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Arcadia Resources, Inc.

Q3 2008 Earnings Call

February 11, 2008 11:00 am ET

Executives

Michelle Molin - Executive Vice President and General Counsel

Marvin Richardson - President and Chief Executive Officer

Matthew Middendorf - Chief Financial Officer

Analysts

Tony Perkins - First Analysis

(Paul Solly) - (Atomic)

(Sheryl Gourmet - CRC)

Mark Fitzgerald

David Lerner - Sangrey Securities

Operator

Greetings and welcome to the Arcadia HealthCare Inc. Third Quarter Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder this conference is being recorded.

It is now my pleasure to introduce your host Ms. Michelle Molin, Executive Vice President and General Counsel of Arcadia HealthCare Inc. Thank you Ms. Molin, you may begin.

Michelle Molin - Executive Vice President and General Counsel

Thank you and thanks to all of you for joining us today. I'd like to read the Safe Harbor language before we proceed.

Our presentation today will include forward-looking statements involving known and unknown risks, assumptions, uncertainties and other factor, which could cause actual financial or operating results to differ materially from those forecasted. Forward-looking statements are not guarantees for future performance. Important factor that could cause actual results, development and business decisions to differ materially from the forward-looking statements are described in the Company's filings with the Securities and Exchange Commission from time-to-time, including the section entitled "Risk Factors" and also in the Company's most recent Annual Report on Form 10-K and subsequent periodic reports, including the Quarterly Report for the quarters ended June 30, 2007, September 30, 2007 and December 31, 2007.

The forward-looking statement speaks only as of the date hereof. The company disclaims any obligation to update or alter its forward-looking statements except as maybe required by law.

With that you will here from Marvin Richardson, President and Chief Executive Officer and then Matt Middendorf, Chief Financial Officer of Arcadia Resources. Marvin, please go ahead.

Marvin Richardson - President and Chief Executive Officer

Good morning and thank you for joining us on today's third quarter fiscal 2008 conference call. With me today, is our recently appointed permanent Chief Financial Officer Matt Middendorf.

Although Matt took on the CFO role earlier this month, he has served Arcadia as a consultant since January 2007 and has done a great job during the past year. Prior to joining Arcadia, Matt spends his carrier in Corporate Financial Management and Public Accounting and we are pleased to have him in the permanent CFO position.

I am pleased to be able to state that for three consecutive quarters we have delivered on the results we promised to our shareholders. Specifically last quarter, we told we were going to focus on six key initiatives and I will report on the progress of each. Additionally, we thought it is important to compare quarter-over-quarter results in both our press release and this conference call to show the significant progress.

We also feel this better represents a fair comparison of numbers since fiscal 2007 was impacted greatly by the significant write-downs in fourth quarter surrounding goodwill impairment, accounts receivable, and other P&L and balance sheet adjustment.

Looking first at our cash flow and EBITDA objectives, we delivered on our previous commitments to you generating positive EBITDA from continuing operations of approximately 230,000 for the third quarter, an improvement of over 1.9 million over second quarter of 2008 and positive cash flow from all operations of nearly $1 million, an improvement over quarter two, 2008 of nearly $5 million. In addition, available cash remains essentially unchanged at approximately 3 million.

Second, we made great progress on our DailyMed initiatives and we will address DailyMed in greater detail later in this call. Third due to soft industry conditions in the medical staffing markets, the gross revenues in our services and staffing segment were affectively flat. However, through an increase in our gross margins, we were able to see increased profitability in this segment.

Fourth, we recorded a significant reduction in SG&A expense in quarter three versus quarter two. Our internal team has identified an additional approximate 2 million in SG&A expense reduction opportunities and we anticipate a significant portion of this will be realized in fiscal year 2009.

Fifth, we continued to reduce our accounts receivable balances in quarter three versus quarter two. In the fourth quarter, Lynn Fetterman, our former CFO who will be working with Matt Middendorf through the end of May to transition the CFO duties, will focus a large part of his attention to our account receivable collections. I would like to take a moment to thank Lynn for his efforts in the interim CFO role, this past year during the time of Arcadia's transition.

And finally we improved our capital structure and reduced our interest cost by extending and restructuring the Jana and Comerica credit agreements. These actions were part of our board approved financing strategy to meet the ongoing capital needs of the business.

As you can see we have delivered tangible results on the initiatives, we outlined for shareholder on our November conference call. We believe we have made positive decisions regarding the sale of assets, the closing of unprofitable business segments, and significant changes in the operational structure of the company. In fact regarding our previously discontinued clinic business, it appears others are following in our footsteps as we recently have seen comparable companies' pullout of the retail health care clinic space.

Moving forward, our new management team is no longer focused on the challenges of Arcadia's past. We have worked tirelessly over the last 12 months to build a company that is viable, that is now cash flowing, and that is poised for success. These actions have prepared Arcadia for our most important initiative. Driving revenue growth by creating and selling, unique products and services focused on our mission keeping people home and healthier longer.

Our most promising near-term revenue generator is Arcadia's DailyMed medication management product. We continue to work toward the role out of the DailyMed program in Indiana in fiscal 2009. As we expand from Indiana to our national direct to consumer launch, this truly will be a game changing event both for Arcadia and for millions of US healthcare consumers who have access to DailyMed, a convenient, safe, and affordable system for managing multiple prescriptions and over-the-counter medications.

As we've mentioned in past call the initial Indiana DailyMed launch is being rolled out to approximately 70,000 home-bound Medicaid patients focusing on those with the most serious medical needs. Once the program gains traction, DailyMed will eventually be promoted statewide for a direct-to-consumer campaign involving media along with physician detailing efforts.

On our second quarter call, I spoke of a 90-day pilot to cross sell DailyMed to 20% of our 600 oxygen patients in three Arcadia locations. I am pleased to report that we hit our goal and have learned a great deal about the degrees of success by location and customer segment as part of this pilot.

We have refined our message and have begun to rollout this strategy to a portion of our 4,000 oxygen patients and 10,000 home care patients beginning in fourth quarter. We have begun this rollout with the State of Michigan and North Carolina. We will expand this program incrementally and believes this gives us another opportunity for pharmacy revenue growth in fiscal 2009.

As many of you may have discovered, we recently initiated a national public relations campaign to increase consumer awareness with medication compliance and medication safety issues. This positions DailyMed as a first of market solution for this growing $176 billion problem.

DailyMed has received national media and clean exposure through this effort including billboard messaging on Times Square, an interview with ABC News Money Matters, and coverage on countless syndicated media channels throughout the United States. This ongoing public relations effort precedes a national DailyMed direct-to-consumer launch schedule for fiscal year 2009.

We previously announced that Avacare a division of United Healthcare had agreed to expand its DailyMed pilot program to a broader patient base in Minneapolis/St Paul. We are pleased to announce that there will be a meeting with the Avacare Minnesota Care Management team in mid March to begin the stage rollout to the State of Minnesota. Avacare manages the healthcare of high risk, dual eligible seniors throughout the State of Minnesota, and nationally Avacare oversees 150,000 lives in 38 states.

We continue to believe we are well positioned to generate up to $40 million in revenue in fiscal year 2009 from our pharmacy segment including DailyMed. Although, significant part of this opportunity will come from DailyMed and other initiatives within the State of Indiana, there are many other channels such as Avacare, our cross selling initiative, and our direct-to-consumer selling efforts that are more broadly based across the county.

We continue to identify additional medication management products for this large market opportunity. While we continue to be excited about the growth prospects of DailyMed, we know that the current level of EBITDA and positive cash flow is driven by our core businesses, which include home care, medical staffing, DME in selected markets, and some non-medical staffing business.

These businesses continue to focus on growing sales in the respective markets, improving margins, controlling costs, and better servicing customers. We do this through a broad network of company-owned location and affiliate partners, and we would like to thank all of them for their collective contribution to Arcadia's turnaround.

Now, let's outline our fourth quarter fiscal 2008 business goals, which remain similar to what they were in quarter three. First, cash flow and EBITDA positive from continuing operations, second, continued growth of DailyMed in the medication management revenues, third, organic growth of our home care and staffing businesses, fourth, continued reduction of SG&A expenses, and last continued reduction of accounts receivable including reducing our DME day sales outstanding.

While we remain committed to these goals for the quarter four, our fourth quarter EBITDA could be slightly impacted by seasonal professional fees and other expenses associated with our restructuring efforts this past year.

We continue to believe that the trends in the US healthcare market are extremely favorable for Arcadia. Allowing people to stay in their homes and stay healthier longer is a key objective of both consumers and payers. There is also the need to provide solutions that may glide easier for the millions of primary care givers in our society. We continue to position Arcadia to serve these needs going forward.

In clothing, we have a sharpened focus on providing innovative medication management solutions such as DailyMed. We are building relationships with partners such as national payers and state agencies, this cooperation will be needed as we expand out service offerings. We have a streamlined organization and a leaner cost structure, all at the same time maintaining the resources to support our growth. And we have a talented, motivated, and energetic management team to deliver on its potential.

While we are excited by our opportunities, we realized that we have more work to do including the delivery of positive earnings to our shareholders. We feel the best way to accomplish this, is to fine tune our cooperation and drive significant revenue growth. I look forward to reporting on our progress with a balance of fiscal of 2008 in the next year in June.

With that, I would like to turn the call over Matt Middendorf for a detailed review of our third quarter financial results. Thank you.

Matthew Middendorf - Chief Financial Officer

Thanks Marvin and good morning everybody. First of all, I would like to say how excited I am about joining Arcadia at this point in time. As Marvin mentioned, I work for Arcadia as a consultants for the past 12 months. The progress I've watched over the last few quarters have been impressive. Also, I would like to reiterate Marvin's earlier sentiment to thank Lynn Fetterman for his contribution during some challenging time. I look forward to continuing to work with Lynn over the next several months.

At this point, we should all have a copy of our earnings release and financial statement. In a few moments, I will discuss the financial highlights for our fiscal third quarter ended December 31, 2007.

Our discussion is primarily going to focus on the third quarter results from the continuing operation consistent with our earnings release, I will be referring to the third quarter result compared to our second quarter result of this fiscal year. Because of the significant changes over the past 12 months, we believe that this comparison is much more useful than the comparisons to prior year.

Our earnings release in 10-Q includes comparison to prior year. Anybody has questions regarding our result compared to the prior year, I will be more than happy to address them during the Q&A session later.

Before I get into the details, I would like to take a moment to briefly touch on the P&L presentation of the release's discontinued operation. As you may recall during our second quarter ended September 30, 2007, company disclosed a certain business operations, most notably, our Care Clinic and portion of our Durable Medical Equipment Business.

During the third quarter, we showed the right size of our business with a disposal of additional operation including our retail durable medical equipment locations and certain Florida operation. Financial results of the businesses that were discontinued in both the second and third quarters are reported in the discontinued operation for the quarter and nine month ended December 31, 2007. Prior period results in our Form 10-Q have also been recapped.

I would like to start with the earnings release comparison of the current year third quarter to second quarter also reflects as recap. We believe that this provides a much more useful comparison. We recognized that the discussion and presentation of discontinued operation makes our P&L slightly more complicated. If necessary, we can answer any questions regarding this later.

Now, I would like to discuss our result for the third quarter. The real highlight of the quarter was our positive EBITDA from continuing operations of $230,000, which is $1.9 million improvement over the previous quarter. As always, I would like to stress that EBITDA is non-GAAP measure, but it is the metric used by our management team on a regular basis.

We realized that EBITDA from continuing operations is still away from achieving positive net income for the company as a whole, but we believe that third quarter results are very good indication of the progress we have made over the last several quarters.

Revenues from the third quarter are $37.5 million reflect a $400,000 decrease from the second quarter revenues of $37.9 million. The decrease was primarily due to an approximately $1 million decrease in in-home health care services segment revenue overall recorded. This decrease was the result of the somewhat soft medical staffing environment as well as certain amount of seasonality within this business from holidays.

The in-home healthcare services segment continues to be a core business and generates the majority of our revenue. For the third quarter services revenue totaled $30.2 million or 80% of our total revenue. We are optimistic at the services segment revenue during the fourth quarter will show improvement over Q3.

Gross profit for the third quarter was $12.4 million versus $12 million during the second quarter of this year. Gross margin percentage increased by 1.4%. Historically, our margins fluctuated based on our revenue mix, but the margin improvement in the third quarter was partially due to the larger bill pay spread within the services segment.

SG&A expenses were $12.7 million during the quarter ended December 31, compared to $14.3 million for the quarter ended September 30. $1.6 million improvement was due to several factors, including decreases in the following areas: worker's compensation expense, equity-based compensation and professional fee primarily legal fee.

We are pleased with our progress to date in cutting SG&A expenses. While we don’t expect such large quarter-over-quarter decreases in SG&A expenses going forward and continue to explore opportunities for improvement. In December we created an SG&A team to spearhead this effort and team has identified approximately $2 million in potential future savings.

Coming back to the P&L depreciation and amortization expense was $884,000 during the third quarter, which is the modest decrease from the previous quarter. Interest expense also decreased slightly during the quarter to $924,000.

Our net loss from continuing operations is $2.3 million, compared to $4.3 million for the quarter ended September 30. As you may recall the second quarter results from continuing operations reported in the September 30th Form 10-Q, reflected a loss of $4.5 million. Again I want to reiterate that the second quarter results that I have been making reference to reflects the recaps from the additional discontinued operations of the third quarter.

Our loss from discontinued operations during the third quarter had an additional 1.4 million in losses for total net loss of $3.7 million or $0.03 per share. This compares to a total net loss of $9.2 million for the second quarter or $0.07 per share.

Moving onto the balance sheet, we had approximately $1.5 million of cash at December 31, 2007 with an additional $1.4 million available under our lines of credit fairly consistent at the end of the previous quarter.

Accounts receivable have decreased significantly during the year to $26.1 million this decrease was due to a combination and collection effort as well as the discontinuance of certain operations. These operations, we'll want to generate revenue and therefore receivables for the company.

Property and equipment was $6.7 million at December 31, 2007 compared to $12.6 million at March 31. Intangible assets were $24.8 million at December 31, compared to $29 million at year end. The decreases in fixed assets and intangibles reflect the write-off and the sale of assets as part of the discontinuing of operations. Most notably the Florida DME operation and the Care Clinic asset, the decrease also reflects the normal recurring deprecation and amortization expense.

Goodwill is $34.3 million at December 31, 2007 but will continue to represent a significant portion of our total assets. Total assets were just over $100 million at December 31, 2007.

I'd like to mention certain changes to our liabilities. As Marvin mentioned previously, we amended our note of (Inaudible) to extend the maturity until October 2009. This pushed approximately $15.5 million of debt from current liabilities for long-term liabilities. I'd also like to again mention that we extended our Comerica Bank line of credit to October 2009 as well.

At this point I would like to emphasize something that we discussed during our last earnings call. For the last nine months we have reduced our debt levels by $12 million, we believe this is quite a significant.

Moving now to the equity section, common shares outstanding at December 31, 2007 were at 126.7 million shares. This represents a net increase of 5.7 million shares at the beginning of the fiscal year. The increase includes the 11 million shares hold on private placement in May partially offset by 9.6 million shares returned to the company by certain former Executives and the (counsel).

I'll refer you to the statements of stockholders equity and the corresponding footnotes in our Form 10-Q for more details from an equity transactions this year.

Finally, I would like to make a few brief comments about our cash flow statements. In general points unlike the P&L presentation, the cash flow statements does not isolate cash used in just continued operations, rather it present all cash flow activities in total. Specifically, year-to-date cash flow from operations were negative $7.1 million. Obviously, the total net loss through December 31, 2007 of $20.3 millions with the driver behind the large negative cash flows from operation.

On positive side, cash flows from operations were $868,000 during the quarter ended December 31. Positive cash flow reflects our overall improvement in net earnings as well as working capital improvement. In summary, we are happy with the improvements that we made during the third quarter. We have a lot of work ahead of us. Our goal is to build a strong profitable company in third quarter was a good step in that direction.

I will turn it back over to Marvin for his closing thoughts and then we will open it up for some questions.

Marvin Richardson –President and Chief Executive Officer

Thanks Matt. We certainly appreciate the interest from our shareholders, the analyst, financial institutions, and our associates. At this time, we'd like to open up this particular call for questions. (Larry) if you would like to go ahead, we will take questions.

Question-and-Answer Session

Operator

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions). First question comes from the line of Tony Perkins with First Analysis. Please proceed with your question.

Tony Perkins

Yeah, hi. First of all congratulated on a solid quarter continuing the turnaround of Arcadia and I was just curious, do you see a revenue make up changing in 2008, it looks greater contribution from the DailyMed products?

Marvin Richardson

I am going to let Matt take that Tony. Thanks.

Matthew Middendorf

Yes Tony, Obviously, we are expecting some significant growth in the pharmacy segment specifically relating to DailyMeds, as that grows the revenue mix, will definitely change.

Tony Perkins

So do you think, can we assume by the end of 2008 and that the 80% total revenue from the Home Health Service will potentially decrease?

Matthew Middendorf

For fiscal 2008, I would not expect the significant change in the mix. I think the mix change will change drastically and gradually over fiscal 2009.

Tony Perkins

Okay. Thank you

Matthew Middendorf

Thank you.

Operator

Thank you. Our next question comes from the line of (Paul Solly) with (Atomic). Please proceed with your question.

PJ Solly

Hi it’s (PJ Solly) Good Morning.

Marvin Richardson

Good Morning

PJ Solly

Hi there. Just going back, when you are talking about EverCare, is it nationally, they have 150, 000 lives in 38 states, how many was it in Minnesota?

Marvin Richardson

Lives, a little by 8000 lives, PJ in the State of Minnesota.

PJ Solly

Okay. And previously you are only serving them in Minneapolis area?

Marvin Richardson

Yeah, we were just servicing a small segment of the Minneapolis market place.

PJ Solly

How many lives was that or what kind of penetration was that in that market percentage wise?

Marvin Richardson

Yeah it was less than a 1000.

PJ Solly

Okay.

Marvin Richardson

It's a broad market opportunity in Minnesota for us with this care management kickoff.

PJ Solly

Okay. And so you will started March talk, in term of about how do you go after the 8000 and then I guess, do they need to see results on that 8000 before potentially letting it go after the 150,000 national or have they seen enough success on what you have shown already in the small sample in Minneapolis?

Marvin Richardson

My sense will know more with the kickoff meeting, but the meeting in mid March is with all of the care managers and case managers for the State of Minnesota, and I would assume, once we get some traction in that program, we have met previously with the COO of all of EverCare and then we would began to talk about how we might broad that overtime, but certainly the opportunity we have got in front of us is to execute well on the Minnesota business.

PJ Solly

Okay, great. And you have had, obviously, you saved a lot of money on the small sample otherwise they would be going to bigger sample I guess?

Marvin Richardson

Yeah we talked second quarter about that, but we had said a little over $500 per patient per year on the drug spend side from DailyMed. So, obviously that's why they would like to broaden in the State of Minnesota because of the drug saving side and obviously we think gives more benefit than just the grave drug savings, but that's one piece of it.

PJ Solly

Okay. And, in terms of Indiana, may be you could just give us an update on where we are there? Have we started shipping? How many lives have we signed up if any?

Marvin Richardson

Well, we've actually filled a few prescriptions for Indiana Medicaid. The primary thrust is the enrollment period is concluded to as of March 1. So, they enroll all of the people into the plan by March 1, and then in March we start the roll out of the DailyMed program. So, you'll see more traction from that probably in early '09 as opposed to anything in '08 although we have had a few prescriptions that we started rolling as a part of that overall rollout.

PJ Solly

What can you tell us about the enrollment so far?

Marvin Richardson

Well, it's sort of tough for us because the enrollment if you will is the enrollment into the two healthcare plans the MDYS and the advantage solutions plan by these particular companies that are managing the overall healthcare. So, what they are doing is enrolling those 70,000 into the plan and from that we'll begin to fill prescriptions for patients that enter into those plans. So the enrollment we're talking about is of DailyMed enrollment into the care plans and once they do that then we're working directly with those plans to get prescriptions filled and put them on DailyMed.

PJ Solly

So, initially they're thinking it's going to be 70,000 enrolled into the two plans though?

Marvin Richardson

Yes. There are 70,000 into the plan. We've never made any assumptions around how many of those we'll capture. We've been fairly conservative in our estimates. But, once they're enrolled in the plans, those are the 70,000 lives carved out of the Medicaid programs specifically to better manage the care of these people because they're sort of the sickest of the sick if you will. And, then we're working directly with the case managers and care managers of the plan in a similar fashion we did Avacare, to begin enrolling them into and putting them on DailyMed once that enrollment period finishes.

PJ Solly

Okay. And, lastly I guess any update on the efforts to cross sell DailyMed into the home healthcare segment.

Marvin Richardson

Yes. I mentioned that during my intro. We achieved the 20% penetration we wanted to with those three sites. We've expanded that now too. We're starting to go into the State of Michigan and North Carolina first with the product. So, any sites we have whether they are DME or home healthcare, we'll begin to grow that cross selling segment in those two states and then our intent is to fully execute that over period of months here as fast as we can, but the intent was to start with the pilot. We've seen success with the pilot. Now, we're going to go in the Michigan and North Carolina, and then from there we'll do a broader roll out. We're in the foot phases of rolling that out as we speak.

PJ Solly

So, the 20% was all achieved in the last quarter I would think?

Marvin Richardson

Correct.

PJ Solly

How many lives is that?

Marvin Richardson

Well, it was 600 that we had intention that we wanted to get 120 of those lives. So, we've done that and started to pilot between last quarter and this quarter. And, we're going to continue to roll this out. I mean this is something we'll roll this out to as an opportunity to all of our affiliate sites. We'll roll this out and to our own location site. We just decided that North Carolina and Michigan were two places that we felt comfortable with executing quickly. So, we did that first and then we'll follow up with the balance of sites over time.

PJ Solly

What was the total, your total, sort of affiliate sites and DME and everything that sort of touches your existing business? What type of opportunity is that, in terms of just total not penetration, but just total lives?

Marvin Richardson

About 14,000.

PJ Solly

Okay.

Marvin Richardson

Yes. There's 4,000 oxygen I think, and 10,000 home care patients.

PJ Solly

Okay.

Marvin Richardson

That will be the total penetration. So, we've moved past the pilot and we're beginning to roll that out into our broader sites.

PJ Solly

All right. I'll let somebody else to get on. Thanks.

Marvin Richardson

I appreciate it.

PJ Solly

Yeah.

Operator

All right. Thank you. Our next question comes from the line of (Sheryl Gourmet with CRC). Please proceed with your question

Sheryl Gourmet

Thank you very much and good morning. Gentlemen, can you talk in a little more detail please about your direct-to-consumer advertising campaign and the rollout. And specifically what I am interested in is on either what your thoughts are in terms of customer acquisition cost or return on that investment, how do we think about it being successful or not successful and is it a dollar metric, is it number of lives gained, is it visibility, any color that you can give me on that would be greatly appreciated. Thank you.

Marvin R Richardson

All right. Thanks Sheryl, this is Marvin. You know I think where we are with the flows of that, we have obviously done a direct-to-consumer campaign in the Minneapolis St. Paul area, so we have some metric turning on that business that we have used to measure success and we felt that the first thing we needed to do was to begin to expose the public to the problem. So we have started a public relations campaign in front of a more direct-to-consumer launch. What this will be followed up by is a penetration in the state of Indiana.

We are committed to Indiana. Obviously we are here and with what we are doing. we will do a direct-to-consumer campaign for all the major city areas of Indiana Indianapolis, Evansville, Terre Haute, Fort Wayne, Lafayette, Wilmington those types of areas and then from there begin to expand out as we execute our financing plan and capital plan to grow additional dollars then we'll expand in '09 on a broader basis.

The measurement we will use obviously, what we typically use without going into great detail because of competitive reasons would be we like to look at the number of caregivers or what we call Heather in the marketplace.

Sheryl Gourmet

Yeah even you can call it Sheryl, go ahead.

Marvin R Richardson

There you go, we appreciate. And that's how we've measured our success in Minneapolis that was based on the penetration of Heathers and that's how we can measured our success as we begin to roll it out. So we have anticipate, I think Indiana first and then sort of broad in the Mid West in terms of direct-to-consumer campaign and then eventually get some more national launch, maybe the top 25 or 30 market per outlet.

Sheryl Gourmet

Okay. I was just curious as to why then you have a billboard, and I don't mean to be critical, but how does the billboard in Times Square fit with focus on Indiana where the biggest and most near-term market opportunity exists.

Marvin R Richardson

We are not that sure with free-advertising.

Sheryl Gourmet

Okay. That's great.

Marvin R Richardson

As part of using PR Newswire for a lot of our launch of this public relations campaign, we received some advertising on the Time Square as a part of that. So it was more of an exposure to the product and to the problem around medication compliance, but certainly we are not bashful, so we will take it.

Sheryl Gourmet

Okay. And then if I could just follow up with the couple of questions about the DSOs, are you at about 64 days now. Is that about right?

Matthew Middendorf

Yeah we are at 62 days at the end of the quarter.

Sheryl Gourmet

Okay. So given that you have got a in-home services business and I am not sure what the revenue mix is there between government and private payers, but can you just sort of break that down in terms of how much is sort of old DME related or old lines of business related and how much of it is sort of current business related and what targets you might have for yourself in terms of collections of those receivables?

Matthew Middendorf

Yes let me start by saying that this 62 days DSO is on a consolidate basis obviously.

Sheryl Gourmet

Right

Matthew Middendorf

The DME receivables, the collection is lot slower or probably I should say a lot slower probably 70 days and at the end of the quarter, so that's lagging behind the services business. Obviously we have had some issues, specifically relating to the collection of our DME business, while that had to do with acquisition, licensure issues etc. All that I can really say is working hard on collecting the old receivables for the DME. We have implemented certain process and procedures probably in December and we feel like we are making significant progress so that we can improve the profits going forward from that. We will continue to monitor very closely and as we mentioned Lynn Fetterman is the previous CFO, he has spend a lot of time on this initiative.

Sheryl Gourmet

Okay. And just indulge me one more time, if you would not mind, also receivables related question, once DailyMed get ups and running with Indiana how will you be paid? Will it be sort of monthly after affect quarterly on an ongoing basis?

Marvin Richardson

Yes, that's a great question and I will answer this for the broader group as well. The pharmacy receivable business is a little different. Whether we're billing Medicare under the Medicare program, Medicare Part D program, or whether we are billing Medicaid or whether we are billing individual pharmacy benefit management companies like Med-Co. We online adjudicate claims at the time we dispense them. So we get an authorization that we are going to be paid for that client realtime. So it assigns the co-pay for the prescription and lots of receivable with an authorization number for us. Typically, we receive payment in about 17 to 20 days of those receivables. So, it’s a fairly sophisticated and a fairly low-risk type of business and if we're not getting approval for things, we're obviously not shifting out the door.

Sheryl Gourmet

Perfect. Thank you so much.

Marvin Richardson

All right.

Operator

Thank you. Our next question comes from the line of Mark Fitzgerald. Please proceed with your question.

Mark Fitzgerald

Thanks, I was curious if there is any additional asset sales on the horizon here that might lower the debt and is there any money that can be raised from the liquidation of the clinics?

Marvin Richardson

In terms of the clinic, there really isn't any money that we can raise from the liquidation that we haven't already raised. In terms of other assets we've said all along that we preserve the right to sell off non-strategic assets of the company going forward. I would say at this point in time we are comfortable where we are but we're always looking at possibilities or opportunities that might be out there for non-strategic assets.

So, as we continue to move forward, we'll continue to evaluate that as being something of a strategy for the board and strategy for us, continually look at that as where we're going. But on the clinic side I wouldn't see any opportunity at all relative to that.

Mark Fitzgerald

And with the new facility that charge is going in at this point in Indiana, can that be funded out of the cash flow as the capital expenditure is swollen up that it could be fed from cash flows?

Marvin Richardson

Well the CapEx for that particular site is not a large number. I would say we have a capital financing strategy plan that we've put in place that the board has approved. We're going down the path of executing sale math financing capital strategy and we're comfortable what we've got what we need because we will have what we need obviously if we continue to go forward with business.

Matthew Middendorf

And also we haven't finalized any of our plans yet with regards to new facility in Indiana. So, we're looking at several opportunities but we've not yet finalized anything.

Mark Fitzgerald

Thank you.

Marvin Richardson

Thanks a lot.

Operator

Thank you. Our next question comes from the line of David Lerner with Sangrey Securities. Please proceed with your question.

David Lerner

Hey guys.

Matthew Middendorf

Hey David.

David Lerner

(Inaudible) and you didn't hold up and is that quarter back (Inaudible) besides that it all looks good. I want to try to understand the volume here a little bit more on number of on your existing capacity in Kentucky and Minnesota can handle how many patients?

Marvin Richardson

I don't think we get into the specifics for discussing the capacity other than to say that it is clear that we willl be moving to an Indiana-based DailyMed pharmacy facility where appropriate to handle the Indiana-based business. Obviously, with that we would close the Minnesota location at that point in time. But the Kentucky facility would remain open and continue to ship products to other states and service the needs of nebulizer medication patients from an occupancy standpoint. So, we know what the capacities are and as we start to get toward those, we'll start to move toward an Indiana-based pharmacy strategy. And we're comfortable and that's what we need today.

David Lerner

Back to what you stated earlier, it seems 70,000 Medicaid patients from Indiana were moved to two insurers that you are now going to start to enroll DailyMed patients after that enrollment is complete. Did I understand that properly?

Marvin Richardson

Say that again for me.

David Lerner

Medicaid had 70,000 patients in the state of Indiana.

Marvin Richardson

Correct.

David Lerner

Those were moved to two insurers that are responsible for both medication and insurance for those 70,000 patients.

Marvin Richardson

Correct, this is nothing new. I mean the Care Select Program is the program we're talking about within the State of Indiana. Care Select is administered by two not-for-profit healthcare plans called MDY's and ADVANTAGE Solutions at the direction of the Indiana Medicaid.

David Lerner

Yes I understand that. I'm asking you when do we start to enroll those patients to start to see the revenue from the pharmacy side from that group of patients, number one; and number two what over the next calendar year, what type of penetration do you expect to get in that group?

Marvin Richardson

Well, I think you'll see the majority of the revenue from that program will be in fiscal year 2009. You'll see some probably late in fourth quarter, March 1 is sort of the target date to begin the process of conversions. We're filling some prescriptions today as we speak for some of those patients, although it is not a big number.

In terms of penetration, I'm not going to speculate on the penetration of what we think we'll get there. I think we'll be able to provide better guidance to our shareholders and others once we get another quarter or two into this. We'll have better guidance from Medicaid and better guidance from the Indiana Medicaid in terms of what percentage capture rates we'll have. But we certainly feel comfortable with the estimates that we've put out there for fiscal year 2009.

David Lerner

And that estimate was 40 million coming from the state and you expect maybe March 1 to start to see some traction there?

Marvin Richardson

Yes I think, 40 million is an aggregate number but we'll expect to see some traction from the Indiana Medicaid program. Our launch with them is March 1. And as we start to roll that out, we'll see where we go and we'll report back, I think next quarter on what that looks like and we'll have a better idea of what '09 will look like as well.

David Lerner

Okay. Thanks guys.

Marvin Richardson

All right thanks David.

Operator

Thank you. (Operator Instructions). Thank you. There are no further questions at this time. I'd like to turn the floor back over to the management for closing comments.

Marvin Richardson

All right, well again we thank all of you for you questions and the interest in our company. We feel obviously that we're very well positioned now as we move forward as an organization and focussed on growing the revenue in this business as opposed to being focussed on some of the challenges we've had. And we look forward to reporting out with all of you guys in another 90 days. Thanks a lot.

Operator

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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Source: Arcadia Resources, Inc. Q3 2008 Earnings Call Transcript

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