of total
revenue. The cost of revenues in the In-Home Health Care Service is primarily employee costs. The
costs of revenue in the DME and pharmacy operations are largely the cost of products and medication
sold to patients, as well as, to a lesser extend, the services provided to patients and supplies
used in the delivery of other rental products. The DME cost of revenues includes the depreciation
of patient rental equipment (discussed in Depreciation and Amortization section).
The In-Home Health Care Services (Services) segment revenues for the three-month period ended
September 30, 2007 was $31,164,000 compared to $30,729,000 for the three-month period ended
September 30, 2006, an increase of $435,000 or 1.4%. The increase in Services revenues was due to
organic growth, and the growth trend is consistent with prior periods. The Services revenues as a
percentage of total Company revenues increased slightly from 80.2% for the three-month period ended
September 30, 2006 to 80.5% for the three-month period ended September 30, 2007. The Services gross
profit percentage remained fairly consistent for the three-month period ended September 30, 2007 at
26.0% compared to 26.7% for the three-month period ended September 30, 2006.
The DME segment revenues for the three-month period ended September 30, 2007 were $4,809,000
compared to $4,897,000 for the three-month period ended September 30, 2006, a decrease of $88,000
or 1.8%. Within the segment, revenue from the standalone locations represented the largest portion
with revenues of $3,896,000 for the three-month period ended September 30, 2007 compared to
$4,048,000 for the three-month period ended September 30, 2006, a decrease of $152,000 or 3.8%. The
decrease is primarily due to an increase in the provision for contractual adjustments during the
three-month period ended September 30, 2007. Due to the complexity of many third-party billing
arrangements, contractual adjustments are sometimes made to amounts originally recorded. The
increase in the contractual adjustments during the three-month period ended September 30, 2007
reflects the increase in these types of adjustments. Revenues from the Catalog and Retail
operations within the DME segment accounted for a total of $913,000 during the three-month period
ended September 30, 2007 compared to $849,000 during the three-month period ended September 30,
2006, an increase of $64,000 or 7.5%. Certain retail locations opened prior to the three-month
quarter ended September 30, 2006, and the revenue associated with these locations is the primary
reason for the increase in Catalog and Retail revenue. The DME gross profit percentage remained
fairly consistent at 66.3% for the three-month period ended September 30, 2007 compared to 68.1%
for the three-month period ended September 30, 2006.
The Retailer and Employer Services segment revenues for the three-month period ended September 30,
2007 were $2,748,000 compared to $2,698,000 for the three-month period ended September 30, 2006, an
increase of $50,000 or 1.9%. This segment primarily includes the pharmacy operations. The increase
in Retailer and Employer Services revenues is due to the acquisition of PrairieStone Pharmacy, LLC
on February 16, 2007 and, to a lesser extent, of Wellscripts, LLC on June 30, 2006. The Retailer
and Employer Services gross margin for the three-month period ended September 30, 2007 was $958,000
and the gross margin percentage was 34.9%. This compares to a gross margin of $495,000 for the
three-month period ended September 30, 2006 and the gross margin percentage was 18.4%. The increase
in the cost of revenues reflects the addition of Wellscripts and PrairieStone. The increase in the
gross margin percentage also reflects the fact that subsequent to the PrairieStone acquisition, the
Retailer and Employer Services segment began generating revenue from its licensed service model as
well as the more traditional pharmacy-type revenues. The licensed service model generates higher
margins.
Selling, General and Administrative
The following summarizes selling, general and administrative expenses by segment for the
three-month periods ended September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Total |
|
|
|
|
|
% of Total |
|
|
2007 |
|
SG&A |
|
2006 |
|
SG&A |
|
|
|
In-Home Health Care Services |
|
$ |
6,950,000 |
|
|
|
46.9 |
% |
|
$ |
6,627,000 |
|
|
|
54.9 |
% |
Durable Medical Equipment: |
|
|
3,836,000 |
|
|
|
25.9 |
% |
|
|
3,594,000 |
|
|
|
29.8 |
% |
Retailer and Employer Services |
|
|
1,307,000 |
|
|
|
8.8 |
% |
|
|
607,000 |
|
|
|
5.0 |
% |
Corporate |
|
|
2,738,000 |
|
|
|
18.4 |
% |
|
|
1,247,000 |
|
|
|
10.3 |
% |
|
|
|
|
|
|
|
$ |
14,831,000 |
|
|
|
100.0 |
% |
|
$ |
12,075,000 |
|
|
|
100.0 |
% |
|
|
|
|
|
Selling, general and administrative expenses for the three-month period ended September 30, 2007
were $14,831,000, or 38.3% of revenues, compared to $12,075,000, or 31.5% of revenues, for the
three-month period ended September 30, 2006, which represents a $2,756,000 or 22.8% increase in
total selling, general and administrative expenses. The increase in selling, general and
administrative expenses was primarily due to the following items:
|
|
|
Within the Retailer and Employer Services segment, pharmacy expenses incurred
subsequent to the PrairieStone Pharmacy, LLC and Wellscripts, LLC acquisitions on February
16, 2007 and June 30, 2006, respectively, contributed $717,000 in selling, general and
administrative expenses during the three-month period ended September 30, 2007 compared to
no expenses in the same period of the prior year. Personnel costs represent approximately
77.7% of the additional expenses. |
|
|
|
|
Corporate selling, general and administrative expenses increased by $1,491,000 during
the three-month period ended September 30, 2007 compared to the three-month period ended
September 30, 2006. Salaries and benefits increased $1,054,000 compared to the same period
in the previous year, primarily due to equity compensation as previously discussed in Note
10 of the condensed consolidated financial statements. Most notably, the Company
recognized $707,000 upon the vesting 2,000,000 stock options held by the former CEO.
Additionally, professional fees increased by $351,000 due to compliance costs related to
Sarbanes-Oxley and other audit related fees. |
Depreciation and Amortization
The following summarizes depreciation and amortization expense from continuing operations for the
three-month periods ended September 30:
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
2006 |
|
|
|
Depreciation cost of revenues |
|
$ |
611,000 |
|
|
$ |
485,000 |
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization of property and equipment |
|
$ |
376,000 |
|
|
$ |
181,000 |
|
Amortization of acquired intangible assets |
|
|
614,000 |
|
|
|
420,000 |
|
|
|
|
Depreciation and amortization operating expense |
|
$ |
990,000 |
|
|
$ |
601,000 |
|
|
|
|
Depreciation expense included in cost of revenues, which represents depreciation related to
equipment rented to patients, was approximately $611,000 for the three-month period ended September
30, 2007 compared to $485,000 for the three-month period ended September 30, 2006, an increase of
$126,000 or 26.0%. The increase reflects the significant increase in rental equipment in use by the
DME segment, which is consistent with the growth in the DME segment. Rental equipment is
depreciated over three years.
Total depreciation and amortization expense included in operating expenses was approximately
$990,000 for the three-month period ended September 30, 2007 compared to $601,000 for the
three-month period ended September 30, 2006, an increase of $389,000 or 64.7%. Depreciation and
amortization of property
and equipment was approximately $376,000 for the three-month period ended September 30, 2007
compared to $181,000 for the three-month period ended September 30, 2006, an increase of $195,000
or 107.7%. The increase reflects the increase in property and equipment subsequent to various
fiscal 2007 acquisitions as well as the investment in equipment and leasehold improvements in
conjunction with the clinics initiative that began in fiscal 2007. Also, the Company made a
significant investment in software during fiscal 2007, and software is amortized over three years
resulting in a significant increase in software amortization expense.
Amortization of acquired intangible assets was approximately $614,000 for the three-month period
ended September 30, 2007 compared to $420,000 for the three-month period ended September 30, 2006,
an increase of $194,000 or 46.2%. The increase reflects the increase in the various acquired
intangible asset values, primarily customer relationships, subsequent to the various fiscal 2007
acquisitions.
Interest Expense and Income
The following summarizes interest expense and income for the three-month periods ended September
30:
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
2006 |
|
|
|
Interest expense |
|
$ |
978,000 |
|
|
$ |
913,000 |
|
Interest income |
|
|
15,000 |
|
|
|
|
|
|
|
|
|
|
$ |
963,000 |
|
|
$ |
913,000 |
|
|
|
|
Interest expense was $978,000 for the three-month period ended September 30, 2007 compared to
$913,000 for the three-month period ended September 30, 2006, an increase of $65,000 or 7.1%.
Interest income was $15,000 for the three-month period ended September 30, 2007 compared to $0 for
the three-month period ended September 30, 2006. As of September 30, 2007, the total balance of
interest bearing liabilities (lines of credit, long-term obligations, and capital leases) was
$35,495,000 compared to $40,550,000 at September 30, 2006, a decrease of $5,055,000 or 12.5%.
Although the total interest-bearing liability balance has decreased, interest expense has increased
due to higher interest rates on current borrowings.
Income Taxes
Income tax expense was $7,000 for the three-month period ended September 30, 2007 compared to
$45,000 for the three-month period ended September 30, 2006, a decrease of $38,000 or 84.4%. Due to
the Companys losses in recent years, it has paid nominal federal income taxes. The income tax
expense is primarily the result of state income tax liabilities of the subsidiary operating
companies. For federal income tax purposes, as of March 31, 2007, the Company had significant
permanent and timing differences between book income and taxable income resulting in combined net
deferred tax assets of $14,247,000 to be utilized by the Company for which an offsetting valuation
allowance has been established for the entire amount. The Company has a net operating loss
carryforward for tax purposes totaling $17,227,000 that expires at various dates through 2027.
Internal Revenue Code Section 382 rules limit the utilization of certain of these net operating
loss carryforwards upon a change of control of the Company. It has been determined that a change in
control took place, and as such, the utilization of $770,000 of the net operating loss
carryforwards will be subject to severe limitations in future periods.
Loss from Discontinued Operations
During the three-month period ended September 30, 2007, the Company completed the sale of its
retail Sears operations, DME Florida operations and DME Colorado operations and ceased its Care
Clinic, Inc. operations. The loss from discontinued operations for the three-month period ended
September 30, 2007 was $4,633,000. This loss included the loss from the discontinued operations of
$2,473,000 and the net loss on disposal of $2,160,000. The earnings from discontinued operations
for the three-month period ended September 30, 2006 was $856,000.
Six-Month Period Ended September 30, 2007 Compared to Six-Month Period Ended September 30, 2006
Results of Operations Continuing Operations
|
|
|
|
|
|
|
|
|
|
|
Six-Month Period |
|
|
Ended September 30, |
|
|
2007 |
|
2006 |
|
|
|
Revenues, net |
|
$ |
77,852,000 |
|
|
$ |
74,303,000 |
|
Cost of revenues |
|
|
52,990,000 |
|
|
|
50,335,000 |
|
|
|
|
Gross profit |
|
|
24,862,000 |
|
|
|
23,968,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses |
|
|
29,202,000 |
|
|
|
23,418,000 |
|
Depreciation and amortization |
|
|
1,949,000 |
|
|
|
1,083,000 |
|
|
|
|
Total operating expenses |
|
|
31,151,000 |
|
|
|
24,501,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
|
(6,289,000 |
) |
|
|
(533,000 |
) |
Interest expense, net |
|
|
2,123,000 |
|
|
|
1,318,000 |
|
|
|
|
Net loss before income tax expense |
|
|
(8,412,000 |
) |
|
|
(1,851,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense |
|
|
23,000 |
|
|
|
83,000 |
|
|
|
|
Net loss from continuing operations |
|
$ |
(8,435,000 |
) |
|
$ |
(1,934,000 |
) |
|
|
|
Weighted average number of shares basic and diluted |
|
|
119,249,723 |
|
|
|
88,238,312 |
|
Net loss from continuing operations per share basic and diluted |
|
$ |
(0.07 |
) |
|
$ |
(0.01 |
) |
|
|
|
Revenues, Cost of Revenues and Gross Profits
The following summarizes revenues, cost of revenues and gross profits by segment for the six-month
periods ended September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Total |
|
|
|
|
|
% of Total |
|
|
2007 |
|
Revenue |
|
2006 |
|
Revenue |
Revenues, net: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In-Home Health Care Services |
|
$ |
62,378,000 |
|
|
|
80.1 |
% |
|
$ |
60,634,000 |
|
|
|
81.6 |
% |
Durable Medical Equipment |
|
|
9,778,000 |
|
|
|
12.6 |
% |
|
|
10,185,000 |
|
|
|
13.7 |
% |
Retailer and Employer Services |
|
|
5,696,000 |
|
|
|
7.3 |
% |
|
|
3,484,000 |
|
|
|
4.7 |
% |
|
|
|
|
|
|
|
|
77,852,000 |
|
|
|
100.0 |
% |
|
|
74,303,000 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In-Home Health Care Services |
|
|
45,857,000 |
|
|
|
|
|
|
|
44,454,000 |
|
|
|
|
|
Durable Medical Equipment |
|
|
3,213,000 |
|
|
|
|
|
|
|
2,980,000 |
|
|
|
|
|
Retailer and Employer Services |
|
|
3,920,000 |
|
|
|
|
|
|
|
2,901,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52,990,000 |
|
|
|
|
|
|
|
50,335,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
Gross |
|
|
|
|
|
|
Margin % |
|
|
|
|
|
Margin % |
Gross margins: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In-Home Health Care Services |
|
|
16,521,000 |
|
|
|
26.5 |
% |
|
|
16,180,000 |
|
|
|
26.7 |
% |
Durable Medical Equipment |
|
|
6,565,000 |
|
|
|
67.1 |
% |
|
|
7,205,000 |
|
|
|
70.7 |
% |
Retailer and Employer Services |
|
|
1,776,000 |
|
|
|
31.2 |
% |
|
|
583,000 |
|
|
|
16.7 |
% |
|
|
|
|
|
|
|
$ |
24,862,000 |
|
|
|
31.9 |
% |
|
$ |
23,968,000 |
|
|
|
32.3 |
% |
|
|
|
|
|
Net revenue was $77,852,000 for the six-month period ended September 30, 2007 compared to
$74,303,000 for the six-month period ended September 30, 2006, an increase of $3,549,000 or 4.8%.
Cost of revenues for the six-month period ended September 30, 2007 was $52,990,000 resulting in a
gross profit of $24,862,000 or 31.9% of revenues. Cost of revenues for the six-month period ended
September 30, 2006 was $50,335,000 resulting in a gross profit of $23,968,000 or 32.3% of revenues.
With the expansion of the DME operations and the pharmacy operations during fiscal 2007, the
revenue mix has changed and will continue to change, but the In-Home Health Care Services segment
revenue remains the largest revenue source for the Company and totals 80.1% of total revenue. The
cost of revenues in the In-Home Health Care Service is primarily employee costs. The costs of
revenue in the DME and pharmacy operations are largely the cost of products and medication sold to
patients, as well as, to a lesser extend, the services provided to patients and supplies used in
the delivery of other rental products. The DME cost of revenues includes the depreciation of
patient rental equipment (discussed in Depreciation and Amortization section).
The Services segment revenues for the six-month period ended September 30, 2007 was $62,378,000
compared to $60,634,000 for the six-month period ended September 30, 2006, an increase of
$1,744,000 or 2.9%. The increase in Services revenues was due to organic growth, and the growth
trend is consistent with prior periods. The Services revenues as a percentage of total Company
revenues decreased from 81.6% for the six-month period ended September 30, 2006 to 80.1% for the
six-month period ended September 30, 2007. This decrease reflects the Companys emphasis on growing
various other segments, which have, or are anticipated to have, higher profit margins. The Services
gross profit percentage remained consistent for the six-month period ended September 30, 2007 at
26.5% compared to 26.7% for the six-month period ended September 30, 2006.
The DME segment revenues for the six-month period ended September 30, 2007 were $9,778,000 compared
to $10,185,000 for the six-month period ended September 30, 2006, a decrease of $407,000 or 4.0%.
Within the segment, revenue from the standalone locations represented the largest portion with
revenues of $8,191,000 for the six-month period ended September 30, 2007 compared to $8,497,000 for
the six-month period ended September 30, 2006, a decrease of $306,000 or 3.6%. The decrease is
primarily due to an increase in the provision for contractual adjustments during the six-month
period ended September 30, 2007. Due to the complexity of many third-party billing arrangements,
contractual adjustments are sometimes made to amounts originally recorded. The increase in the
contractual adjustments during the six-month period ended September 30, 2007 reflects the increase
in these types of adjustments. Revenues from the Catalog and Retail operations within the DME
segment accounted for a total of $1,587,000 during the six-month period ended September 30, 2007
compared to $1,688,000 during the six-month period ended September 30, 2006, a decrease of $101,000
or 6.0%. This decrease was primarily due to decrease in spending on lead generation in the Catalog
business, which resulted in a decrease in sales. The DME gross profit percentage remained fairly
consistent at approximately 67.1% for the six-month period ended September 30, 2007 compared to
70.7% for the six-month period ended September 30, 2006.
The Retailer and Employer Services segment revenues for the six-month period ended September 30,
2007 were $5,696,000 compared to $3,484,000 for the six-month period ended September 30, 2006, an
increase of $2,212,000 or 63.5%. This segment primarily includes the pharmacy operations. The
increase in Pharmacy revenues is due to the acquisitions of Wellscripts, LLC on June 30, 2006 and
PrairieStone Pharmacy, LLC on February 16, 2007. The Retailer and Employer Services segment gross
margin for the six-month period ended September 30, 2007 was $1,776,000 and the gross margin
percentage was 31.2%. This compares to a gross margin of $583,000 for the six-month period ended
September 30, 2006 and the gross margin percentage was 16.7%. The increase in the cost of revenues
reflects the addition of Wellscripts and PrairieStone. The increase in the gross margin percentage
also reflects the fact that subsequent to the PrairieStone acquisition, the pharmacy division began
generating revenue from its licensed service model as well as the more traditional pharmacy-type
revenues. The licensed service model generates higher margins.
Selling, General and Administrative
The following summarizes selling, general and administrative expenses by segment for the six-month
periods ended September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Total |
|
|
|
|
|
% of Total |
|
|
2007 |
|
SG&A |
|
2006 |
|
SG&A |
|
|
|
In-Home Health Care Services |
|
$ |
13,968,000 |
|
|
|
47.8 |
% |
|
$ |
13,202,000 |
|
|
|
56.4 |
% |
Durable Medical Equipment |
|
|
7,795,000 |
|
|
|
26.7 |
% |
|
|
6,986,000 |
|
|
|
29.8 |
% |
Retailer and Employer Services |
|
|
2,386,000 |
|
|
|
8.2 |
% |
|
|
840,000 |
|
|
|
3.6 |
% |
Corporate |
|
|
5,053,000 |
|
|
|
17.3 |
% |
|
|
2,390,000 |
|
|
|
10.2 |
% |
|
|
|
|
|
|
|
$ |
29,202,000 |
|
|
|
100.0 |
% |
|
$ |
23,418,000 |
|
|
|
100.0 |
% |
|
|
|
|
|
Selling, general and administrative expenses for the six-month period ended September 30, 2007 were
$29,202,000, or 37.5% of revenues, compared to $23,418,000, or 31.5% of revenues, for the six-month
period ended September 30, 2006, which represents a $5,784,000 or 24.7% increase in total selling,
general and administrative expenses. The increase in selling, general and administrative expenses
was primarily due to the following items:
|
|
|
Within the Retailer and Employer Services segment, pharmacy expenses incurred
subsequent to the PrairieStone Pharmacy, LLC and Wellscripts, LLC acquisitions on February
16, 2007 and June 30, 2006, respectively, contributed $1,085,000 in selling, general and
administrative expenses during the six-month period ended September 30, 2007 compared to no
expenses in the same period of the prior year. Personnel costs represent approximately
74.4% of the additional expenses. |
|
|
|
|
Corporate selling, general and administrative expenses increased by $2,664,000 during
the six-month period ended September 30, 2007 compared to the six-month period ended
September 30, 2006. Salaries and benefits increased $1,208,000 compared to the same period
in the previous year, primarily due to equity compensation as previously discussed in Note
10 of the condensed consolidated financial statements. Most notably, the Company
recognized $707,000 upon the vesting 2,000,000 stock options held by the former CEO.
Additionally, professional fees increased by $1,229,000 due to compliance costs related to
Sarbanes-Oxley and other audit related fees. |
Depreciation and Amortization
The following summarizes depreciation and amortization expense from continuing operations for the
six-month periods ended September 30:
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
2006 |
|
|
|
Depreciation cost of revenues |
|
$ |
1,240,000 |
|
|
$ |
873,000 |
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization of property and equipment |
|
$ |
762,000 |
|
|
$ |
320,000 |
|
Amortization of acquired intangible assets |
|
|
1,187,000 |
|
|
|
763,000 |
|
|
|
|
Depreciation and amortization operating expense |
|
$ |
1,949,000 |
|
|
$ |
1,083,000 |
|
|
|
|
Depreciation expense included in cost of revenues, which represents depreciation related to
equipment rented to patients, was approximately $1,240,000 for the six-month period ended September
30, 2007 compared to $873,000 for the six-month period ended September 30, 2006, an increase of
$367,000 or 42.0%. The increase reflects the significant increase in rental equipment in use by the
DME segment, which is consistent with the growth in the DME segment. Rental equipment is
depreciated over three years.
Total depreciation and amortization expense included in operating expenses was approximately
$1,949,000 for the six-month period ended September 30, 2007 compared to $1,083,000 for the
six-month period
ended September 30, 2006, an increase of $866,000 or 80.0%. Depreciation and amortization of
property and equipment was approximately $762,000 for the six-month period ended September 30, 2007
compared to $320,000 for the six-month period ended September 30, 2006, an increase of $442,000 or
138.1%. The increase reflects the increase in property and equipment subsequent to various fiscal
2007 acquisitions as well as the investment in equipment and leasehold improvements in conjunction
with the clinics initiative that began in fiscal 2007. Also, the Company made a significant
investment in software during fiscal 2007, and software is amortized over three years resulting in
a significant increase in software amortization expense.
Amortization of acquired intangible assets was approximately $1,187,000 for the six-month period
ended September 30, 2007 compared to $763,000 for the six-month period ended September 30, 2006, an
increase of $424,000 or 55.6%. The increase reflects the increase in the various acquired
intangible asset values, primarily customer relationships, subsequent to the various fiscal 2007
acquisitions.
Interest Expense and Income
The following summarizes interest expense and income for the six-month periods ended September 30:
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
2006 |
|
|
|
Interest expense |
|
$ |
2,181,000 |
|
|
$ |
1,318,000 |
|
Interest income |
|
|
(58,000 |
) |
|
|
|
|
|
|
|
|
|
$ |
2,123,000 |
|
|
$ |
1,318,000 |
|
|
|
|
Interest expense was $2,181,000 for the six-month period ended September 30, 2007 compared to
$1,318,000 for the six-month period ended September 30, 2006, an increase of $863,000 or 65.5%.
Interest income was $58,000 for the six-month period ended September 30, 2007 compared to $0 for
the six-month period ended September 30, 2006. As of September 30, 2007, the total balance of
interest bearing liabilities (lines of credit, long-term obligations, and capital leases) was
$35,495,000 compared to $40,550,000 at September 30, 2006, a decrease of $5,055,000 or 12.5%. The
Company reduced its interest bearing liabilities by more than $10,000,000 during the six-month
period ended September 30, 2007. Although the total interest-bearing liability balance has
decreased, interest expense has increased due to higher interest rates on current borrowings, and
the timing of borrowings and payments. The six-month period ended September 30, 206 includes the
Jana Master Fund, Ltd. borrowing for only three months as the debt agreement was entered into on
June 29, 2006.
Income Taxes
Income tax expense was $23,000 for the six-month period ended September 30, 2007 compared to
$83,000 for the six-month period ended September 30, 2006, a decrease of $60,000 or 72.3%. Due to
the Companys losses in recent years, it has paid nominal federal income taxes. The income tax
expense is primarily the result of state income tax liabilities of the subsidiary operating
companies. For federal income tax purposes, as of March 31, 2007, the Company had significant
permanent and timing differences between book income and taxable income resulting in combined net
deferred tax assets of $14,247,000 to be utilized by the Company for which an offsetting valuation
allowance has been established for the entire amount. The Company has a net operating loss
carryforward for tax purposes totaling $17,227,000 that expires at various dates through 2027.
Internal Revenue Code Section 382 rules limit the utilization of certain of these net operating
loss carryforwards upon a change of control of the Company. It has been determined that a change in
control took place, and as such, the utilization of $770,000 of the net operating loss
carryforwards will be subject to severe limitations in future periods.
Loss from Discontinued Operations
During the six-month period ended September 30, 2007, the Company completed the sale of its retail
Sears operations, DME Florida operations and DME Colorado operations and ceased its Care Clinic,
Inc. operations. The loss from discontinued operations for the six-month period ended September
30, 2007 was $8,168,000. This loss included the loss from the discontinued operations of
$6,008,000 and the net loss on disposal of $2,160,000. The earnings from discontinued operations
for the six-month period ended
September 30, 2006 was $1,041,000.
Liquidity and Capital Resources
Our independent auditors report on the consolidated financial statements and schedule for the year
ended March 31, 2007 contains an explanatory paragraph regarding the Companys ability to continue
as a going concern. The accompanying consolidated financial statements for the six-month period
ended September 30, 2007 have been prepared on a going concern basis, which contemplates the
realization of assets and the settlement of liabilities in the normal course of business and the
continuation of the Company as a going concern. The Company has experienced operating losses and
negative cash flows since its inception and currently has an accumulated deficit. These factors
raise substantial doubt about the Companys ability to continue as a going concern. Liquidation
values may be substantially different from carrying values as shown and these consolidated
financial statements do not give effect to adjustments, if any, that would be necessary to the
carrying values and classification of assets and liabilities should the Company be unable to
continue as a going concern.
The Company has grown primarily through acquisition since the reverse merger in May 2004 and has
incurred operating losses since that time. For the years ended March 31, 2007 and 2006, the Company
incurred net losses of $43.8 million and $4.7 million, respectively, and for the six-month period
ended September 30, 2007, the Company incurred an additional net loss of $16.6 million. During the
six-month period ended September 30, 2007, the Company used approximately $8.0 million of cash in
operations and had approximately $1.7 million in cash and cash equivalents at September 30, 2007.
Additionally, the Companys debt agreements include provisions that allow certain of its lenders,
in their sole discretion, to determine that the Company has experienced a material adverse change,
which, in turn, would be an event of default.
Our continuation as a going concern is dependent upon several factors, including our ability to
generate sufficient cash flow to meet our obligations on a timely basis. Managements current cash
projections indicate significant improvement in the cash generated from operations but anticipate
the need for additional capital during fiscal 2008.
Management has prepared projections for fiscal 2008 that anticipate an increase in revenue and
reductions in monthly operating expenses. After a period of growth through acquisition, management
intends to focus its efforts on improving operating efficiencies and reducing selling, general and
administrative expenses while growing the developing businesses. The Company recently hired
in-house counsel and expects a significant decrease in legal fees beginning in the third fiscal
quarter. The first step in this process includes certain restructuring initiatives, which the Board
of Directors approved and the Company announced in March 2007. Management anticipates significant
improvements in cash flows from operations during fiscal 2008 compared to fiscal 2007. Management
anticipates strong growth in revenues from the Retailer and Employer Services segment as well as
continued steady growth in the In-Home Health Services segment. Management believes the significant
cost reductions can be realized with certain administrative expenses, including
accounting/consulting fees, legal costs, and facility costs. Management is committed to reducing
costs to appropriate levels if the projected revenue increases do not materialize.
In May 2007, the Company raised $13 million through the sale of common stock. Approximately $5.5
million of the proceeds were used to pay down outstanding debt. In June 2007, the Company
restructured a significant portion of its outstanding debt, which included the extension of the
maturity date to June 30, 2008.
The Company sold its durable medical equipment operations in Florida and Colorado for total cash
proceeds of $7.7 million in September 2007, which were considered non-strategic assets based on
managements analysis. Additionally, the Company closed Care Clinics and certain Retail Operations
due to unfavorable performance of these lines of business. These locations did not complement our
existing and future strategic direction.
Medicare requires supplier numbers to obtain reimbursement for certain durable medical and
respiratory equipment. The Company resolved certain licensure issues related to various durable
medical accounts receivables during the quarter and has now been authorized to collect on these
receivables. It is the Companys opinion that the resolution of these issues will improve our
liquidity and financial position in the short-term.
Also in September 2007, the Company entered into a new revolving credit agreement with a potential
borrowing capacity of $5 million. Management believes that these events have substantially
improved the Companys cash position since March 31, 2007. Management continues to explore various
other alternatives for raising additional capital, if considered necessary, including further
divestitures of non-strategic businesses and seeking new debt or equity financing.
Although management believes that its efforts in obtaining additional financing will be successful,
there can be no assurance that its efforts will ultimately be successful.
The Companys primary needs for liquidity and capital resources are the funding of operations of
the Company and its subsidiaries. Secondarily, the Company will continue to execute its long-term
strategic growth plan, which includes internal growth at existing locations, expanded product
offerings and synergistic integration of the Companys types of businesses.
At September 30, 2007, the Company maintained $1,748,000 in cash and cash equivalents. Working
capital, which represents current assets less current liabilities, was $5,904,000.
The following summarizes the Companys cash flows for the six-month periods ended September 30:
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
2006 |
Net cash used in operating activities |
|
$ |
(8,011,000 |
) |
|
$ |
(4,548,000 |
) |
Net cash provided by (used in) investing activities |
|
|
4,289,000 |
|
|
|
(8,694,000 |
) |
Net cash provided by financing activities |
|
|
2,476,000 |
|
|
|
14,311,000 |
|
Net (decrease) increase in cash and cash
equivalents |
|
|
(1,246,000 |
) |
|
|
1,069,000 |
|
Cash and cash equivalents at the end of the period |
|
$ |
1,748,000 |
|
|
$ |
1,600,000 |
|
Net cash used in operating activities was $8,011,000 and $4,548,000 for the six-month periods ended
September 30, 2007 and 2006, respectively. The increase in the cash used during the six-month
period ended September 30, 2007 was primarily due the significant increase in the cash
expenditures. Specifically, the Company continued to incur costs associated with the investment in
the clinics initiative through August 2007 as well as an increase in professional and legal fees.
Further, the costs associated with recent acquisitions contributed to the increase in cash
expenditures in the day-to-day operations. The increase in the cash used in operations was also due
to a slowdown in cash collections primarily due to difficulties collecting receivables relating to
recent acquisitions for various reasons, including licensure issues.
Net cash provided by investing activities was $4,289,000 for the six-month period ended September
30, 2007 compared to net cash used in investing activities of $8,694,000 for the six-month period
ended September 30, 2006. Cash provided by investing activities included $5,751,000 received upon
the sale of the Florida and Colorado DME operations. Cash used in investing activities included
$384,000 used in the purchase of JASCORP, LLC and an additional $1,079,000 used to purchase
equipment. During the six-month period ended September 30, 2006, the Company used $7,065,000 for
business acquisitions and $1,629,000 for equipment.
Net cash provided by financing activity was $2,476,000 and $14,311,000 for the six-month periods
ended September 30, 2007 and 2006, respectively. The Company has financed its expansion and
acquisitions through a combination of debt and equity financing. Additionally, the Company paid
down approximately$10.0 million of debt during the 6 month period ending September 30, 2007.
In May 2007, the Company sold 11,019,000 shares of common stock at $1.19 per share to various
investors
in a private placement for aggregate proceeds of $13,112,000. The investors also received a total
of 2,755,000 warrants to purchase common stock at $1.75 per share for a period of seven years. In
conjunction with this private placement, the Company paid a placement fee of $655,000. A portion of
the proceeds were used to pay off $2,564,000 of outstanding debt due Jana and the Trinity
Healthcare line of credit balance with Comerica Bank of $2,000,000. In addition, the Company paid
$1,000,000 of the outstanding Comerica Bank line of credit.
In June 2007, the Company and Jana Master Fund, Ltd. entered into an Amended and Restated
Promissory Note relating to the $17,000,000 note dated November 30, 2006. The amended note extends
the maturity date to June 30, 2008. Effective July 1, 2007, the interest rate shall be equal to the
one-year LIBOR rate plus 8%. If the outstanding balance of the note is reduced to less than
$8,500,000, the interest rate will be reduced to the one-year LIBOR rate plus 4%. 50% of the
accrued unpaid interest shall be due and payable on the following dates: September 30, 2007,
December 31, 2007 and March 31, 2008. All remaining unpaid accrued interest shall be due and
payable on the maturity date of June 30, 2008. If the Company prepays any portion of the principal
amount before December 30, 2007, a prepayment fee equal to the one-year LIBOR rate plus 1.5% will
be due. If the Company sells assets, other than inventory in the ordinary course of business, it is
required to use a portion of the proceeds to pay down the outstanding debt. Specifically, the
Company must remit to Jana 50% of the net proceeds on the sale of assets up to $10 million and 75%
of the net proceeds to the extent that the aggregate net proceeds exceed $10 million.
During the six-month period ended September 30, 2006, the Company entered into the original
$15,000,000 debt agreement with Jana.
On September 26, 2007, the Company, through its wholly-owned subsidiary Arcadia Products, Inc.,
entered into a line of credit with Presidential Healthcare Credit Corporation. The credit
agreement provides the Company with a revolving credit facility of up to $5 million. The credit
agreement provides that the Company may request advances up to 85% of the eligible receivables
minus any amounts reserved pursuant to the agreement, if applicable. The maturity date is
September 26, 2010. The line of credit agreement requires the Company to maintain a lockbox
account. Advances under the credit facility bear interest at the prime rate plus 1.75% per annum.
The line of credit agreement is secured by the Companys accounts receivable and is guaranteed by
Arcadia Resources, Inc.
Net accounts receivable were $31,852,000 at September 30, 2007 compared to $33,427,000 at March 31,
2007. The Services and DME segments account for 68% and 7%, respectively, of total accounts
receivable at September 30, 2007 compared to 69% and 26% at March 31, 2007. As of September 30,
2007, the Companys net accounts receivable represented 70 days sales outstanding compared to 81
days as of March 31, 2007. The days sales outstanding for the Services segment were 63 days at
September 30, 2007 compared to 79 days at March 31, 2007. The days sales outstanding for the DME
segment were 90 days at September 30, 2007 compared to 131 days at March 31, 2007. The Company
calculates its days sales outstanding as accounts receivable, net of the related allowance for
doubtful accounts, divided by the annualized net revenues.
The integration of acquisitions in the DME segment during the last two fiscal years has affected
the related collection process due to the required re-working of licensure, specifically, the
provider number changeover with payers after a change in ownership. This licensure process can take
up to a full year depending on the laws and licensure requirements in the state of operations and
the various payers involved. The Company has a limited number of customers with individually large
amounts due at any given balance sheet date. The Companys payer mix for the six-month period ended
September 30, 2007 was as follows:
|
|
|
|
|
Government-funded |
|
|
27 |
% |
Institutions |
|
|
41 |
% |
Commercial Insurance |
|
|
11 |
% |
Private Pay |
|
|
21 |
% |
As of September 30, 2007, the Company had total outstanding borrowings under its line of credit
agreements of $18,078,000. The Company had approximately $1,223,000 available on its line of credit
with Comerica Bank, which borrowings are contingent on the results of supporting borrowing base
calculations. In addition, the Companys line of credit with AmerisourceBergen Drug Corporation
increased from $2,500,000 to $4,000,000 in September 2007. Borrowings are subject to PrairieStone
satisfying certain borrowing base requirements and beginning in June 2007, PrairieStone achieving
certain EBITDA targets. To date, the PrairieStone has not satisfied the borrowing base requirement
nor achieved the EBITDA targets necessary to draw dawn the additional amounts. As of September 30,
2007, the Company was in compliance with all financial covenants relating to its line of credit
agreement with Comerica Bank.
As of September 30, 2007, the Company had total long-term obligations of $35,495,000, of which
$15,646,000 is payable to Jana and $13,980,000 is payable to Comerica Bank under a line of credit
agreement.
Recent Accounting Pronouncements
In June 2006, the FASB issued FASB Interpretation (FIN) No. 48, Accounting for Uncertainty in
Income Taxes, which amends and clarifies previous guidance on the accounting for deferred income
taxes as presented in SFAS No. 109, Accounting for Income Taxes. The statement is effective for
fiscal years beginning after December 15, 2006. Effective April 1, 2007, the Company adopted the
provisions of FIN 48 and there was no material effect to the consolidated financial statements. As
a result, there was no cumulative effect related to the adoption of FIN 48.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which defines fair
value, establishes a framework for measuring fair value in generally accepted accounting principles
and expands disclosure about fair value measurements. The statement is effective for financial
statements issued for fiscal years beginning after November 15, 2007, and interim periods within
those years. Management is currently evaluating the statement to determine what, if any, impact it
will have on the Companys consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities, which permits companies to make a one-time election to carry eligible types
of financial assets and liabilities at fair value, even if measurement is not required by GAAP. The
statement is effective for fiscal years beginning after November 15, 2007. Management is currently
evaluating the statement to determine what, if any, impact it will have on the Companys
consolidated financial statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The majority of our cash balances are held primarily in highly liquid commercial bank accounts. The
Company utilizes lines of credit to fund operational cash needs. The risk associated with
fluctuating interest rates is 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 the future currency rate exposure as it
is not anticipated that foreign revenues are likely to occur in the near future.
Item 4. Controls and Procedures.
Disclosure Controls and Procedures. As of September 30, 2007, our management, with the
participation of our Chief Executive Officer and Chief Financial Officer, carried out an evaluation
of the effectiveness of our disclosure controls and procedures as such term is defined in Rule
13a-15(e) under the Exchange Act. Based on this evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the Companys disclosure controls and procedures were not
effective as of September 30, 2007, because of the identification of the material weaknesses in
internal control over financial reporting as of March 31, 2007 described below, the remediation of
which was not completed as of September 30, 2007. Notwithstanding such material weaknesses, our
Chief Executive Officer and Chief Financial Officer have each concluded that the consolidated
financial statements included in this Quarterly Report on Form 10-Q present fairly, in all material
respects, the financial position, results of operations and cash flows of the Company and its
subsidiaries in conformity with accounting principles generally accepted in the United States of
America (GAAP).
Design of Internal Control Over Financial Reporting. Our management is responsible for establishing
and maintaining adequate internal control over financial reporting. Our internal control over
financial reporting is a process designed under the supervision of our chief executive officer and
interim chief financial officer to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial
statements for external reporting purposes in accordance with accounting principles generally
accepted in the United States.
Our internal control over financial reporting includes policies and procedures that:
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Pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect transactions and dispositions of our assets; |
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Provide reasonable assurance that our transactions are recorded as necessary to permit
preparation of financial statements in accordance with U.S. generally accepted accounting
principles; |
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Provide reasonable assurances that our receipts and expenditures are being made only in
accordance with authorizations of our management and directors; and |
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Provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of our assets that could have a material effect on the
financial statements. |
Status of Managements Remedial Action. At March 31, 2007, we reported that we had three material
weakness as follows:
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Management did not design and maintain effective controls relating to the month-end
closing and financial reporting process due to lack of evidence of review surrounding
various account reconciliations and properly evidenced journal entries. Additionally, the
Company had insufficient personnel resources and technical accounting and reporting
expertise within the Companys financial closing and reporting functions. |
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Management did not maintain adequate control relating to the business acquisition
process due to lack of formalized due diligence procedures and evidentiary support of
purchase accounting review. |
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Management did not design and maintain controls to analyze and record appropriate
adjustments to the accounts receivable reserve and properly monitor review of reductions to
accounts receivable due to ineffective controls over contract pricing and the
standardization of a contract pricing system emphasized by changes in payer mix and other
contracting licensure issues. |
We have developed a remediation plan that we believe will resolve the material weaknesses. We are
in the process of implementing this plan and believe the full implementation will make the design
and operation of our internal controls over financial reporting effective.
Changes in Internal Controls. Other than the remediation plan that is discussed above, there have
been no other changes in our internal control over financial reporting that occurred during the
fiscal quarter ended September 30, 2007 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
We are a defendant from time to time in lawsuits incidental to our business. We are not currently
subject to, and none of our subsidiaries are subject to, any material legal proceedings.
Item 1A. Risk Factors.
In addition to the information set forth under Item 1A of Part I to our Annual Report on Form 10-K
for the year ended March 31, 2007 and elsewhere in this Quarterly Report including Part I, Item 2,
you should carefully consider the following factors, which could have a material adverse effect on
our results of operations, financial condition, cash flows, business or the market for our common
shares and could cause actual results and actual events that occur to differ materially from those
contemplated by the forward-looking statements contained in this report. As previously stated
elsewhere in this report, we caution you that statements contained in this report 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. The Cautionary Statement
Concerning Forward-Looking Statements, contained in Part I, Item 2, is incorporated herein by this
reference.
We recently became a public company and have a limited operating history as a public company upon
which you can base an investment decision.
The shares of our common stock were quoted on the OTC Bulletin Board from August 2, 2002 through
June 30, 2006 and began trading on the American Stock Exchange on July 3, 2006. We have a limited
operating history as a public company upon which you can make an investment decision, or upon which
we can accurately forecast future sales. You should, therefore, consider us subject to all of the
business risks associated with a new business. The likelihood of our success must be considered in
light of the expenses, difficulties and delays frequently encountered in connection with the
formation and initial operations of a new and unproven business.
To finance the numerous acquisitions made as part of our growth strategy, the Company incurred
significant debt which must be repaid. Our debt level could adversely affect our financial health
and affect our ability to run our business.
We acquired Arcadia Services and Arcadia Rx on May 10, 2004 and have acquired approximately 30
additional companies since that time. We incurred substantial debt to finance these acquisitions.
This debt has been reduced periodically through capital infusions. As of September 30, 2007, the
current portion of our debt, including lines of credit and capital lease obligations, totals
approximately $18.5 million, while the long-term portion of our debt totals approximately $16.9
million, for a total of approximately $35.4 million. This level of debt could have consequences to
holders of our common stock. Below are some of the material potential consequences resulting from
this amount of debt:
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We may be unable to obtain additional financing for working capital, capital
expenditures, acquisitions and general corporate purposes. |
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Our ability to adapt to changing market conditions may be hampered. We may be more
vulnerable in a volatile market and at a competitive disadvantage to our competitors that
have less debt. |
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Our operating flexibility is more limited due to financial and other restrictive
covenants, including restrictions on incurring additional debt, creating liens on our
properties, making acquisitions and paying dividends. |
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We are subject to the risks that interest rates and our interest expense will increase. |
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Our ability to plan for, or react to, changes in our business is more limited. |
Under certain circumstances, we may be able to incur additional indebtedness in the future. If we
add new debt, the related risks that we now face could intensify. In order to repay our debt
obligations timely, we must maintain adequate cash flow from operations or raise additional capital
from equity investment or other sources. Cash, which we must use to repay these obligations, will
reduce cash available for other purposes, such as payment of operating expenses, investment in new
products and services offered by the Company, self-financing of acquisitions to grow the Companys
business, or distribution to our shareholders as a return on investment.
Due to our debt level, we may not be able to increase the amount we can draw on our revolving
credit facility with Comerica Bank, or to obtain credit from other sources, to fund our future
needs for working capital or acquisitions.
As of September 30, 2007, we have total outstanding long-term obligations (lines of credit, notes
payable and capital lease obligations) of $35.4 million. Due to our debt level, there is the risk
that Comerica Bank or other sources of credit may decline to increase the amount we are permitted
to draw on the revolving credit facilities or to lend additional funds for working capital or other
purposes. This development could result in various consequences to the Company, ranging from
implementation of cost reductions, which could impact our product and service offerings, to the
modification or abandonment of our present business strategy.
The terms of our Credit Agreements with Comerica Bank subject us to the risk of foreclosure on
certain property.
RKDA granted Comerica Bank a first priority security interest in all of the issued and outstanding
capital stock of Arcadia Services, Inc. Arcadia Services, Inc. and its subsidiaries granted the
bank security interests in all of their assets. The credit agreement provides that the debt will
mature on October 1, 2008. If an event of default occurs, Comerica Bank may, at its option,
accelerate the maturity of the debt and exercise its right to foreclose on the issued and
outstanding capital stock of Arcadia Services, Inc. and on all of the assets of Arcadia Services, Inc. and its subsidiaries. Any such default and
resulting foreclosure would have a material adverse effect on our financial condition.
In order to repay our short-term debt obligations, as well as to pursue our growth strategy, we may
seek additional equity financing, which could result in dilution to our security holders.
The Company may continue to raise additional financing through the equity markets to repay debt
obligations and to fund operations. Further, because of the capital requirements needed to pursue
our growth strategy, we may access the public or private equity markets whenever conditions appear
to us to be favorable, even if we do not have an immediate need for additional capital at that
time. The Company also plans to continue to expand product and service offerings. Cash flow from
operations is not expected to entirely fund these efforts, and the scope of these plans may be
determined by the Companys ability to generate cash flow or to secure additional new funding. To
the extent we access the equity markets, the price at which we sell shares may be lower than the
current market prices for our common stock. If we obtain financing through the sale of additional
equity or convertible debt securities, this could result in dilution to our security holders by
increasing the number of shares of outstanding stock. We cannot predict the effect this dilution
may have on the price of our common stock.
The Company has completed approximately 30 acquisitions since the reverse merger in May 2004. The
licensure and credentialing process under the new ownership must be satisfied timely in order to
bill and collect for services rendered to beneficiaries of government-based health care programs
and other insurance carriers. Cash flow related to these transitions can be impaired sufficient to
require additional external financing in the form of debt or equity.
The Company has made several recent acquisitions of durable medical and respiratory equipment
businesses, the transitional credentialing of which has taken longer than expected, which has
slowed the billing and collections process, resulting in a negative impact to the timing of cash in
flows from the respective entities or in the worst case scenario, resulting in uncollectible fees
for services provided. Management has recently brought additional resources to these efforts. The
Companys experience in
ultimately billing and collecting for services provided in the transition
period in question has been somewhat inconsistent. The inability to collect receivables timely or
not at all could have a negative impact on its ability to meet its current obligations timely. This
delay in collecting cash from normal operations could force the Company to pursue outside financing
that it would not otherwise need to pursue.
To the extent we do not raise adequate funds from the equity markets or possible business
divestitures to satisfy short-term debt obligations, we would need to seek debt financing or modify
or abandon our growth strategy or product and service offerings.
Although we raised $13.1 million in equity financing in May 2007, these funds, in
combination with funds generated from operations and the divestiture of certain business
operations, may not be adequate to satisfy short-term cash needs. To the extent that we are
unsuccessfully in raising funds from the equity markets or through the possible additional
divestitures of certain businesses, we will need to seek debt financing. In this event, we may need
to modify or abandon our growth strategy or may need to eliminate certain product or service
offerings, because debt financing is generally at a higher cost than financing through equity
investment. Higher financing costs, modification or abandonment of our growth strategy, or the
elimination of product or service offerings could negatively impact our profitability and financial
position, which in turn could negatively impact the price of our common stock.
Because the Company is dependent on key management and advisors, the loss of the services or advice
of any of these persons could have a material adverse effect on our business and prospects. We also
face certain risks as a result of the recent changes to our management team.
The success of the Company is dependent on its ability to attract and retain qualified and
experienced management and personnel. We do not presently maintain key person life insurance for
any of our personnel. There can be no assurance that the Company will be able to attract and retain
key personnel in the future, and the Companys inability to do so could have a material adverse
effect on us. We have recently made significant changes in our senior management team. In addition,
the Company has experienced several changes in key accounting personnel as part of its
restructuring initiatives, as well as the transition of certain accounting functions from Orlando,
Florida to Southfield, Michigan. Our management team will need to work together effectively to
successfully develop and implement our business strategies and financial operations. In addition,
management will need to devote significant attention and resources to preserve and strengthen
relationships with employees, customers and the investor community. If our new management team is
unable to achieve these goals, our ability to grow our business and successfully meet operational
challenges could be impaired.
A decline in the rate of growth of the staffing and home care industries, or negative growth, could
adversely affect us by reducing sales, thereby resulting in less cash being available for the
payment of operating expenses, debt obligations and to pursue our strategic plans.
We believe the staffing industry, including both medical and non-medical staffing, is a large and
growing market. The growth in medical staffing is being driven by the shrinkage in the number of
healthcare professionals at the same time as the demand for their services is increasing.
Healthcare providers are increasingly using temporary staffing to manage fluctuations in demand for
their services. Growth in non-medical staffing is driven by companies seeking to control personnel
costs by increasingly using temporary employees to meet fluctuating personnel needs. Our business
strategy within our Services segment is premised on the continued and consistent growth of the
staffing and home care industries. A decline in the rate of growth of the staffing and home care
industries, or negative growth, could adversely affect us by reducing sales, resulting in
lower cash collections. Even if we were to pursue cost reductions in this event, there is a risk
that less cash would be available to us to pay operating expenses, in which case we may have to
contract our existing businesses by abandoning selected product or service offerings or geographic
markets served, as well as to modify or abandon our present business strategy. We could have less
cash available to pay our short and long-term debt obligations as they become due, in which event
we could default on our obligations. Even if none of these events occurred following a negative
change in the growth of the staffing and home care industries, the market for our shares of common
stock could react negatively to a decline in growth or negative growth of these industries,
potentially resulting in the diminished value of our Companys common stock.
Sales of certain of our services and products are largely dependent upon payments from governmental
programs and private insurance, and cost containment initiatives may reduce our revenues, thereby
harming our performance.
We have a number of contractual arrangements with governmental programs and private insurers,
although no individual arrangement accounted for more than 10% of our net revenues for the fiscal
years ended March 31, 2007, 2006, or 2005. Nevertheless, sales of certain of our services and
products are largely dependent upon payments from governmental programs and private insurance, and
cost containment initiatives may reduce our revenues, thereby harming our performance.
In the U.S., healthcare providers and consumers who purchase durable medical equipment,
prescription drug products and related products generally rely on third party payers to reimburse
all or part of the cost of the healthcare product. Such third party payers include Medicare,
Medicaid and other health insurance and managed care plans. Reimbursement by third party payers may
depend on a number of factors, including the payers determination that the use of our products is
clinically useful and cost-effective, medically necessary and not experimental or investigational.
Also, third party payers are increasingly challenging the prices charged for medical products and
services. Since reimbursement approval is required from each payer individually, seeking such
approvals can be a time consuming and costly process. In the future, this could require us to
provide supporting scientific, clinical and cost-effectiveness data for the use of our products to
each payer separately. Significant uncertainty exists as to the reimbursement status of newly
approved healthcare products. Third party payers are increasingly attempting to contain the costs
of healthcare products and services by limiting both coverage and the level of reimbursement for
new and existing products and services. There can be no assurance that third party reimbursement
coverage will be available or adequate for any products or services that we develop.
In addition to the potential negative impact on our revenue due to future cost containment efforts,
if Medicare reimbursement rates for certain durable medical equipment are reduced for the calendar
year 2008 or 2009, the Company will be obligated to repay a portion of the proceeds received from its sale of the Florida and Colorado durable medical
equipment operations in September 2007. The potential purchase price adjustment depends on in what
calendar year the legislation is enacted and the number of months that the new legislation would
provide for reimbursement. The maximum amount will be $1,000,000 if the number of months is
reduced to 18 months or lower during 2008.
We could be subject to severe fines and possible exclusion from participation in federal and state
healthcare programs if we fail to comply with the laws and regulations applicable to our business
or if those laws and regulations change.
Certain of the healthcare-related products and services offered by the Company are subject to
stringent laws and regulations at both the federal and state levels, requiring compliance with
burdensome and complex billing, substantiation and record-keeping requirements. Financial
relationships between our Company and physicians and other referral sources are subject to
governmental regulation. Government officials and the public will continue to debate healthcare
reform and regulation. Changes in healthcare law, new interpretations of existing laws, or changes
in payment methodology may have a material impact on our business and results of operations.
The markets in which the Company operates are highly competitive and the Company may be unable to
compete successfully against competitors with greater resources.
The Company competes in markets that are constantly changing, intensely competitive (given low
barriers to entry), highly fragmented and subject to dynamic economic conditions. Increased
competition is likely to result in price reductions, reduced gross margins, loss of customers, and
loss of market share, any of which
could harm our net revenue and results of operations. Many of the Companys competitors and potential competitors relative to the Companys products and services
in the areas of durable medical equipment, and oxygen and respiratory services, have more capital,
substantial marketing, and technical resources and expertise in specialized financial services than
does the Company. These competitors include: on-line marketers, national wholesalers, and national
and regional distributors. Further, the Company may face a significant competitive challenge from
alliances entered into between and among its competitors, major HMOs or chain drugstores, as well
as from larger competitors created through industry consolidation. These potential competitors may
be able to respond more quickly than the Company to emerging market changes or changes in customer
needs. In addition, certain of our competitors may have or may obtain significantly greater
financial and marketing resources than we may have. In addition, relatively few barriers to entry
exist in local healthcare markets. As a result, we could encounter increased competition in the
future that may increase pricing pressure and limit our ability to maintain or increase our market
share for our durable medical equipment, mail order pharmacy and related businesses.
We may not be able to successfully integrate acquired businesses, which could result
in our failure to increase revenues or to avoid duplication of costs among acquired businesses,
thereby adversely affecting our financial results and profitability.
The successful integration of an acquired business is dependent on various factors including the
size of the acquired business, the assets and liabilities of the acquired business, the complexity
of system conversions, the scheduling of multiple acquisitions in a given geographic area and
managements execution of the integration plan. In the past, our business plan was primarily
premised upon increasing our revenues by leveraging the strengths of our staffing and home care
network to cross sell our other products and services. Our business plan is also premised on
avoiding duplication of cost among our existing and acquired businesses where possible. If we fail
to successfully integrate in these key areas, our Companys financial results and profitability
will be adversely affected, due to the failure to capitalize on the economies of scale presented by
spreading our cost structure over a wider revenue base.
The failure to implement the Companys business strategy may result in our inability to be
profitable and adversely impact the value of our common stock.
We anticipate that the Company will continue to pursue an aggressive internal growth strategy,
which will depend, in large part, upon our ability to develop and expand the Companys businesses.
We believe that the failure to implement an aggressive growth strategy, or a failure to
successfully integrate recently acquired businesses, may result in our inability to be profitable,
because our business plan is premised on, among other things, capitalizing on the economies of
scale presented by spreading our cost structure over a wider revenue base. Our inability to achieve
profitability could adversely impact the value of our common stock.
We cannot predict the impact that the registration of the shares may have on the price of the
Companys shares of common stock.
We cannot predict the effect, if any, that sales of, or the availability for sale of, shares of our
common stock by the selling security holders pursuant to a prospectus or otherwise will have on the
market price of our securities prevailing from time to time. The possibility that substantial
amounts of our common stock might enter the public market could adversely affect the prevailing
market price of our common stock and could impair our ability to fund acquisitions or to raise
capital in the future through the sales of securities. Sales of substantial amounts of our
securities, including shares issued upon the exercise of options or warrants, or the perception
that such sales could occur, could adversely effect prevailing market prices for our securities.
The price of our Common Stock has been, and will likely continue to be, volatile, which could
diminish the ability to recoup an investment, or to earn a return on an investment, in our Company.
The market price of our common stock, like that of the securities of many other companies with
limited operating history and public float, has fluctuated over a wide range, and it is likely that
the price of our common stock will fluctuate in the future. Since the reverse merger on May 10, 2004, the closing price of our common stock, as quoted by the
OTC Bulletin Board and the American Stock Exchange (AMEX) beginning July 3, 2006, has fluctuated
from a low of $0.60 to a high of $3.49. From October 1, 2006 through November 7, 2007, our common
stock has fluctuated from a low of $0.64 to a high of $3.38. Slow demand for our common stock has
resulted in limited liquidity, and it may be difficult to dispose of the Companys securities. Due
to the volatility of the price our common stock, an investor may be unable to resell shares of our
common stock at or above the price paid for them, thereby exposing an investor to the risk that he
may not recoup an investment in our Company or earn a return on an investment. In the past,
securities class action litigation has been brought against companies following periods of
volatility in the market price of their securities. If we are the target of similar litigation in
the future, our Company would be exposed to incurring significant litigation costs. This would also
divert managements attention and resources, all of which could substantially harm our business and
results of operations.
Resale of our securities by any holder may be limited and affected by state blue-sky laws, which
could adversely affect the price of our securities and the holders investment in our Company.
Under the securities laws of some states, shares of common stock and warrants can be sold in such
states only through registered or licensed brokers or dealers. In addition, in some states,
warrants and shares of common stock may not be sold unless these shares have been registered or
qualified for sale in the state or an exemption from registration or qualification is available and
is complied with. The requirement of a seller to comply with the requirements of state blue sky
laws may lead to delay or inability of a holder of our securities to dispose of such securities,
thereby causing an adverse effect on the resale price of our securities and your investment in our
Company.
The issuance of our preferred stock could materially impact the price of common stock and the
rights of holders of our common stock.
The Company is authorized to issue 5,000,000 shares of serial preferred stock, par value $0.001.
Shares of preferred stock may be issued from time to time in one or more series as may be
determined by the Companys Board of Directors. Except as otherwise provided in the Companys
Articles of Incorporation, the Board of Directors has authority to fix by resolution adopted before
the issuance of any shares of each particular series of preferred stock, the designation, powers,
preferences, and relative participating, optional and other rights, and the qualifications,
limitations, and restrictions. The issuance of our preferred stock could materially impact the
price of common stock and the rights of holders of our common stock, including voting rights. The
issuance of preferred stock could decrease the amount of earnings and assets available for
distribution to holders of common stock, and may have the effect of delaying, deferring or
preventing a change in control of our Company, despite such change of control being in the best
interest of the holders of our shares of common stock. The existence of authorized but unissued
preferred stock may enable the Board of Directors to render more difficult or to discourage an
attempt to obtain control of us by means of a merger, tender offer, proxy contest or otherwise.
The exercise of common stock warrants may depress our stock price and may result in dilution to our
common security holders.
Approximately 22.2 million warrants to purchase 22.2 million shares of our common stock are issued
and outstanding as of September 30, 2007. The market price of our common stock is above the
exercise price of some of the outstanding warrants; therefore, holders of those securities are
likely to exercise their warrants and sell the common stock acquired upon exercise of such warrants
in the open market. Sales of a substantial number of shares of our common stock in the public
market by holders of warrants may depress the prevailing market price for our common stock and
could impair our ability to raise capital through the future sale of our equity securities.
Additionally, if the holders of outstanding warrants exercise those warrants, our common security
holders will incur dilution. The exercise price of all common stock warrants, including Classes A,
B-1 and B-2 Warrants, is subject to adjustment upon stock dividends, splits and combinations, as
well as certain anti-dilution adjustments as set forth in the respective common stock warrants.
We have granted stock options to certain management employees and directors as compensation, which
may depress our stock price and result in dilution to our common security holders.
As of September 30, 2007, options to purchase approximately 6.5 million shares of our common stock
were issued and outstanding. On August 18, 2006, the Board of Directors approved the Arcadia
Resources, Inc. 2006 Equity Incentive Plan (the Plan), which was subsequently approved by the
security holders on September 26, 2006. The Plan allows for the granting of additional incentive
stock options, non-qualified stock options, stock appreciation rights and restricted shares up to 5
million shares (2.5% of the Companys authorized shares of common stock as of the date the Plan was
approved). The market price of our common stock is above the exercise price of some of the
outstanding options; therefore, holders of those securities are likely to exercise their options
and sell the common stock acquired upon exercise of such options in the open market. Sales of a
substantial number of shares of our common stock in the public market by holders of options may
depress the prevailing market price for our common stock and could impair our ability to raise
capital through the future sale of our equity securities. Additionally, if the holders of
outstanding options exercise those options, our common security holders will incur dilution. The
exercise price of all common stock options is subject to adjustment upon stock dividends, splits
and combinations, as well as anti-dilution adjustments as set forth in the option agreement.
As of November 7, 2007, the former Chief Operating Officer has 3,000,000 options at an exercise
price of $0.25 per share, which expire on February 28, 2008. In addition, the former Chief
Executive Officer has 2,000,000 options at an exercise price of $0.25 per share, which expire on
March 15, 2008. The exercising of these options and the subsequent sale of the common stock in the
open market could depress the prevailing market price for our common stock.
The Company has entered into several agreements whereby it has guaranteed the stock price at
certain times in the future. If the future stock price is below the guaranteed stock price, the
Company is obligated to true up the difference in either common stock or cash. The issuance of common stock would result in dilution to our common
stock holders, and the settlement of the liability with cash would decrease cash available for
other purpose, such as funding operations, paying down debt or investing in growth initiatives.
Pursuant to the purchase agreements relating to the PrairieStone Pharmacy, LLC and JASCORP, LLC
acquisitions entered into in February 2007 and July 2007, respectively, the Company guaranteed the
stock price at the one-year anniversary dates of the acquisitions. If our future stock price at
these future dates is below the guaranteed price, then the Company is obligated to true up the
difference in either common stock or cash or a combination thereof, at the Companys sole
discretion.
In addition, in order to induce certain individuals to accept common stock in lieu of cash relating
to several transactions, the Company guaranteed that these individuals would receive a certain
price per share of common stock if and when they sell their shares through certain dates, the last
of which is December 15, 2008. If these individuals do not receive the guaranteed price and if
certain other defined conditions are satisfied, then the Company is obligated to true up the
difference in either common stock or cash or a combination thereof, at the Companys sole
discretion.
The amount of the Companys aggregate true up obligation is dependent on the closing price of the
Companys common stock on the various future dates specified in the referenced agreements. Based
on the lowest and highest closing prices of the Companys common stock in the fiscal quarter ended
September 30, 2007, $0.64 and $1.17 per share, respectively, the Companys total aggregate
obligation would range from $3,772,484 (5,894,506 shares at $0.64 per share) to $2,747,840
(2,348,581 shares at $1.17 per share).
The issuance of common stock in the future to settle these true up liabilities would result in
dilution to our common stock holders. The payment of the true up liabilities with cash would use
cash that could otherwise be used to fund operations, to pay down debt or to invest in growth
initiatives.
We are dependent on our affiliated agencies and our internal sales force to sell our services and
products, the loss of which could adversely affect our business.
We rely heavily upon our affiliated agencies to sell our staffing and home care services and on our
internal sales force to sell our durable medical equipment and pharmacy products. Arcadia Services
affiliated agencies are owner-operated businesses. The office locations maintained by our
affiliated agencies are listed on the Companys website. The primary responsibilities of Arcadia
Services affiliated agencies include the recruitment and training of field staff employed by
Arcadia Services and generating and maintaining sales to Arcadia Services customers. The
arrangements with affiliated agencies are formalized through a standard contractual agreement,
which state performance requirements of the affiliated agencies. Our affiliated agencies and
internal sales force operate in particular defined geographic regions. Our employees provide the
services to our customers and the affiliated agents and internal sales force are restricted by
non-competition agreements. In the event of loss of our affiliated agents or internal sales force
personnel, we would recruit new sales and marketing personnel and/or affiliated agents, which could
cause our operating costs to increase and our sales to fall in the interim.
Our recurring losses from operations have caused us to receive a going concern opinion from our
independent auditors, which could negatively affect our business and results of operation.
After conducting an audit of the Companys consolidated financial statements for the fiscal year
ended March 31, 2007, our independent auditors issued an unqualified opinion on the financial
statements that included a material uncertainty related to our ability to continue as a going
concern due to recurring losses from operations, which could adversely impact our ability to raise
additional capital. The Companys ability to continue as a going concern is dependent upon its
ability to generate sufficient cash flow to meet its obligations on a timely basis. The Company has
raised additional cash through equity and debt financing and the sale of certain non-strategic
businesses during the first six months of fiscal 2008, but management anticipates that the Company
may require additional financing to fund operating activities during the remainder of the year. The
Companys new management team is exploring various alternatives for raising additional capital,
including potential divestitures of additional non-strategic businesses, seeking new debt or equity
financing, and pursuing joint venture arrangements. To the extent that these alternatives are
insufficient to fund operating activities over the next year, management anticipates raising
capital through offering equity securities in private or public offerings or through subordinated
debt. If the Company is unable to obtain additional funds when they are required or if the funds
cannot be obtained on terms favorable to the Company, management may be required to delay, scale
back or eliminate its current business strategy. Additionally, the Company must continue to satisfy
the listing standards of the American Stock Exchange. Although the Company has received no
notification of any adverse action, the American Stock Exchange, as a matter of policy, will
consider the suspension or delisting of any security when, in the opinion of the Exchange the
financial condition and/or operating results of the issuer appear to be unsatisfactory.
In connection with our evaluation of internal controls over financial reporting as required by
Section 404 under the Sarbanes-Oxley Act of 2002, we identified certain material weaknesses, which
could impact our ability to provide reliable and accurate financial reports and prevent fraud. We
could fail to meet our financial reporting responsibilities in future reporting periods if these
weaknesses are not remediated timely, or if any future failures by us to maintain adequate internal
controls over financial reporting result in additional material weaknesses.
Section 404 of the Sarbanes-Oxley Act of 2002 requires detailed review, documentation and testing
of our internal controls over financial reporting. This detailed review, documentation and testing
includes the assessment of the risks that could adversely affect the timely and accurate
preparation of our financial statements and the identification of internal controls that are
currently in place to mitigate the risks of untimely or inaccurate preparation of these financial
statements. The Company was required to comply with the requirements of Section 404 for the first
time in fiscal 2007. As part of this first-year review, management identified several control
deficiencies that represent material weaknesses at March 31, 2007. The Public Company Accounting Oversight Board has defined material
weakness as a significant deficiency or combination of significant deficiencies, that results in
more than a remote likelihood that a material misstatement of the annual or interim financial
statements will not be prevented or detected. Although the Company is implementing remedial
controls, if we fail to remedy these material weaknesses in a timely manner, or if we fail in the
future to maintain adequate internal controls over financial reporting which result in additional
material weaknesses, it could cause us to improperly record our financial and operating results and
could result in us failing to meet our financial reporting responsibilities in future reporting
periods.
We may not be able to secure the additional financing to fund operating activities through the end
of fiscal year 2008, which would raise substantial doubt about our ability to continue as a going
concern and would have a material adverse effect on our business and prospects.
Management anticipates that we may require additional financing to fund operating activities during
the remainder of fiscal 2008 as described under the section entitled Liquidity and Capital
Resources. The Companys new management team has developed a business plan that addresses
operations, the expectation of positive cash flow and alternatives for raising additional capital,
including potential divestitures of non-strategic businesses, restructuring existing short-term
indebtedness and/or seeking new debt or equity financing, and pursuing joint venture arrangements.
To the extent that restructuring existing short-term indebtedness, seeking new debt, restructuring
operations or selling non-strategic businesses are insufficient to fund operating activities over
the next year, management anticipates raising capital through offering equity securities in private
or public offerings or through subordinated debt. Our ability to secure additional financing in
this time period may be difficult due to our history of operating losses and negative cash flows,
and we cannot guarantee that such additional sources of financing will be available on acceptable
terms, if at all. An inability to raise sufficient capital to fund our operations would have a
material adverse affect on our business and would raise substantial doubt about our ability to
continue as a going concern, which would have a material adverse effect on our businesses and
prospects.
Our financial results could suffer as a result of a goodwill and/or intangible asset impairment
expense being recognized.
As of March 31, 2007, a goodwill impairment expense of $17,197,000 was recognized in the Durable
Medical Equipment segment and an additional customer relationships impairment expense of $1,457,000
was recognized in the Durable Medical Equipment segment, for total impairment expense in the
Durable Medical Equipment segment of $18,654,000. Depending on the Companys financial performance,
the carrying values of goodwill and other intangible assets could continue to be negatively
impacted. We will perform impairment tests periodically, and at least annually, in the future.
Whenever we perform impairment tests, the carrying value of goodwill or other intangible assets
could exceed their implied fair value and would, therefore, require adjustment. Such adjustment
would result in a non-cash charge to our operating income in that period, which could harm our
financial results.
Our financial results could suffer if the goodwill and other intangible assets we
acquired in our acquisition of PrairieStone Pharmacy, LLC become impaired, or as a result of costs
associated with the acquisition.
Primarily as a result of our acquisition of PrairieStone Pharmacy, LLC in February 2007,
approximately 56% of our total assets are goodwill and other intangibles as of September 30, 2007,
of which approximately $33.9 million is goodwill and $25.7 million is other intangibles. In
accordance with the Financial Accounting Standards Boards Statement No. 142, Goodwill and Other
Intangible Assets, goodwill is not amortized but is reviewed for impairment annually, or more
frequently if impairment indicators arise. Other intangibles are also reviewed at least annually or
more frequently, if certain conditions exist, and may be amortized. Management is contemplating
cost reduction initiatives that may result in the closure or sale of certain non-strategic
businesses. Depending upon the outcome of such initiatives, the carrying values of goodwill and
other intangible assets could be negatively impacted. When we perform impairment tests, the
carrying value of goodwill or other intangible assets could exceed its implied fair value and
would, therefore, require adjustment. Such adjustment would result in a charge to our operating
income in that period, which would likely harm our financial results. In addition, we believe that
we may incur charges to operations, which are not currently reasonably estimable, in subsequent
quarters after the acquisition was completed, to reflect costs associated with integrating
PrairieStone. It is possible that we will incur additional material charges in subsequent quarters
to reflect additional costs associated with the acquisition.
We have a history of operating losses and negative cash flow that may continue into the foreseeable
future.
We have a history of operating losses and negative cash flow. If we fail to execute our strategy to
achieve and maintain profitability in the future, investors could lose confidence in the value of
our common stock, which could cause our stock price to decline, adversely affect our ability to
raise additional capital, and could adversely affect our ability to meet the financial covenants
contained in our credit agreement with our financial institution. Further, if we continue to incur
operating losses and negative cash flow we may have to implement significant cost cutting measures,
which could include a substantial reduction in work force, location closures, and/or the sale or
disposition of certain subsidiaries. We cannot assure that any of the cost cutting measures we
implement will be effective or result in profitability or positive cash flow. Our acquisitions may
not create the benefits and results we expect, adversely affecting our strategy to achieve
profitability. To achieve profitability, we will also need to, among other things, effectively
integrate our acquisitions, increase our revenue base, reduce our cost structure and realize
economies of scale. If we are unable to achieve and maintain profitability, our stock price could
be materially adversely affected.
We may not be able to meet the financial covenants contained in our credit facility, and we may not
be able to obtain a waiver for such violations.
Under our existing credit facility, we are required to adhere to certain financial covenants. As of
March 31, 2007, the Company was not in compliance with certain covenants and received a waiver from
the lender. As of September 30, 2007, the Company was in compliance with these financial covenants.
If there are future covenant violations and we do not receive a waiver for such future covenant violations, then our lender
could declare a default under the credit facility and, among other actions, increase our borrowing
costs and demand the immediate repayment of the credit facility. If such demand is made and we are
unable to refinance the credit facility or obtain an alternative source of financing, such demand
for repayment would have a material adverse affect on our financial condition and liquidity. Based
on our history of operating losses, we cannot guarantee that we would be able to refinance or
obtain alternative financing.
In addition to the financial covenants, our existing credit facility with Comerica Bank includes a
subjective acceleration clause and requires the Company to maintain a lockbox. Currently, the
Company has the ability to control the funds in the deposit account and determine the amount issued
to pay down the line of credit balance. The bank reserves the right under the security agreement to
request that the indebtedness be on a remittance basis in the future, whether or not an event of
default has occurred. If the bank exercises this right, then the Company would be forced to use its
cash to pay down this indebtedness rather than for other needs, including day-to-day operations,
expansion initiatives or the pay down of debt which accrues at a higher interest rate.
The disposition of businesses that do not fit with our evolving strategy can be highly uncertain.
In September 2007, we sold our Florida and Colorado durable medical equipment businesses. We will
continue to evaluate the potential disposition of additional assets and businesses that are not
profitable or are no longer consistent with our strategic objectives. When we decide to sell assets
or a business, we may encounter difficulty in finding buyers or alternative exit strategies on
acceptable terms in a timely manner, which could delay the accomplishment of our strategic
objectives, or we may dispose of a business at a price or on terms which are less than we had
anticipated. There is also a risk that we sell a business whose subsequent performance exceeds our
expectations, in which case our decision would have potentially sacrificed enterprise value.
Conversely, we may be too optimistic about a particular businesss prospects, in which case we may
be unable to find a buyer at a price acceptable to us and, therefore, may have potentially
sacrificed enterprise value.
The Centers for Medicare and Medicaid Services (CMS) recently announced a competitive bidding
program related to durable medical equipment. The program will operate within the ten largest
metropolitan areas during 2008 and then be expanded to 70 additional areas in 2009. As a durable
medical equipment vendor, the competitive bidding program could result in loss of revenue due to
over-bidding by the Company and will increase the compliance costs.
Starting in 2007, Medicare is scheduled to begin to phase in a nationwide competitive bidding
program to replace the existing fee schedule payment methodology. The program is to begin in 10
high-population metropolitan statistical areas, or MSAs, expanding to 80 MSAs in 2009 and
additional areas thereafter. Under competitive bidding, suppliers compete for the right to provide
items to beneficiaries in a defined region. Only a limited number of suppliers will be selected in
any given MSA, resulting in restricted supplier choices for beneficiaries. The Medicare
Modernization Act of 2003 permits certain exemptions
from competitive bidding, including exemptions
for rural areas and areas with low population density within urban areas that are not competitive, unless there is a
significant national market through mail-order for the particular item. On April 24, 2006, CMS
issued proposed regulations regarding the implementation of competitive bidding. The proposed
regulations include, among other things, proposals regarding how CMS will determine in which MSAs
to initiate the program, conditions to be met for awarding contracts, and the grandfathering of
existing oxygen and other HME agreements with beneficiaries if a supplier is not selected. The
proposed regulations also would revise the methodology CMS would use to price new products not
included in competitive bidding. The proposed regulations do not provide many of the details needed
to assess the impact that competitive bidding and other elements of the rule will have on our
business. Until the regulations are finalized, significant uncertainty remains as to how the
competitive bidding program will be implemented. At this time, we do not know which of our products
will be subject to competitive bidding, nor can we predict the impact that it will have on our
business.
Several anti-takeover measures under Nevada law could delay or prevent a change of our control,
despite such change of control being in the best interest of the holders of our shares of Common
Stock.
Several anti-takeover measures under Nevada law could delay or prevent a change of our control,
despite such change of control being in the best interest of the holders of our shares of Common
Stock. This could make it more difficult or discourage an attempt to obtain control of us by means
of a merger, tender offer, proxy contest or otherwise. This could negatively impact the value of an
investment in our Company, by discouraging a potential suitor who may otherwise be willing to offer
a premium for shares of the Companys common stock.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
See Item 5. below.
Item 4. Submission of Matters to a Vote of Security Holders.
The voting results with respect to the election of directors at the annual meeting of shareholders,
held on September 7, 2007, required to be disclosed by this Item were previously disclosed in the
Companys Current Report on Form 8-K filed on September 10, 2007 and such information is
incorporated herein by reference.
Item 5. Other Information.
On November 7, 2007, the Companys Board of Directors amended Article VII of the Companys Amended
and Restated Bylaws to explicitly authorize the Company to evidence shares of its stock by
registration in uncertificated form, to facilitate the Companys eligibility for a direct
registration system. The American Stock Exchange requires all listed companies to be eligible,
beginning January 1, 2008, for a direct registration system operated by a securities depository.
The Bylaws of the Company, as restated to incorporate the amendment made on November 7, 2007, is attached as an Exhibit 3.2 and
incorporated by this reference.
On November 7, 2007, the Company agreed to issue to 15,000 shares of its common stock, valued at
$21,000, to an independent contractor in satisfaction of certain contractual criteria being met.
The issuance of Company shares of common stock is exempt from registration pursuant to Section 4(2)
of the Securities Act of 1933, as not involving a public offering. The 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 Companys counsel that registration is not required under the
Securities Act of 1933.
On November 7, 2007, the Company Board of Directors amended and restated the Code of Ethics and
Conduct which applies to all employees, officers and directors of the Company. The amendments
incorporate the text of the Companys existing policies on the trading of the Companys securities
by employees, officers and directors, and clarify the language describing the requirements of the
Companys existing policies with respect to the disclosure, use and non-disclosure of Company
confidential information and authority to speak publicly for the Company.
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.
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November 9, 2007
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By:
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/s/ Marvin R. Richardson
Marvin R. Richardson
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Chief Executive Officer |
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(Principal Executive Officer) and
Director |
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November 9, 2007
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By:
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/s/ Lynn K. Fetterman |
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Lynn K. Fetterman |
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Interim Chief Financial Officer |
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(Principal Financial and
Accounting Officer) |
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EXHIBIT INDEX
The following documents are filed as part of this report. Exhibits not required for this report
have been omitted. Arcadia Resources Commission file number is 000-31249.
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Exhibit |
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No. |
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Exhibit Description |
3.2
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Amended and Restated Bylaws of Arcadia Resources, Inc. (November 7, 2007). |
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10.1
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Employment Agreement between Arcadia Resources, Inc. and Steven L. Zeller dated September 24, 2007 |
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10.2
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Employment Agreement between Arcadia Resources, Inc. and Michelle M. Molin dated October 22, 2007 |
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10.3
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Escrow Release Agreement relating to the sale of the Florida
Durable Medical Equipment Division of Arcadia Resources, Inc. dated July 19, 2007. |
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31.1
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Certification of the Chief Executive Officer required by rule 13a 14(a) or rule 15d 14(a). |
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31.2
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Certification of the Principal Accounting and Financial Officer required by rule 13a 14(a) or rule 15d 14(a). |
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32.1
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Chief Executive Officer Certification Pursuant to 18 U.S.C. §1350, as Adopted Pursuant to
§206 of the Sarbanes Oxley Act of 2002. |
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32.2
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Principal Accounting and Financial Officer Certification Pursuant to 18 U.S.C. §1350, as
Adopted Pursuant to §206 of the Sarbanes Oxley Act of 2002. |
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99.1
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Current Report on Form 8-K filed previously filed with the Securities and Exchange
Commission on September 10, 2007 (file no. 0001071941) |