UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2010

OR

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

For the Transition period from                      to                     

Commission file number 001-32935

ARCADIA RESOURCES, INC.

(Exact name of registrant as specified in its charter)

NEVADA		88-0331369
(State or other jurisdiction of Incorporation)		(I.R.S. Employer Identification Number)
9320 PRIORITY WAY WEST DRIVE
INDIANAPOLIS, INDIANA		46240
(Address of principal executive offices)		(Zip Code)

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

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES o NO o

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, non-accelerated filer or a smaller reporting company (as defined in Exchange Act Rule 12b-2).

Large Accelerated filer o		Accelerated filer þ		Non-accelerated filer o		Smaller Reporting Company 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 8, 2010, 193,053,000 shares of common stock, $0.001 par value, of the Registrant were outstanding.

 

 

Table of Contents

		Page
		No.
Part I: Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 2010 (unaudited) and March 31, 2010			2
Condensed Consolidated Statements of Operations for the Three and Six Months ended September 30, 2010 and 2009 (unaudited)			3
Condensed Consolidated Statement of Stockholders’ Deficit for the Six Months ended September 30, 2010 (unaudited)			4
Condensed Consolidated Statements of Cash Flows for the Six Months ended September 30, 2010 and 2009 (unaudited)			5
Notes to the Condensed Consolidated Financial Statements (unaudited)			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			22
Item 3. Quantitative and Qualitative Disclosures About Market Risk			41
Item 4. Controls and Procedures			41
Part II: Other Information
Item 1. Legal Proceedings			41
Item 1A. Risk Factors			41
Item 6. Exhibits			51
Signatures			52
EXHIBIT INDEX			53
EX-10.1 (AMENDMENT DATED OCTOBER 31, 2010 TO THE AMENDED AND RESTATED CREDIT AGREEMENT BY AND AMONG ARCADIA SERVICES, INC., ARCADIA HEALTH SERVICES, INC., GRAYROSE, INC., ARCADIA HEALTH SERVICES OF
EX-10.2 (AMENDMENT DATED OCTOBER 31, 2010 TO THE COMERICA REVOLVING CREDIT NOTE DATED JULY 13, 2009)
EX-31.1 (CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002.)
EX-31.2 (CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002.)
EX-32.1 (CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350)
EX-32.2 (CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350)

PART I. — FINANCIAL INFORMATION

Item 1. Financial Statements

ARCADIA RESOURCES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

		September 30,				March 31,
		2010				2010
		(unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	1,704			$	5,444
Accounts receivable, net of allowance of $2,309 and $2,623, respectively			12,184				12,290
Inventories, net			1,357				917
Prepaid expenses and other current assets			1,995				1,551
Current assets of discontinued operations			155				174
Total current assets			17,395				20,376
Property and equipment, net			1,801				1,738
Goodwill			2,500				2,500
Acquired intangible assets, net			7,384				7,670
Other assets			426				412
Restricted cash			500				500
Total assets		$	30,006			$	33,196
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable		$	1,836			$	2,859
Accrued expenses:
Compensation and related taxes			2,629				3,184
Interest			38				82
Health insurance			507				463
Other			1,539				1,507
Fair value of warrant liability			1,635				1,499
Payable to affiliated agencies			502				1,076
Long-term obligations, current portion			189				939
Capital lease obligations, current portion			43				69
Current liabilities of discontinued operations			117				308
Total current liabilities			9,035				11,986
Lines of credit			12,186				7,774
Long-term obligations, less current portion			26,471				25,192
Capital lease obligations, less current portion			12				19
Total liabilities			47,704				44,971
Commitments and contingencies
STOCKHOLDERS’ DEFICIT
Preferred stock, $.001 par value, 5,000,000 shares authorized, none outstanding			—				—
Common stock, $.001 par value, 300,000,000 shares authorized; 177,428,044 shares and 177,918,044 shares issued, respectively			177				178
Additional paid-in capital			146,396				145,381
Accumulated deficit			(164,271	)			(157,334	)
Total stockholders’ deficit			(17,698	)			(11,775	)
Total liabilities and stockholders’ deficit		$	30,006			$	33,196

See accompanying notes to these consolidated financial statements.

ARCADIA RESOURCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

		Three Month Period Ended								Six Month Period Ended
		September 30,								September 30,
		(Unaudited)								(Unaudited)
		2010				2009				2010				2009
Services		$	20,931			$	21,709			$	41,295			$	44,389
Pharmacy			4,911				3,408				9,965				6,625
Revenues, net			25,842				25,117				51,260				51,014
Cost of revenues			18,797				17,923				37,453				36,549
Gross profit			7,045				7,194				13,807				14,465
Selling, general and administrative			9,581				9,878				19,315				19,329
Depreciation and amortization			326				531				634				942
Total operating expenses			9,907				10,409				19,949				20,271
Operating loss			(2,862	)			(3,215	)			(6,142	)			(5,806	)
Other expenses:
Interest expense, net			980				846				1,823				1,684
Change in fair value of warrant liability			(779	)			—				(137	)			—
Other			—				(6	)			—				30
Total other expenses			201				840				1,686				1,714
Loss from continuing operations before income taxes			(3,063	)			(4,055	)			(7,828	)			(7,520	)
Income tax expense			40				7				73				100
Loss from continuing operations			(3,103	)			(4,062	)			(7,901	)			(7,620	)
Discontinued operations:
Loss from discontinued operations			(52	)			(248	)			(82	)			(1,477	)
Net gain on disposal			259				163				1,046				379
			207				(85	)			964				(1,098	)
NET LOSS		$	(2,896	)		$	(4,147	)		$	(6,937	)		$	(8,718	)
Weighted average number of common shares outstanding			177,295				161,201				177,267				160,709
Basic and diluted net loss per share:
Loss from continuing operations		$	(0.02	)		$	(0.03	)		$	(0.04	)		$	(0.05	)
Income (loss) from discontinued operations			—				—				—				—
Net loss per share		$	(0.02	)		$	(0.03	)		$	(0.04	)		$	(0.05	)

See accompanying notes to these condensed consolidated financial statements.

ARCADIA RESOURCES, INC.

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIT

(Unaudited)

										Additional								Total
		Common Stock								Paid-In				Accumulated				Stockholders’
		Shares				Amount				Capital				Deficit				Deficit
Balance, April 1, 2010			177,918,044			$	178			$	145,381			$	(157,334	)		$	(11,775	)
Stock-based compensation expense			106,250				—				753				—				753
Issuance of warrants in conjunction with debt financing			—				—				260				—				260
Exercise of stock options			3,750				—				1				—				1
Cancellation of shares held in escrow			(600,000	)			(1	)			1				—				—
Net loss for the period			—				—				—				(6,937	)			(6,937	)
Balance, September 30, 2010			177,428,044			$	177			$	146,396			$	(164,271	)		$	(17,698	)

See accompanying notes to these condensed consolidated financial statements.

ARCADIA RESOURCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

		Six-Month Period Ended
		September 30,
		(Unaudited)
		2010				2009
Operating activities
Net loss for the period		$	(6,937	)		$	(8,718	)
Adjustments to reconcile net loss to net cash used in operating activities:
Provision for doubtful accounts			351				1,155
Depreciation of property and equipment			348				912
Amortization of intangible assets			286				405
Gain on business disposals			(1,046	)			(379	)
Non-cash interest expense			1,392				1,224
Amortization of deferred financing costs and debt discounts			190				121
Stock-based compensation expense			753				551
Change in fair value of warrant liability			(137	)			—
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable			(260	)			2,440
Inventories			(437	)			904
Other assets			(413	)			821
Accounts payable			(1,274	)			(1,449	)
Accrued expenses			(536	)			(957	)
Due to affiliated agencies			(564	)			(277	)
Net cash used in operating activities			(8,284	)			(3,247	)
Investing activities
Business acquisitions, net of cash acquired			(106	)			(196	)
Proceeds from business disposal			1,046				9,320
Increase in restricted cash			—				(500	)
Purchases of property and equipment			(411	)			(96	)
Net cash provided by investing activities			529				8,528
Financing activities
Lines of credit, net activity			4,798				(4,610	)
Proceeds from note payable, net of fees			—				2,141
Payments on notes payable and capital lease obligations			(784	)			(4,334	)
Proceeds from exercise of stock options			1				—
Net cash provided by (used in) financing activities			4,015				(6,803	)
Net change in cash and cash equivalents			(3,740	)			(1,522	)
Cash and cash equivalents, beginning of period			5,444				1,522
Cash and cash equivalents, end of period		$	1,704			$	—
Supplementary information:
Cash paid during the period for:
Interest		$	247			$	322
Income taxes			73				100
Non-cash investing / financing activities:
Capital lease			—				70
Accounts payable converted to notes payable			—				750
Accrued interest converted to notes payable			1,392				1,224

See accompanying notes to these consolidated financial statements.

ARCADIA RESOURCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 1 — Description of Company and Significant Accounting Policies

Description of Company

Arcadia Resources, Inc., a Nevada corporation, together with its wholly-owned subsidiaries (the “Company”), is a national provider of home care, medical staffing and pharmacy services operating under the service mark Arcadia HealthCare. In May and June 2009, the Company disposed of its Home Health Equipment (“HHE”), retail pharmacy software and industrial staffing businesses. In October 2010, the Company disposed of its home-health oriented mail-order catalog and website business (“Catalog”). Subsequent to these divestitures, the Company operates in two reportable business segments: Home Care/Medical Staffing Services (“Services”) and Pharmacy. The Company’s corporate headquarters are located in Indianapolis, Indiana. The Company conducts its business from approximately 65 facilities located in 18 states. The Company operates pharmacies in Indiana, California and Minnesota and has customer service centers in Michigan and Indiana.

Unaudited Interim Financial Information

The accompanying consolidated balance sheet as of September 30, 2010, the consolidated statements of operations for the three-month and six-month periods ended September 30, 2010 and 2009, the consolidated statements of cash flows for the six-month periods ended September 30, 2010 and 2009 and the consolidated statement of stockholders’ deficit for the six-month period ended September 30, 2010 are unaudited but include all adjustments (consisting of normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of our financial position at such dates and the results of operations and cash flows for the periods then ended, in conformity with accounting principles generally accepted in the United States (“GAAP”). The consolidated balance sheet as of March 31, 2010 has been derived from the audited consolidated financial statements at that date but, in accordance with the rules and regulations of the United States Securities and Exchange Commission (“SEC”), does not include all of the information and notes required by GAAP for complete financial statements. Operating results for the three-month and six-month periods ended September 30, 2010 are not necessarily indicative of results that may be expected for the entire fiscal year. The financial statements should be read in conjunction with the financial statements and notes for the fiscal year ended March 31, 2010 included in the Company’s Form 10-K filed with the SEC on June 11, 2010.

Reclassifications

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

Recent Accounting Pronouncements

In June 2009, the FASB issued new guidance which improves and defines the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets. This new guidance is effective for financial statements issued for fiscal years beginning after November 15, 2009. The implementation of this guidance did not have a material impact on the Company’s consolidated financial statements.

In June 2009, the FASB issued new guidance which improves financial reporting by enterprises involved with variable interest entities. The new guidance is effective for financial statements issued for fiscal years beginning after November 15, 2009. Adoption did not have a material impact on the Company’s consolidated financial statements.

In October 2009, the FASB issued new guidance which addresses the unit of accounting for arrangements involving multiple deliverables and addresses how arrangement consideration should be allocated to the separate units of accounting. Entities also will no longer be permitted to use the residual method to allocate arrangement consideration to deliverables in an arrangement and rather requires consideration to be allocated to each unit of account based on a relative selling price method. The new guidance is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010 and is not expected to have a material impact on the Company’s consolidated financial statements.

In December 2009, the FASB issued revised authoritative guidance associated with the consolidation of variable interest entities. This revised guidance replaces the current quantitative-based assessment for determining which enterprise has a controlling interest in a variable interest entity with an approach that is now primarily qualitative. This qualitative approach focuses on identifying the enterprise that has (i) the power to direct the activities of the variable interest entity that can most significantly impact the entity’s economic performance; and (ii) the obligation to absorb losses or the right to receive benefits from the entity that could potentially be significant to the variable interest entity. This revised guidance also requires an ongoing assessment of whether an enterprise is the primary beneficiary of a variable interest entity rather than a reassessment only upon the occurrence of specific events. The revised guidance is effective for financial statements issued for fiscal years beginning after November 15, 2009. The implementation of this guidance did not have a material impact on the Company’s consolidated financial statements.

Note 2 — Discontinued Operations

Catalog Operations

On October 1, 2010, the Company completed the sale of its ownership interest in Rite at Home Health Care Products, LLC to Home Health Depot, Inc. The Company is to receive 50% of future earnings of the business until total payments equal $375,000. 40% of these proceeds are to be paid to a third party. No earn-out payments will be payable after the quarter ending September 30, 2013. This entity represented the Company’s Catalog segment.

HHE Operations

On May 18, 2009, the Company completed the sale of its ownership interest in Lovell Medical Supply, Inc., Beacon Respiratory Services of Georgia, Inc., and Trinity Healthcare of Winston-Salem, Inc. to Aerocare Holdings, Inc. for total proceeds of $4,750,000, less fees of $150,000. At the time of closing, $475,000 of the purchase price was held by the buyer to cover the Company’s contingent obligations. During fiscal 2010, the buyer released $267,000 of this amount. In May 2010, the Company received the final payment of $155,000. These payments were recognized as additional gain on the sale during the periods in which they were received. A total of $53,000 was retained by the buyer to cover certain obligations of the Company. The entities sold represented the Southeast region of the Company’s HHE business.

On May 19, 2009, the Company entered into an Asset Purchase Agreement with Braden Partners, L.P. to sell the assets of its Midwest region of the Company’s HHE business. Total proceeds were $4,000,000, less fees of $150,000. $1,000,000 of the purchase price was held by the buyer to cover the Company’s contingent obligations. The Company retained all accounts receivable for services provided prior to May 2009. Subsequent to the transaction date, the buyer made certain claims, and in June 2010, the buyer and the Company received a final settlement payment of $500,000 to resolve these claims. This payment was recognized as an additional gain on the sale during the six-month period ended September 30, 2010.

As of May 2009, the Company had sold all of its HHE operations.

Pharmacy Operations

On June 11, 2009, the Company entered into an Asset Purchase Agreement with a leading pharmacy management company to sell substantially all of the assets of JASCORP, LLC (“JASCORP”) for proceeds of $2,200,000, less fees of $185,000. $220,000 of the purchase price is being held back by the buyer until December 2010 in order to cover the Company’s contingent obligations. JASCORP operated the retail pharmacy software business that the Company acquired in July 2007.

Industrial Staffing Operations

On May 29, 2009, the Company finalized the sale of substantially all of the assets of its industrial and non-medical staffing business for cash proceeds of $250,000, which was paid in five equal installments through September 2009. Additionally, the Company is to receive 50% of the future earnings of the business until the total payments equal $1,600,000. During fiscal 2010, the Company received $72,000 in earn out payments. The Company received additional payments of $132,000 and $259,000 in May and August 2010, respectfully. These payments were recorded as additional gain on the sale transaction. The Company retained all accounts receivable for services provided prior to May 29, 2009.

The assets and liabilities associated with these discontinued business operations have been classified as assets and liabilities of discontinued operations in the accompanying consolidated balance sheets. The results of the above are reported in discontinued operations in the accompanying consolidated statements of operations, and the prior period consolidated statement of operations have been recast to conform to this presentation. The segment results in Note 12 also reflect the reclassification of the discontinued operations. The discontinued operations do not reflect the costs of certain services provided to these operations by the Company. Such costs, which were not allocated by the Company to the various operations, included internal employee costs associated with administrative functions, including accounting, information technology, human resources, compliance and contracting as well as external costs for legal fees, insurance, audit fees, payroll processing, and various public-company expenses. The Company uses a centralized approach to cash management and financing of its operations, and, accordingly, debt and the related interest expense were also not allocated specifically to these operations. The consolidated statements of cash flows do not separately report the cash flows of the discontinued operations.

The components of the assets and liabilities of the discontinued Catalog segment operations are presented below (in thousands):

		September 30, 2010				March 31, 2010
Assets
Accounts receivable, net of allowance of $4		$	90			$	76
Inventory			15				17
Prepaid expenses and other current assets			50				81
Total current assets of discontinued operations		$	155			$	174
Liabilities
Accounts payable		$	99			$	301
Accrued compensation and related taxes			17				6
Accrued other			1				1
Total current liabilities of discontinued operations		$	117			$	308

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

		Three Month Period Ended								Six Month Period Ended
		September 30,								September 30,
		2010				2009				2010				2009
Revenues, net:
Services — Industrial Staffing		$	—			$	—			$	—			$	1,223
Catalog			324				499				660				1,009
Home Health Equipment			—				—				—				1,423
Pharmacy — Software			—				—				—				348
		$	324			$	499			$	660			$	4,003
Loss from operations:
Services — Industrial Staffing		$	—			$	(8	)		$	—			$	(44	)
Catalog			(52	)			7				(82	)			(31	)
Home Health Equipment			—				(189	)			—				(1,228	)
Pharmacy — Software			—				(58	)			—				(174	)
		$	(52	)		$	(248	)		$	(82	)		$	(1,477	)
Gain (loss) on disposal:
Services — Industrial Staffing		$	259			$	3			$	391			$	129
Home Health Equipment			—				160				655				280
Pharmacy — Software			—				—				—				(30	)
		$	259			$	163			$	1,046			$	379
Earnings (loss) from discontinued operations:
Services — Industrial Staffing		$	259			$	(5	)		$	391			$	85
Catalog			(52	)			7				(82	)			(31	)
Home Health Equipment			—				(29	)			655				(948	)
Pharmacy — Software			—				(58	)			—				(204	)
		$	207			$	(85	)		$	964			$	(1,098	)

Note 3 — Fair Value

Effective April 1, 2008, the Company adopted accounting guidance that established a framework for measuring fair value and expanded disclosures about fair value measurements. Fair value is an exit price, representing the amount that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants. Fair value is to be determined based on assumptions that market participants would use in pricing an asset or liability. Current authoritative accounting guidance uses a three-tier hierarchy that classifies assets and liabilities based on the inputs used in the valuation methodologies. In accordance with this guidance, the Company measures its warrant liability at fair value. Management classified these as level 3 liabilities, as they are based on unobservable inputs and involve management judgement.

The following table presents a reconciliation of warrant liabilities measured at fair value on a recurring basis at September 30, 2010 (in thousands):

		Fair Value
		Measurements
		Using Significant
		Unobservable
		Inputs (Level 3)
		Warrant Liability
Balance at April 1, 2009		$	—
Warrants issued			2,478
Decrease in market value			(979	)
Balance at March 31, 2010			1,499
Warrants issued			273
Decrease in market value			(137	)
Balance at September 30, 2010		$	1,635

Note 4 — Goodwill and Acquired Intangible Assets

The following table presents the detail of the changes in goodwill by segment for the periods ended September 30 and March 31, 2010, respectfully (in thousands):

		Services				Pharmacy				Total
Goodwill at March 31, 2009		$	14,553			$	2,500			$	17,053
Acquisitions during the year			46				—				46
Impairment expense			(14,599	)			—				(14,599	)
Goodwill at September 30 and March 31, 2010		$	—			$	2,500			$	2,500

For tax purposes goodwill of approximately $16.4 million is amortizable over 15 years while the remainder of the Company’s goodwill is not amortizable for tax purposes as the acquisitions related to the purchase of common stock rather than of assets or net assets.

Impairment Expense

In accordance with our policy, the Company performs its annual impairment review during the fiscal fourth quarter. As of the end of fiscal year 2010, the Company recognized $14,599,000 of goodwill impairment relating to the Services segment. Subsequent to this charge, there is no remaining goodwill associated with the Services segment. As of the end of fiscal year 2009, the Company recognized $13,217,000 of goodwill impairment relating to the Pharmacy segment. Subsequent to the impairment charge, the Pharmacy segment has $2,500,000 of remaining goodwill. Prior to fiscal 2009, the Company had not previously recognized any goodwill impairment expense for continuing operations.

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

		September 30, 2010								March 31, 2010
						Accumulated								Accumulated
		Cost				Amortization				Cost				Amortization
Trade name		$	6,664			$	931			$	6,664			$	847
Customer relationships			4,720				3,069				4,720				2,867
			11,384			$	4,000				11,384			$	3,714
Less accumulated amortization			(4,000	)							(3,714	)
Net acquired intangible assets		$	7,384							$	7,670

Amortization expense for acquired intangible assets included in continuing operations was $143,000 and $159,000 for the three-month periods ended September 30, 2010 and 2009, respectively, and $286,000 and $318,000 for the six-month periods ending September 30, 2010 and 2009, respectively.

The estimated amortization expense related to acquired intangible assets in existence as of September 30, 2010 is as follows (in thousands):

Remainder of fiscal 2011		$	286
Fiscal 2012			518
Fiscal 2013			476
Fiscal 2014			382
Fiscal 2015			350
Thereafter			5,372
Total		$	7,384

Note 5 — Lines of Credit

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

						At September 30, 2010
						Maximum
						Available								March 31,
Lending Institution		Maturity date				Borrowing				Balance				2010				Interest rate
Comerica Bank		April 1, 2012				$	8,881			$	8,072			$	7,774			Prime plus 2.75%
H.D. Smith		April 23, 2013					4,613				4,613				—				7	%
Total lines of credit obligations						$	13,494				12,685				7,774
H.D. Smith debt discount											(499	)			—
										$	12,186			$	7,774

Comerica Bank

Arcadia Services, Inc. (“ASI”), a wholly-owned subsidiary of the Company, and three of ASI’s wholly-owned subsidiaries have an outstanding line of credit agreement with Comerica Bank. As of September 30, 2010, advances under the line of credit agreement cannot exceed the revolving credit commitment amount of $14 million or the aggregate principal amount of indebtedness permitted under the advance formula amount at any one time. The advance formula base is 85% of the eligible accounts receivable, plus the lesser of 85% of eligible unbilled accounts or $3,000,000. The line of credit agreement contains a subjective acceleration clause and requires the Company to maintain a lockbox. However, the Company has the ability to control the funds in the deposit account and to determine the amount used to pay down the line of credit balance. As such, the line of credit is not automatically classified as a current obligation in the consolidated balance sheets. Arcadia Services, Inc. agreed to various financial covenant ratios (as described below), to have any person who acquires Arcadia Services, Inc.’s capital stock to pledge such stock to Comerica Bank, and to customary negative covenants. The line of credit agreement also requires the Company to maintain a deposit account with a minimum balance, and this amount is classified as restricted cash on the Company’s consolidated balance sheet. If an event of default occurs, Comerica Bank may, at its option, accelerate the maturity of the debt and exercise its right to foreclose on the issued and outstanding capital stock of Arcadia Services, Inc. and on all of the assets of Arcadia Services, Inc. and its subsidiaries. On September 30, 2010, the interest rate on this line of credit agreement was the bank’s prime rate plus 2.75% (6.0%), and the availability under the line was $809,000.

RKDA, Inc. (“RKDA”), a wholly-owned subsidiary of the Company and the holding company of Arcadia Services, Inc. and Arcadia Products, Inc., granted Comerica Bank a first priority security interest in all of the issued and outstanding capital stock of Arcadia Services, Inc. Arcadia Services, Inc. granted Comerica Bank a first priority security interest in all of its assets. The subsidiaries of Arcadia Services, Inc. granted the bank security interests in all of their assets. RDKA is restricted from paying dividends to the Company. RKDA executed a guaranty to Comerica Bank for all indebtedness of Arcadia Services, Inc. and its subsidiaries. Any such default and resulting foreclosure would have a material adverse effect on the Company’s financial condition.

On October 31, 2010, the Company and the bank entered into an amendment and waiver agreement. The amendment reduced the revolving credit commitment amount from $14 million to $11 million and extended the maturity date to April 1, 2012. As of September 30, 2010, the Company was not in compliance with two financial covenants. The amendment waived these covenant violations and established new covenant requirements. Specifically, subsequent to this amendment, the following financial covenants apply: tangible effective net worth of $750,000 as of December 31, 2010 and gradually increasing on a quarterly basis to $1.25 million by March 31, 2012; minimum quarterly net income of $400,000; and, minimum subordination of indebtedness to Arcadia Resources, Inc. of $9.15 million. Finally, the amendment increased the required restricted cash balance from $500,000 to $1 million.

H.D. Smith Wholesale Drug Co.

On April 23, 2010, the Company executed a Line of Credit and Security Agreement with H.D. Smith Wholesale Drug Co. (“H.D. Smith”), its new primary supplier of pharmaceutical products. Under terms of the agreement, the Company can borrow up to $5,000,000, including amounts payable under normal product purchasing terms. Beginning April 1, 2011, additional borrowings under the agreement will be limited based upon a borrowing base of the assets of the Pharmacy business. The debt accrues interest at the greater of 7% and the prime rate plus 3%, and it matures on April 23, 2013. Interest during the first 12 months of the agreement will be capitalized and then interest only payments are required from May 2011 through April 2012. Beginning with May 2012, the Company will make monthly payments of $75,000 plus interest. Borrowing may be prepaid at any time without penalty. The agreement includes certain financial covenants beginning in fiscal 2012. As of September 30, 2010, the availability under the line was immaterial.

In conjunction with the credit agreement, the Company issued H.D. Smith certain warrants to purchase common stock (see “Note 7 — Stockholders’ Deficit” for more details) and incurred certain professional fees. These costs, which originally totaled $561,000, were recorded as a debt discount and will be amortized over the term of the debt agreement.

Note 6 — Long-Term Obligations

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

		September 30,				March 31,
		2010				2010
Note payable to JANA Master Fund, Ltd. (“JANA”) in the original amount of $18.0 million, dated March 25, 2009 bearing an effective interest rate of 10% with unpaid accrued interest and principal due in full on April 1, 2012. Cash interest that would otherwise be payable on such quarterly interest payment dates may be added to the principal balance of the note payable at the Company’s option. The note payable is unsecured.		$	18,473			$	17,581
Note payable to Vicis Capital Master Fund (“Vicis”) in the original amount of $7.8 million, dated March 25, 2009 bearing an effective interest rate of 10% with unpaid accrued interest and principal due in full on April 1, 2012. Cash interest that would otherwise be payable on such quarterly interest payment dates may be added to the principal balance of the note payable at the Company’s option. The note payable is unsecured.			6,836				6,505
Note payable to LSP Partners, LP (“LSP”) in the amount of $1.0 million, dated March 25, 2009 bearing an effective interest rate of 10% with unpaid accrued interest and principal due in full on April 1, 2012. Cash interest that would otherwise be payable on such quarterly interest payment dates may be added to the principal balance of the note payable at the Company’s option. The note payable is unsecured.			1,162				1,106
Payable due to AmerisourceBergen Drug Corporation consistent with the terms of an amendment to a line of credit agreement dated June 10, 2009 bearing an effective interest rate of 8.0%. The unpaid accrued interest and principal was paid in full in April 2010. The debt was secured by the assets of the Pharmacy segment.			—				750
Other			189				189
Total long-term obligations			26,660				26,131
Less current portion of long-term obligations			(189	)			(939	)
Long-term obligations, less current portion		$	26,471			$	25,192

The promissory notes due to JANA, Vicis, and LSP include covenants relating to, among other items, limitations of additional indebtedness, issuance of new equity securities and the application of proceeds from future asset sales. Specifically, the notes provide that the first $2,000,000 in proceeds would be retained by the Company. Additional proceeds are then paid to JANA, Vicis and LSP as provided in the promissory notes. After these promissory note prepayments are made, proceeds up to $20,000,000 are split 50% to the Company and 50% to be paid pro-rata to these three lenders. Thereafter, proceeds are split 25% to the Company and 75% to the lenders. As of September 30, 2010, the Company owes these lenders $800,000 before additional proceeds are split between the Company and the lenders.

As of September 30, 2010 future maturities of long-term obligations are as follows (in thousands):

Remainder of fiscal 2011		$	189
Fiscal 2012			—
Fiscal 2013			26,471
Total		$	26,660

The weighted average interest rate of outstanding long-term obligations as of September 30 and March 31, 2010 was 10.0%.

Note 7 — Stockholders’ Deficit

General

On October 14, 2009, the Company’s shareholders approved an amendment to the Company’s Articles of Incorporation to increase the number of authorized shares of the Company’s common stock to 300,000,000, $0.001 par value per share, from 200,000,000, $0.001 par value per share.

Warrants

The following represents warrants outstanding:

								September 30,				March 31,
Exercise Price				Granted		Expiration		2010				2010
$	0.40			April 2010		April 2015			500,000				—
$	0.41			April 2009		April 2014			52,800				52,800
$	0.50			various		May 2011			2,301,774				2,301,774
$	0.50			May 2004		March 2014			1,070,796				1,070,796
$	0.75			June 2008		June 2015			490,000				490,000
$	0.95			November 2009		May 2015			7,135,713				7,135,713
$	2.25			September 2005		September 2010			44,444				44,444
									11,595,527				11,095,527

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

The 7,135,713 warrants issued in November 2009 in conjunction with the equity financing transaction did not meet all of the criteria for equity classification. As a result, on November 17, 2009, the Company recorded the warrants in accordance with ASC Topic 815-40, “Derivatives and Hedging”, as a warrant liability at its then fair value of $2,478,000. The Company will mark the warrant liability to market at the end of each period until the Company complies with the requirements of equity classification of the warrant, at which time the warrant liability will be reclassified to equity. For the three-month and six-month periods ended September 30, 2010, the Company recorded $642,000 and $0, respectively, of other income, and these amounts represent the change in the fair value of the warrant liability during these periods.

The fair value of warrant liability was calculated under the Black-Scholes pricing model using the Company’s stock price on the date of the warrant grant, the warrant exercise price, the Company’s expected volatility, and the risk free interest rate matched to the warrants’ expected life. The Company does not anticipate paying dividends during the term of the warrants. The Company uses historical data to estimate volatility assumptions used in the valuation model. The expected term of warrants is equal to the contract life. The risk-free rate for periods within the contractual life of the warrant is based on the U.S. Treasury yield curve in effect at the time of grant.

The specific assumptions used to determine the fair value of the warrants are as follows:

Weighted-average		November 17, 2009				September 30, 2010
Expected volatility			86	%			90	%
Expected dividend yields			0	%			0	%
Expected terms (in years)			5.5				4.6
Risk-free interest rate			2.19	%			1.27	%

During the six-month period ending September 30, 2010, no warrants were exercised. During the six-month period ended September 30, 2009, the Company accounted for 22,489 shares of common stock forfeited to the Company as part of the cashless exercise of 8,545,833 warrants in March 2009.

On April 23, 2010 and in conjunction with the H.D. Smith line of credit agreement (see “Note 5 — Lines of Credit”), the Company granted H. D. Smith 500,000 warrants to purchase common stock at an exercise price of $0.40 per share. The warrants expire on April 23, 2015. The Company also granted H.D. Smith up to an additional 500,000 warrants to purchase common stock. These warrants vest on March 31, 2011 if the value of the Pharmacy segment’s borrowing base does not exceed certain thresholds. The number of warrants that vest depends on the computed borrowing base amount as of March 31, 2011. The exercise price will be the lower of $0.40 or the preceding 10-day average of the closing prices per shares on March 31, 2011. The warrants have a 5-year life. Because these warrants have not vested and the terms have not been finalized, they are excluded from the above table.

The fair value of the initial 500,000 warrants issued to H.D. Smith was estimated using the Black-Scholes pricing model and was determined to be $260,000. This was recorded as a debt discount and will be amortized over the term of the H.D. Smith line of credit. The assumptions used in the fair value calculation were as follows: risk free interest rate of 2.6%, expected dividend yield of 0%, expected volatility of 86%, and expected life of 5 years.

The fair value of the 500,000 warrants issued to H.D. Smith that potentially vest on March 31, 2011 was estimated using the Black-Scholes pricing model and was determined to be $273,000. This was recorded as a debt discount and will be amortized over the term of the H.D. Smith line of credit. The assumptions used in the fair value calculation were as follows: risk free interest rate of 3.0%, expected dividend yield of 0%, expected volatility of 87%, and expected life of 6 years. Because the vesting of these warrants is contingent on a future event, the fair value of the warrants is classified as a liability until they vest, at which time they will be reclassified to permanent equity assuming all criteria for equity treatment are met at that point in time. The fair value of this liability is adjusted on a quarterly basis. For the three-month and six-month periods ended September 30, 2010, the Company recorded $137,000 of other income for both periods, and these amounts represent the change in the fair value of the warrant liability during these periods.

Escrow Shares

In conjunction with the PrairieStone Pharmacy, LLC (“PrairieStone”) acquisition on February 15, 2007, the purchase agreement provided for a potential earn out for two continuing employees of up to an aggregate of 600,000 shares of common stock. The earn out was based on PrairieStone’s earnings before interest, taxes depreciation and amortization for periods through March 31, 2010. The earn out targets were not met, and the shares were returned to the Company and canceled during the three-month period ending September 30, 2010.

Note 8 — Contingencies

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

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

Note 9 — Stock-Based Compensation

On August 18, 2006, the Board of Directors approved the Arcadia Resources, Inc. 2006 Equity Incentive Plan (the “2006 Plan”), which was subsequently approved by the stockholders on September 26, 2006. The 2006 Plan provides for grants of incentive stock options, non-qualified stock options, stock appreciation rights and restricted shares (collectively “Awards”). The 2006 Plan will terminate and no more Awards will be granted after August 2, 2016, unless terminated by the Board of Directors sooner. The termination of the 2006 Plan will not affect previously granted Awards. All non-employee directors, executive officers and employees of the Company and its subsidiaries are eligible to receive Awards under the 2006 Plan.

On January 27, 2009, the Board of Directors approved and adopted the Second Amendment (the “Amendment”) to the 2006 Plan, and the Amendment was approved by the stockholders on October 14, 2009. The Amendment increased the number of shares available to be issued under the Plan to 5% of the Company’s authorized shares of common stock, or 15 million shares.

As of September 30, 2010, approximately 5.1 million shares were available for grant under the amended 2006 Plan.

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

		Three-Month Period								Six-Month Period
		Ended September 30,								Ended September 30,
Weighted-average		2010				2009				2010				2009
Expected volatility			N/A				85	%			96	%			78	%
Expected dividend yields			N/A				0	%			0	%			0	%
Expected terms (in years)			N/A				4				4				4
Risk-free interest rate			N/A				2.59	%			2.15	%			2.64	%

Stock option activity for the six-month period ended September 30, 2010 is summarized below:

										Weighted-
						Weighted-				Average				Aggregate
						Average				Remaining				Intrinsic
						Exercise				Contractual				Value
Options		Shares				Price				Term (Years)				(thousands)
Outstanding at April 1, 2010			8,336,184				0.65
Granted			45,000				0.42
Exercised			(3,750	)			0.38
Forfeited or expired			(98,479	)			0.45
Outstanding at September 30, 2010			8,278,955			$	0.65				5.2			$	102
Exercisable at September 30, 2010			6,624,163			$	0.66				5.0			$	101

The following table summarizes information about stock options outstanding at September 30, 2010:

		Options Outstanding												Options Exercisable
						Weighted
						Average				Weighted								Weighted
						Remaining				Average								Average
		Number				Contractual				Exercise				Number				Exercise
Range of Exercise Prices		Outstanding				Life				Price				Exercisable				Price
$0.18 - $0.42			3,329,394				6.0			$	0.38				2,815,644			$	0.38
$0.43 - $0.72			3,599,334				4.9			$	0.72				2,483,292			$	0.72
$0.73 - $1.07			781,647				5.2			$	0.79				756,647			$	0.79
$1.01 - $1.50			450,967				2.9			$	1.34				450,967			$	1.34
$1.51 - $2.25			43,000				2.6			$	2.22				43,000			$	2.22
$2.92			74,613				2.8			$	2.92				74,613			$	2.92
Outstanding at September 30, 2010			8,278,955							$	0.65				6,624,163			$	0.66

The weighted-average grant-date fair value of options granted during the six-month period ended September 30, 2010 and 2009 was $0.28 and $0.43, respectively.

3,750 stock options were exercised during the six-month period ended September 30, 2010. No stock options were exercised during the six-month period ended September 30, 2009.

The Company recognized $283,000 and $178,000 in stock-based compensation expense from all operations relating to stock options during the three-month periods ended September 30, 2010 and 2009, respectively, and $558,000 and $364,000 for the six-month periods ended September 30, 2010 and 2009.

As of September 30, 2010, total unrecognized stock-based compensation expense related to stock options was $666,000, which is expected to be expensed through March 2012.

Restricted Stock

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

The following table summarizes the activity for restricted stock awards during the three-month period ended September 30, 2010:

						Weighted-
						Average
						Grant Date
						Fair Value
		Shares				per Share
Unvested at April 1, 2010			332,967			$	1.10
Vested			(106,250	)			1.50
Unvested at September 30, 2010			226,717			$	0.91

During the three-month periods ended September 30, 2010 and 2009, the Company recognized $108,000, and $88,000, respectively, of stock-based compensation expense from all operations related to restricted stock. During the six-month periods ended September 30, 2010 and 2009, the Company recognized $195,000 and $187,000, respectively, of stock-based compensation expense from all operations related to restricted stock.

During the six-month periods ended September 30, 2010 and 2009, the total fair value of restricted stock vested was $195,000 and $318,000, respectively.

As of September 30, 2010, total unrecognized stock-based compensation expense related to unvested restricted stock awards was $165,000, which is expected to be expensed over a weighted-average period of approximately 1.0 year.

Note 10 — Income Taxes

The Company incurred state and local tax expense of $40,000 and $7,000 during the three-month periods ended September 30, 2010 and 2009, respectively, and $72,000 and $100,000 during the six-month periods ended September 30, 2010 and 2009

ASC Topic 740 requires that a valuation allowance be established when it is more likely than not that all or a portion of deferred income tax assets will not be realized. A review of all available positive and negative evidence needs to be considered, including a company’s performance, the market environment in which the company operates, the length of carryback and carryforward periods, and expectation of future profits. The relevant guidance further states, that forming a conclusion that a valuation allowance is not needed is difficult when there is negative evidence such as the cumulative losses in recent years. Therefore, cumulative losses weigh heavily in the overall assessment. The Company will continue to provide a full valuation allowance on future tax benefits until it can sustain a level of profitability that demonstrates its ability to utilize the assets, or other significant positive evidence arises that suggests the Company’s ability to utilize such assets.

Note 11 — Related Party Transactions

On September 30, 2010, the Company had an outstanding balance of $18,473,000 related to a note payable with JANA dated March 25, 2009. JANA held approximately 15% of the outstanding shares of Company common stock on September 30, 2010. The Company incurred interest expense relating to the debt due JANA in the amounts of $454,000 and $418,000 for the three-month periods ended September 30, 2010 and 2009, respectively, and $892,000 and $832,000 for the six-month periods ended September 30, 2010 and 2009, respectively. See “Note 6 — Long-Term Obligations” for additional information pertaining to the balances of these debt instruments.

On September 30, 2010, the Company had an outstanding balance of $6,836,000 related to a note payable with Vicis Capital Master Fund dated March 25, 2009. Vicis held approximately 15% of the outstanding shares of Company common stock on September 30, 2010. The Company incurred interest expense relating to the debt in the amount of $168,000 and $152,000 for the three-month periods ended September 30, 2010 and 2009, respectively, and $330,000 and $297,000 for the six-month periods ended September 30, 2010 and 2009, respectively. See “Note 6 — Long-Term Obligations” for additional information pertaining to the balances of this debt instrument.

The Company’s Chief Operating Officer has a beneficial ownership interest in an affiliated agency and thereby has an interest in the affiliate’s transactions with the Company, including the payments of commissions to the affiliate based on a specified percentage of gross margin. The affiliate is responsible to pay its selling, general and administrative expenses. Commissions totaled $214,000 and $195,000 for the three-month periods ended September 30, 2010 and 2009, respectively, and $404,000 and $406,000 for the six-month periods ended September 30, 2010 and 2009, respectively. In addition, the Company has an agreement with this affiliate, which is terminable under certain circumstances, to purchase the business under certain events, but in no event later than 2011.

Note 12 — Segment Information

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

The Company’s continuing operations include two segments: Services and Pharmacy. Segments include operations engaged in similar lines of business and in some cases, may utilize common back office support services.

The Services segment is a national provider of home care services, including skilled and personal care, and medical staffing services (per diem and travel nursing) to numerous types of acute care and sub-acute care medical facilities. In May 2009, the Company sold its industrial staffing business, which has since been included in discontinued operations.

The Pharmacy segment includes the Company’s proprietary medication management system called DailyMed™. The Company operates pharmacies in Indiana, California and Minnesota, which dispense patients’ prescriptions, over-the-counter medications and vitamins, and organize them into pre-sorted packets clearly marked with the date and time they should be taken. The DailyMed™ approach is designed to improve the safety and efficacy of the medications being dispensed. In June 2009, the Company sold its pharmacy dispensing and billing software business, which has since been included in discontinued operations.

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

		Three-Month Period Ended								Six-Month Period Ended
		September 30,								September 30,
		2010				2009				2010				2009
Revenue, net:
Services		$	20,931			$	21,709			$	41,295			$	44,389
Pharmacy			4,911				3,408				9,965				6,625
Total revenue		$	25,842			$	25,117			$	51,260			$	51,014
Operating income (loss):
Services		$	1,222			$	1,035			$	2,121			$	2,242
Pharmacy			(1,599	)			(1,564	)			(3,401	)			(2,877	)
Unallocated corporate overhead			(2,485	)			(2,686	)			(4,862	)			(5,171	)
Total operating loss			(2,862	)			(3,215	)			(6,142	)			(5,806	)
Other expenses:
Interest expense, net			980				846				1,823				1,684
Change in fair value of warrant liability			(779	)			—				(137	)			—
Other			—				(6	)			—				30
Net loss before income tax expense			(3,063	)			(4,055	)			(7,828	)			(7,520	)
Income tax expense			40				7				73				100
Net loss from continuing operations		$	(3,103	)		$	(4,062	)		$	(7,901	)		$	(7,620	)
Depreciation and amortization:
Services		$	165			$	191			$	330			$	385
Pharmacy			74				206				135				293
Corporate			87				134				169				264
Total depreciation and amortization		$	326			$	531			$	634			$	942

		2010				2009				2010				2009
Capital expenditures:
Services		$	8			$	8			$	48			$	26
Pharmacy			156				8				240				61
Corporate			15				6				123				9
Total capital expenditures		$	179			$	22			$	411			$	96

		September 30,				March 31,
		2010				2010
Assets:
Services		$	20,530			$	25,007
Pharmacy			7,298				6,107
Unallocated coporate assets			2,023				1,908
Assets of discontinued operations			155				174
Total assets		$	30,006			$	33,196

Note 13 — Subsequent Event

On November 2, 2010, the Company finalized an equity financing transaction whereby it raised $5,000,000 in gross proceeds. Under the terms of the agreements with the investors, the Company sold 15,625,000 shares of common stock for $0.32 per share. Expenses associated with the transaction, which include a 7.0% placement fee, are estimated to be $450,000 resulting in net proceeds of $4,550,000.

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

The following discussion and analysis provides information we believe is relevant to an assessment and understanding of our results of operations and financial condition for the three and six month periods ended September 30, 2010 and 2009. This discussion should be read in conjunction with the condensed consolidated financial statements and notes thereto included herein, the consolidated financial statements and notes and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended March 31, 2010 and Form 10-Q for the period ended June 30, 2010 filed with the SEC on June 11, 2010 and August 6, 2010, respectively, which are incorporated herein by this reference.

Cautionary Statement Concerning Forward-Looking Statements

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

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

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

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

Overview

Arcadia Resources, Inc., a Nevada corporation, together with its wholly-owned subsidiaries (the “Company”), is a national provider of home care, medical staffing and pharmacy services operating under the service mark Arcadia HealthCare. In May and June 2009, the Company disposed of its Home Health Equipment (“HHE”), retail pharmacy software and industrial staffing businesses. In October 2010, the Company disposed of its home-health oriented mail-order catalog and website business (“Catalog”). Subsequent to these divestitures, the Company operates in two reportable business segments: Home Care/Medical Staffing Services (“Services”) and Pharmacy. The Company’s corporate headquarters are located in Indianapolis, Indiana. The Company conducts its business from approximately 65 facilities located in 18 states. The Company operates pharmacies in Indiana, California and Minnesota and has customer service centers in Michigan and Indiana.

Critical Accounting Policies

See Part II, Item 7 — Critical Accounting Policies, our consolidated financial statements and related notes in Part IV, Item 15 of our Annual Report on Form 10-K for the year ended March 31, 2010 filed with the SEC on June 11, 2010 for accounting policies and related estimates we believe are the most critical to understanding our condensed consolidated financial statements, financial condition and results of operations and which require complex management judgment and assumptions, or involve uncertainties.

Three-Month Period Ended September 30, 2010 Compared to the Three-Month Period Ended September 30, 2009

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

		Three-Month Period
		Ended September 30,
		2010				2009
Revenues, net		$	25,842			$	25,117
Cost of revenues			18,797				17,923
Gross profit			7,045				7,194
Selling, general and administrative			9,581				9,878
Depreciation and amortization			326				531
Total operating expenses			9,907				10,409
Operating loss			(2,862	)			(3,215	)
Other expenses:
Interest expense, net			980				846
Change in fair value of warrant liability			(779	)			—
Other expenses:			—				(6	)
Total other expenses			201				840
Net loss before income tax expense			(3,063	)			(4,055	)
Income tax expense			40				7
Net loss from continuing operations		$	(3,103	)		$	(4,062	)
Weighted average number of shares — basic and diluted			177,295				161,201
Net loss from continuing operations per share — basic and diluted		$	(0.02	)		$	(0.03	)

Revenues, Cost of Revenues and Gross Profits

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

						% of Total								% of Total				$ Increase/				% Increase/
		2010				Revenue				2009				Revenue				(Decrease)				(Decrease)
Revenues, net:
Services		$	20,931				81.0	%		$	21,709				86.5	%		$	(778	)			-3.6	%
Pharmacy			4,911				19.0	%			3,408				13.6	%			1,503				44.1	%
			25,842				100.0	%			25,117				100.0	%			725				2.9	%
Cost of revenues:
Services			14,650								15,028								(378	)			-2.5	%
Pharmacy			4,147								2,895								1,252				43.2	%
			18,797								17,923								874				4.9	%
						Gross								Gross
						Margin %								Margin %
Gross margins:
Services			6,281				30.0	%			6,681				30.8	%			(400	)			-6.0	%
Pharmacy			764				15.6	%			513				15.1	%			251				48.9	%
		$	7,045				27.3	%		$	7,194				28.6	%		$	(149	)			-2.1	%