##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2007
 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 000-50348
 NATIONSHEALTH, INC.
 (Exact name of registrant as specified in its charter)
 Delaware
    
    06-1688360(State or other jurisdiction of 
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)
 13630 N.W. 8th Street, Suite 210, Sunrise, Florida
    
    33325(Address of principal executive offices)
    
    (Zip Code)
 (954) 903-5000
(Registrants telephone number, including area code)
 N/A
(Former name, former address and former fiscal year, if changed since last report)
 þ o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer þ
 o þ




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##### 



NATIONSHEALTH, INC.
 FORM 10-Q
 FOR THE QUARTER ENDED JUNE 30, 2007
 INDEX
 PagePART I.Item 1.
    
    Financial StatementsCondensed Consolidated Balance Sheets -- as of June 30, 2007 (Unaudited) and December 31, 2006
    
    
    2Condensed Consolidated Statements of Operations (Unaudited)-- for the Three and Six Months Ended June 30, 2007 and 2006
    
    
    3Condensed Consolidated Statements of Cash Flows (Unaudited)-- for the Six Months Ended June 30, 2007 and 2006
    
    
    4Notes to Condensed Consolidated Financial Statements (Unaudited)
    
    
    5Item 2.
    
    Management's Discussion and Analysis of Financial Condition and Results of Operations
    
    
    11Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    21Item 4T.
    
    Controls and Procedures
    
    
    21PART II.Item 1.
    
    Legal Proceedings
    
    
    22Item 1A.
    
    Risk Factors
    
    
    22Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    23Item 6.
    
    Exhibits
    
    
    23Signatures
    
    
    
    
    24Exhibit 10.1Exhibit 31.1Exhibit 31.2Exhibit 32.1




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PART I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 
 NATIONSHEALTH, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
 June 30,
    
    
    December 31,2007
    
    
    2006(Unaudited)ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    1,136
    
    
    $
    4,224Accounts receivable, net of allowances of $13,746 and $12,451, respectively
    
    
    7,616
    
    
    
    6,075Inventory
    
    
    1,612
    
    
    
    1,636Costs related to billings in process, net
    
    
    628
    
    
    
    565Prepaid expenses and other current assets
    
    
    1,040
    
    
    
    748Total current assets
    
    
    12,032
    
    
    
    13,248Property and equipment, net
    
    
    5,119
    
    
    
    3,557Customer contract intangible, net
    
    
    9,693
    
    
    
    11,632Acquired customer lists, net
    
    
    2,715
    
    
    
    363Other assets, net
    
    
    3,286
    
    
    
    1,588Total assets
    
    $
    32,845
    
    
    $
    30,388LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Accounts payable
    
    $
    2,945
    
    
    $
    3,026Accrued expenses
    
    
    5,334
    
    
    
    9,069Promissory note payable, net
    
    
    1,406
    
    
    
    Current portion of long-term debt
    
    
    1,470
    
    
    
    Line of credit
    
    
    2,500
    
    
    
    2,500Total current liabilities
    
    
    13,655
    
    
    
    14,595Long-Term Liabilities:Convertible notes, related party, net
    
    
    6,979
    
    
    
    6,316Long-term debt
    
    
    4,772
    
    
    
    Promissory note payable, net
    
    
    
    
    
    
    1,328Other long-term liabilities
    
    
    1,102
    
    
    
    782Total long-term liabilities
    
    
    12,853
    
    
    
    8,426Stockholders Equity:Common stock
    
    
    3
    
    
    
    3Additional paid-in capital
    
    
    71,498
    
    
    
    70,816Accumulated deficit
    
    
    (65,164
    )
    
    
    (63,452
    )Total stockholders equity
    
    
    6,337
    
    
    
    7,367Total liabilities and stockholders equity
    
    $
    32,845
    
    
    $
    30,388
 The accompanying notes are an integral part of these condensed consolidated financial statements.
  2




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NATIONSHEALTH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
 For the Three Months
    
    
    For the Six MonthsEnded June 30,
    
    
    Ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Revenue:Net product sales
    
    $
    10,201
    
    
    $
    10,890
    
    
    $
    21,276
    
    
    $
    21,744Prescription drug card revenue
    
    
    
    
    
    
    1,339
    
    
    
    
    
    
    
    3,312Service revenue
    
    
    6,824
    
    
    
    7,387
    
    
    
    14,502
    
    
    
    19,57517,025
    
    
    
    19,616
    
    
    
    35,778
    
    
    
    44,631Cost of product sales
    
    
    3,990
    
    
    
    4,907
    
    
    
    8,388
    
    
    
    10,191Cost of services
    
    
    2,395
    
    
    
    4,173
    
    
    
    6,131
    
    
    
    23,255Gross Profit
    
    
    10,640
    
    
    
    10,536
    
    
    
    21,259
    
    
    
    11,185Operating Expenses:Patient acquisition and related costs
    
    
    683
    
    
    
    1,563
    
    
    
    1,418
    
    
    
    2,644Patient service and fulfillment
    
    
    2,141
    
    
    
    2,099
    
    
    
    4,364
    
    
    
    4,543General and administrative
    
    
    5,325
    
    
    
    8,129
    
    
    
    11,199
    
    
    
    15,971Provision for doubtful accounts
    
    
    528
    
    
    
    990
    
    
    
    1,263
    
    
    
    1,846Depreciation and amortization
    
    
    508
    
    
    
    322
    
    
    
    915
    
    
    
    666Amortization of customer contract intangible
    
    
    969
    
    
    
    970
    
    
    
    1,939
    
    
    
    1,939Impairment of investment in joint venture
    
    
    
    
    
    
    733
    
    
    
    
    
    
    
    73310,154
    
    
    
    14,806
    
    
    
    21,098
    
    
    
    28,342Income (Loss) from Operations
    
    
    486
    
    
    
    (4,270
    )
    
    
    161
    
    
    
    (17,157
    )Other Income (Expense):Interest expense , related party
    
    
    (668
    )
    
    
    (604
    )
    
    
    (1,318
    )
    
    
    (1,195
    )Other interest expense, net
    
    
    (342
    )
    
    
    (123
    )
    
    
    (555
    )
    
    
    (175
    )(1,010
    )
    
    
    (727
    )
    
    
    (1,873
    )
    
    
    (1,370
    )Net Loss
    
    $
    (524
    )
    
    $
    (4,997
    )
    
    $
    (1,712
    )
    
    $
    (18,527
    )Loss per share  basic and diluted
    
    $
    (0.02
    )
    
    $
    (0.18
    )
    
    $
    (0.06
    )
    
    $
    (0.67
    )Weighted average shares outstanding  basic and
diluted
    
    
    28,080
    
    
    
    27,888
    
    
    
    28,062
    
    
    
    27,848
 The accompanying notes are an integral part of these condensed consolidated financial statements.
  3




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NATIONSHEALTH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
 For the Six Months EndedJune 30,2007
    
    
    2006Cash Flows from Operating Activities:Net Loss
    
    $
    (1,712
    )
    
    $
    (18,527
    )Adjustments to reconcile net loss to net cash and cash equivalents used in
operating activities:Provision for doubtful accounts
    
    
    1,263
    
    
    
    1,846Provision for sales allowances and returns
    
    
    547
    
    
    
    1,139Reserve for (recovery of) costs related to billings in process
    
    
    135
    
    
    
    (229
    )Depreciation and amortization
    
    
    1,246
    
    
    
    914Amortization of note discount
    
    
    741
    
    
    
    541Amortization of deferred loan costs and other non-cash interest charges, net
    
    
    233
    
    
    
    131Amortization of customer contract intangible
    
    
    1,939
    
    
    
    1,939Stock-based compensation
    
    
    698
    
    
    
    1,373Impairment of investment in joint venture
    
    
    
    
    
    
    733Other non-cash charges
    
    
    
    
    
    
    440Changes in operating assets and liabilities:(Increase) decrease in:Accounts receivable
    
    
    (3,197
    )
    
    
    124Inventory
    
    
    82
    
    
    
    124Costs related to billings in process
    
    
    (197
    )
    
    
    (143
    )Prepaid expenses and other assets
    
    
    (499
    )
    
    
    842Increase (decrease) in:Accounts payable and accrued expenses
    
    
    (3,684
    )
    
    
    (5,678
    )Deferred revenue
    
    
    
    
    
    
    1,980Net cash and cash equivalents used in operating activities
    
    
    (2,405
    )
    
    
    (12,451
    )Cash Flows from Investing Activities:Maturity of available for sale investments
    
    
    
    
    
    
    923Asset acquisitions
    
    
    (2,686
    )
    
    
    Acquisition of property and equipment
    
    
    (515
    )
    
    
    (771
    )Net cash and cash equivalents (used in) provided by investing activities
    
    
    (3,201
    )
    
    
    152Cash Flows from Financing Activities:Proceeds from exercise of warrants
    
    
    
    
    
    
    2,000Draws on term loan
    
    
    4,151
    
    
    
    Deposit of restricted cash under credit facility
    
    
    (1,500
    )
    
    
    Draws on line of credit, net
    
    
    
    
    
    
    681Proceeds from exercise of stock options
    
    
    
    
    
    
    17Repurchase of common stock
    
    
    (16
    )
    
    
    Principal payments under capital lease obligations
    
    
    (117
    )
    
    
    (64
    )Net cash and cash equivalents provided by financing activities
    
    
    2,518
    
    
    
    2,634Net Decrease in Cash and Cash Equivalents
    
    
    (3,088
    )
    
    
    (9,665
    )Cash and Cash Equivalents, Beginning of Period
    
    
    4,224
    
    
    
    13,971Cash and Cash Equivalents, End of Period
    
    $
    1,136
    
    
    $
    4,306Non-cash Investing and Financing Activities:Property and equipment acquired under capital leases
    
    $
    2,170
    
    
    $
    
 The accompanying notes are an integral part of these condensed consolidated financial statements.
  4




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NATIONSHEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 1. BASIS OF PRESENTATION
   2. REVENUE RECOGNITION
     5




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3. SALE OF PRESCRIPTION DRUG CARD BUSINESS
  4. ASSET ACQUISITIONS
  5. CREDIT FACILITY
   Balance Sheet Classification of Borrowings Outstanding
under Revolving Credit Agreements That Include both a Subjective Acceleration Clause and a Lock-Box
Arrangement.
  6




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6. CONVERTIBLE NOTES
    7




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7. COMMITMENTS AND CONTINGENCIES
 Capital Lease
  Employment Separation Agreement
   8




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Medicare Audit
   8. SEGMENT INFORMATION
    9




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Three Months Ended June 30,
    
    
    Six Months Ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Revenue:Medical Products (1)
    
    $
    10,201
    
    
    $
    12,229
    
    
    $
    21,276
    
    
    $
    25,056Insurance Services
    
    
    6,824
    
    
    
    7,387
    
    
    
    14,502
    
    
    
    19,575Consolidated revenue
    
    $
    17,025
    
    
    $
    19,616
    
    
    $
    35,778
    
    
    $
    44,631Segment profit (loss):Medical Products
    
    $
    1,492
    
    
    $
    1,609
    
    
    $
    3,093
    
    
    $
    3,864Insurance Services
    
    
    3,658
    
    
    
    2,424
    
    
    
    6,717
    
    
    
    (5,545
    )Unallocated amounts:Amortization of customer contract
intangible
    
    
    (969
    )
    
    
    (970
    )
    
    
    (1,939
    )
    
    
    (1,939
    )Impairment of investment in joint venture
    
    
    
    
    
    
    (733
    )
    
    
    
    
    
    
    (733
    )Other corporate expenses
    
    
    (3,695
    )
    
    
    (6,600
    )
    
    
    (7,710
    )
    
    
    (12,804
    )Consolidated income (loss) from operations
    
    $
    486
    
    
    $
    (4,270
    )
    
    $
    161
    
    
    $
    (17,157
    )
 (1)
    
    Revenue for the Medical Products segment includes net product sales and prescription drug
card revenue for the periods in 2006.
  9. INCOME TAXES
   10




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
 Important Factors That May Affect Future Operations and Results
   
    
    Expected future operations, revenue, gross margins and expenses;
    
    Credit facilities and projected cash needs;
    
    Sales opportunities, strategic relationships and marketing plans;
    
    Estimates of potential markets for our products and services, including the
anticipated drivers for future growth; and
    
    Assessment of the impact of future accounting pronouncements.
   
    
    We have a limited operating history and are subject to the risks of a new
enterprise.
    
    We could experience significantly reduced revenues and earnings if Medicare
changes, delays, reduces or denies reimbursement.
    
    Competitive bidding for Durable Medical Equipment Prosthetics/Orthotics and
Supplies (DMEPOS) may reduce our revenues and earnings.
    
    We have invested significant capital and dedicated substantial resources to
launch our insurance services to Medicare prescription drug providers, which may
not be successful.
    
    If we do not have sufficient capital to fund patient acquisitions, our ability
to grow our business will be substantially diminished.
    
    If we are unable to grow our business and manage growth successfully, we may not
achieve profitability.
    
    Our Medical Supplies segment is highly dependent on patient reorder practices
and the profitability of our Medical Products business will decrease if we do not
receive recurring orders from patients.
    
    We could experience significantly reduced revenues and profit from sales of
diabetes products if improved technologies developed for glucose monitoring
eliminate the need for consumable testing supplies.
  11




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
    
    Due to our size and limited operating history, we depend substantially on
certain key personnel.
    
    Certain executive officers have rights under employment agreements that could
require us to make substantial payments to them.
    
    If any of our information technology platforms malfunction, our business and
profitability may be seriously harmed.
    
    We may have difficulties in achieving volume-based discounts or finding
replacement supplies if we lose any agreement with our suppliers of medical
products.
    
    If we do not comply with applicable government regulations, we may be prohibited
from selling our products and could experience significantly reduced revenues and
profit.
    
    The cost of efforts to comply with HIPAA regulations and the possible
consequences of non-compliance could adversely affect our operations and profit
significantly.
    
    Future sales of our common stock may depress our stock price.
    
    Voting control by our executive officers, directors and other affiliates may
limit outside stockholders ability to influence the outcome of director elections
and other matters requiring stockholder approval.
    
    Our common stock may continue to have a volatile public trading price and low
trading volume.
    
    Anti-takeover provisions in our governing documents and under Delaware law may
make an acquisition of us more difficult.
  Business
    12




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Medical Products
 Home Delivery of Medical Products
   Retail Program
  Discount Prescription Drug Card Services
   13




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Insurance Services
   Critical Accounting Policies
   14




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Results of Operations
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006$
    
    
    %
    
    
    $
    
    
    %
    
    
    $
    
    
    %
    
    
    $
    
    
    %Revenue:Net product sales
    
    $
    10,201
    
    
    
    59.9
    %
    
    $
    10,890
    
    
    
    55.5
    %
    
    $
    21,276
    
    
    
    59.5
    %
    
    $
    21,744
    
    
    
    48.7
    %Prescription card revenue
    
    
    
    
    
    
    
    
    
    
    1,339
    
    
    
    6.8
    
    
    
    
    
    
    
    
    
    
    
    3,312
    
    
    
    7.4Service revenue
    
    
    6,824
    
    
    
    40.1
    
    
    
    7,387
    
    
    
    37.7
    
    
    
    14,502
    
    
    
    40.5
    
    
    
    19,575
    
    
    
    43.917,025
    
    
    
    100.0
    
    
    
    19,616
    
    
    
    100.0
    
    
    
    35,778
    
    
    
    100.0
    
    
    
    44,631
    
    
    
    100.0Cost of product sales
    
    
    3,990
    
    
    
    23.4
    
    
    
    4,907
    
    
    
    25.0
    
    
    
    8,388
    
    
    
    23.4
    
    
    
    10,191
    
    
    
    22.8Cost of services
    
    
    2,395
    
    
    
    14.1
    
    
    
    4,173
    
    
    
    21.3
    
    
    
    6,131
    
    
    
    17.1
    
    
    
    23,255
    
    
    
    52.1Gross Profit
    
    
    10,640
    
    
    
    62.5
    
    
    
    10,536
    
    
    
    53.7
    
    
    
    21,259
    
    
    
    59.4
    
    
    
    11,185
    
    
    
    25.1Operating Expenses:Patient acquisition and related costs
    
    
    683
    
    
    
    4.0
    
    
    
    1,563
    
    
    
    8.0
    
    
    
    1,418
    
    
    
    4.0
    
    
    
    2,644
    
    
    
    5.9Patient service and fulfillment
    
    
    2,141
    
    
    
    12.6
    
    
    
    2,099
    
    
    
    10.7
    
    
    
    4,364
    
    
    
    12.2
    
    
    
    4,543
    
    
    
    10.2General and administrative
    
    
    5,325
    
    
    
    31.3
    
    
    
    8,129
    
    
    
    41.4
    
    
    
    11,199
    
    
    
    31.3
    
    
    
    15,971
    
    
    
    35.8Provision for doubtful accounts
    
    
    528
    
    
    
    3.1
    
    
    
    990
    
    
    
    5.0
    
    
    
    1,263
    
    
    
    3.5
    
    
    
    1,846
    
    
    
    4.1Depreciation and amortization
    
    
    508
    
    
    
    3.0
    
    
    
    322
    
    
    
    1.6
    
    
    
    915
    
    
    
    2.6
    
    
    
    666
    
    
    
    1.5Amortization of customer contract
intangible
    
    
    969
    
    
    
    5.7
    
    
    
    970
    
    
    
    4.9
    
    
    
    1,939
    
    
    
    5.4
    
    
    
    1,939
    
    
    
    4.3Impairment of investment in joint
venture
    
    
    
    
    
    
    
    
    
    
    733
    
    
    
    3.7
    
    
    
    
    
    
    
    
    
    
    
    733
    
    
    
    1.610,154
    
    
    
    59.6
    
    
    
    14,806
    
    
    
    75.5
    
    
    
    21,098
    
    
    
    59.0
    
    
    
    28,342
    
    
    
    63.5Income (Loss) from Operations
    
    
    486
    
    
    
    2.9
    
    
    
    (4,270
    )
    
    
    (21.8
    )
    
    
    161
    
    
    
    0.4
    
    
    
    (17,157
    )
    
    
    (38.4
    )Other expense, net
    
    
    (1,010
    )
    
    
    (5.9
    )
    
    
    (727
    )
    
    
    (3.7
    )
    
    
    (1,873
    )
    
    
    (5.2
    )
    
    
    (1,370
    )
    
    
    (3.1
    )Net loss
    
    
    ($524
    )
    
    
    (3.1
    %)
    
    
    ($4,997
    )
    
    
    (25.5
    %)
    
    
    ($1,712
    )
    
    
    (4.8
    %)
    
    
    ($18,527
    )
    
    
    (41.5
    %)
 Three Months Ended June 30, 2007 Compared to Three Months Ended June 30, 2006
 Revenue.
  15




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Cost of Product Sales .
 Cost of Services.
 Gross Profit Margin.
 Patient Acquisition and Related Costs.
 Patient Service and Fulfillment Expenses .
  16




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General and Administrative Expenses .
 Provision for Doubtful Accounts.
 Depreciation and Amortization .
 Other Expense, net.
 Six Months Ended June 30, 2007 Compared to Six Months Ended June 30, 2006
 Revenue.
  Cost of Product Sales .
  17




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Cost of Services.
 Gross Profit Margin.
 Patient Acquisition and Related Costs.
 Patient Service and Fulfillment Expenses .
 General and Administrative Expenses .
 Provision for Doubtful Accounts.
  18




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Depreciation and Amortization .
 Other Expense, net.
 LIQUIDITY AND CAPITAL RESOURCES
        19




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Off-Balance-Sheet Arrangements
  Recently Adopted Accounting Standards
 Accounting for Uncertainty in Income Taxes
  20




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Fair Value Measurements
 The Fair Value Option for Financial Assets
and Financial Liabilities
 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
  
 Item 4T. Controls and Procedures
     21




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PART IIOTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
 Certain executive officers have rights under employment agreements that could require us to make
substantial payments to them.
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Item 4. Submission of Matters to a Vote of Security Holders
  For
    
    
    Against
    
    
    WithheldArthur Spector
    
    
    25,269,129
    
    
    
    
    
    
    
    44,244Glenn M. Parker, M.D.
    
    
    25,268,659
    
    
    
    
    
    
    
    44,714Elliot F. Hahn, Ph.D.
    
    
    25,598,273
    
    
    
    
    
    
    
    15,100Timothy Fairbanks
    
    
    25,267,999
    
    
    
    
    
    
    
    45,374
 
 Item 6. Exhibits
    23




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##### Table of Contents



SIGNATURES
  NATIONSHEALTH, INC.Date: August 14, 2007
    By:
    /s/ Glenn M. ParkerName:
    Glenn M. ParkerTitle:
    Chief Executive Officer
(Principal Executive Officer)Date: August 14, 2007
    By:
    /s/ Timothy FairbanksName:
    Timothy FairbanksTitle:
    Chief Financial Officer
(Principal Financial Officer)Date: August 14, 2007
    By:
    /s/ Bryan HappName:
    Bryan HappTitle:
    Chief Accounting Officer
(Principal Accounting Officer)  24




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##### Table of Contents



NATIONSHEALTH, INC.
 EXHIBIT INDEX
 ExhibitNo.
    
    Description10.1
    
    Acknowledgement by Robert Gregg to NationsHealth, Inc. dated July 16, 2007.31.1
    
    Certification of Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Chief Executive Officer and Chief Financial Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  25