##### Table of Contents



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, 2008
 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 o
    
    Smaller reporting company þ(Do not check if a smaller reporting company)
 o þ




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##### 



NATIONSHEALTH, INC.
 FORM 10-Q
 FOR THE QUARTER ENDED SEPTEMBER 30, 2008
 INDEX
 PagePART IItem 1. Financial Statements
    
    
    2Condensed Consolidated Balance Sheets  as of September 30, 2008 (Unaudited) and
December 31, 2007
    
    
    2Condensed Consolidated Statements of Operations (Unaudited) for the Three and Nine
Months Ended September 30, 2008 and 2007
    
    
    3Condensed Consolidated Statements of Cash Flows (Unaudited) for the Nine Months
Ended September 30, 2008 and 2007
    
    
    4Notes to Condensed Consolidated Financial Statements (Unaudited)
    
    
    5Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    12Item 4. Controls and Procedures
    
    
    24PART IIItem 1. Legal Proceedings
    
    
    25Item 1A. Risk Factors
    
    
    25Item 3. Defaults Upon Senior Securities
    
    
    26Item 6. Exhibits
    
    
    26Signatures
    
    
    27Exhibit 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)
 September 30,
    
    
    December 31,2008
    
    
    2007(Unaudited)ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    1,578
    
    
    $
    1,925Accounts receivable, net of allowances of $10,775 and $7,974, respectively
    
    
    15,526
    
    
    
    10,993Inventory
    
    
    3,227
    
    
    
    2,557Prepaid expenses and other current assets
    
    
    2,463
    
    
    
    1,253Total current assets
    
    
    22,794
    
    
    
    16,728Property and equipment, net
    
    
    3,558
    
    
    
    4,666Customer contract intangible, net
    
    
    5,853
    
    
    
    7,755Acquired customer lists, net
    
    
    2,246
    
    
    
    3,090Other intangible assets, net
    
    
    652
    
    
    
    907Goodwill
    
    
    1,075
    
    
    
    1,075Restricted cash
    
    
    1,899
    
    
    
    1,899Other assets, net
    
    
    1,142
    
    
    
    1,360Total assets
    
    $
    39,219
    
    
    $
    37,480LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Accounts payable
    
    $
    5,071
    
    
    $
    6,314Accrued expenses
    
    
    8,089
    
    
    
    4,553Promissory note payable, net
    
    
    
    
    
    
    1,478Current portion of long-term debt
    
    
    6,024
    
    
    
    3,489Line of credit
    
    
    8,215
    
    
    
    2,500Convertible notes, related party, net
    
    
    8,972
    
    
    
    Total current liabilities
    
    
    36,371
    
    
    
    18,334Long-Term Liabilities:Convertible notes, related party, net
    
    
    
    
    
    
    7,715Long-term debt
    
    
    844
    
    
    
    5,376Other long-term liabilities
    
    
    527
    
    
    
    1,212Total long-term liabilities
    
    
    1,371
    
    
    
    14,303Stockholders Equity:Common stock
    
    
    3
    
    
    
    3Additional paid-in capital
    
    
    75,174
    
    
    
    74,218Accumulated deficit
    
    
    (73,700
    )
    
    
    (69,378
    )Total stockholders equity
    
    
    1,477
    
    
    
    4,843Total liabilities and stockholders equity
    
    $
    39,219
    
    
    $
    37,480
 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 Nine MonthsEnded September 30,
    
    
    Ended September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Revenue:Net product sales
    
    $
    17,522
    
    
    $
    10,728
    
    
    $
    48,861
    
    
    $
    32,003Service revenue
    
    
    7,755
    
    
    
    7,447
    
    
    
    24,564
    
    
    
    21,94925,277
    
    
    
    18,175
    
    
    
    73,425
    
    
    
    53,952Cost of product sales
    
    
    10,226
    
    
    
    5,140
    
    
    
    27,479
    
    
    
    13,527Cost of services
    
    
    2,551
    
    
    
    2,565
    
    
    
    8,192
    
    
    
    8,696Gross Profit
    
    
    12,500
    
    
    
    10,470
    
    
    
    37,754
    
    
    
    31,729Operating Expenses:Patient acquisition and related costs
    
    
    523
    
    
    
    1,242
    
    
    
    1,580
    
    
    
    2,661Patient service and fulfillment
    
    
    3,531
    
    
    
    2,340
    
    
    
    10,182
    
    
    
    6,708General and administrative
    
    
    5,215
    
    
    
    7,898
    
    
    
    17,392
    
    
    
    19,093Provision for doubtful accounts
    
    
    880
    
    
    
    226
    
    
    
    2,933
    
    
    
    1,489Depreciation and amortization
    
    
    1,050
    
    
    
    1,717
    
    
    
    4,161
    
    
    
    4,571Restructuring costs
    
    
    426
    
    
    
    
    
    
    
    1,933
    
    
    
    Gain on sale of business line
    
    
    
    
    
    
    (338
    )
    
    
    
    
    
    
    (338
    )11,625
    
    
    
    13,085
    
    
    
    38,181
    
    
    
    34,184Income (Loss) from Operations
    
    
    875
    
    
    
    (2,615
    )
    
    
    (427
    )
    
    
    (2,455
    )Other Expense:Interest expense, related party
    
    
    (767
    )
    
    
    (685
    )
    
    
    (2,237
    )
    
    
    (2,003
    )Other interest expense, net
    
    
    (594
    )
    
    
    (471
    )
    
    
    (1,658
    )
    
    
    (1,026
    )(1,361
    )
    
    
    (1,156
    )
    
    
    (3,895
    )
    
    
    (3,029
    )Net Loss
    
    $
    (486
    )
    
    $
    (3,771
    )
    
    $
    (4,322
    )
    
    $
    (5,484
    )Loss per share  basic and diluted
    
    $
    (0.02
    )
    
    $
    (0.13
    )
    
    $
    (0.15
    )
    
    $
    (0.19
    )Weighted average shares outstanding  basic and
diluted
    
    
    28,730
    
    
    
    28,314
    
    
    
    28,850
    
    
    
    28,147
 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 Nine months EndedSeptember 30,2008
    
    
    2007Cash Flows from Operating Activities:Net Loss
    
    $
    (4,322
    )
    
    $
    (5,484
    )Adjustments to reconcile net loss to net cash and cash equivalents
used in operating activities:Provision for doubtful accounts
    
    
    2,933
    
    
    
    1,489Provision for sales allowances and returns
    
    
    1,432
    
    
    
    746Depreciation and amortization
    
    
    4,904
    
    
    
    5,089Amortization of note discount and other non-cash interest charges, net
    
    
    1,855
    
    
    
    1,533Stock-based compensation
    
    
    1,115
    
    
    
    2,627Gain on sale of business line
    
    
    
    
    
    
    (338
    )Changes in operating assets and liabilities:(Increase) decrease in:Accounts receivable
    
    
    (8,482
    )
    
    
    (4,760
    )Inventory
    
    
    (670
    )
    
    
    (563
    )Prepaid expenses and other assets
    
    
    (878
    )
    
    
    (604
    )Increase (decrease) in:Accounts payable and accrued expenses
    
    
    874
    
    
    
    (2,229
    )Net cash and cash equivalents used in operating activities
    
    
    (1,239
    )
    
    
    (2,494
    )Cash Flows from Investing Activities:Asset acquisitions
    
    
    
    
    
    
    (2,803
    )Acquisition of Diabetes Care and Education, Inc., net of cash acquired
    
    
    
    
    
    
    (2,494
    )Acquisition of property and equipment
    
    
    (1,164
    )
    
    
    (787
    )Net cash and cash equivalents used in investing activities
    
    
    (1,164
    )
    
    
    (6,084
    )Cash Flows from Financing Activities:Net draws on line of credit
    
    
    5,715
    
    
    
    Draws on term loan
    
    
    
    
    
    
    6,768Principal payments on long-term debt
    
    
    (2,027
    )
    
    
    (245
    )Payment of promissory note
    
    
    (1,500
    )
    
    
    Deposit of restricted cash under credit facility
    
    
    
    
    
    
    (1,500
    )Repurchases of common stock
    
    
    (113
    )
    
    
    (16
    )Payment of debt issuance costs
    
    
    (19
    )
    
    
    Net cash and cash equivalents provided by financing activities
    
    
    2,056
    
    
    
    5,007Net Decrease in Cash and Cash Equivalents
    
    
    (347
    )
    
    
    (3,571
    )Cash and Cash Equivalents, Beginning of Period
    
    
    1,925
    
    
    
    4,224Cash and Cash Equivalents, End of Period
    
    $
    1,578
    
    
    $
    653Non-cash Investing and Financing Activities:Property and equipment acquired under capital leases
    
    $
    20
    
    
    $
    2,437
 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. LIQUIDITY CONSIDERATIONS
    5




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3. REVENUE RECOGNITION
    4. CIGNA AGREEMENT
    6




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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.
  straight-line
  7




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6. CONVERTIBLE NOTES
     8




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cross-default cross-acceleration
 7. RESTRUCTURING COSTS
  8. COMMITMENTS AND CONTINGENCIES
    9




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out-of-pocket
  10




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9. SEGMENT INFORMATION
    Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Revenue:Medical Products
    
    $
    17,522
    
    
    $
    10,728
    
    
    $
    48,861
    
    
    $
    32,003Insurance Services
    
    
    7,755
    
    
    
    7,447
    
    
    
    24,564
    
    
    
    21,949Consolidated revenue
    
    $
    25,277
    
    
    $
    18,175
    
    
    $
    73,425
    
    
    $
    53,952Segment profit (loss):Medical Products
    
    $
    325
    
    
    $
    (62
    )
    
    $
    344
    
    
    $
    3,031Insurance Services (1)
    
    
    4,113
    
    
    
    2,996
    
    
    
    12,321
    
    
    
    7,774Unallocated amounts:Restructuring costs
    
    
    (426
    )
    
    
    
    
    
    
    (1,933
    )
    
    
    Gain on sale of business line
    
    
    
    
    
    
    338
    
    
    
    
    
    
    
    338Other corporate expenses
    
    
    (3,137
    )
    
    
    (5,887
    )
    
    
    (11,159
    )
    
    
    (13,598
    )Consolidated income (loss) from operations
    
    $
    875
    
    
    $
    (2,615
    )
    
    $
    (427
    )
    
    $
    (2,455
    )
 (1)
    
    Segment profit for the Insurance Services segment for the nine month period ended September
30, 2008 includes a gain of $500,000 realized pursuant to the CIGNA Second Amendment (See Note 4).  11




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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;
    
    Available cash, 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.
   
    
    Restrictions imposed on us under our debt agreements may adversely affect our
ability to operate our business
    
    Our ability to successfully maintain our Insurance Services segment
    
    Competitive bidding for durable medical equipment (DME) and supplies
    
    Reduction in reimbursement rates by Medicare for DME and supplies
    
    Increases in the costs of medical products dispensed
    
    Our history of operating losses and the possibility that we will incur significant
additional operating losses
    
    Our ability to raise the capital that we will need to sustain our operations
    
    Our ability to attract new patients and retain existing patients
    
    Identification of, and competition for, growth and expansion opportunities
  12




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
    
    Compliance with, or changes in, government regulation and legislation, or
interpretations thereof, including, but not limited to, pharmacy licensing requirements
and healthcare reform legislation, including HIPAA
    
    An inability to establish and maintain successful collaborative relationships could
adversely affect our ability to generate revenue
    
    Adverse developments in any investigation related to the pharmaceutical industry
    
    Competition and technological change that may make our products and technologies
less attractive or obsolete
    
    Our ability to obtain and maintain intellectual property protection for our
technologies
    
    Adverse resolution of current or future lawsuits or investigations
    
    Significant fluctuations in our revenue and operating results, which have occurred
in the past and which could continue to fluctuate in the future
    
    Any loss or inability to hire and retain qualified personnel
    
    Our exposure to product liability in excess of our insurance coverage
    
    Any failure to maintain an effective system of internal controls in the future could
adversely affect our ability to accurately report financial results or prevent fraud
    
    Compliance with changing regulation of corporate governance and public disclosure
may result in additional expenses
    
    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
    13




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Medical Products Segment
    Insurance Services Segment
   14




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Critical Accounting Policies
   15




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Results of Operations
  Three Months Ended September 30,
    
    
    Nine months Ended September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007$
    
    
    %
    
    
    $
    
    
    %
    
    
    $
    
    
    %
    
    
    $
    
    
    %Revenue:Net product sales
    
    $
    17,522
    
    
    
    69.3
    %
    
    $
    10,728
    
    
    
    59.0
    %
    
    $
    48,861
    
    
    
    66.5
    %
    
    $
    32,003
    
    
    
    59.3
    %Service revenue
    
    
    7,755
    
    
    
    30.7
    
    
    
    7,447
    
    
    
    41.0
    
    
    
    24,564
    
    
    
    33.5
    
    
    
    21,949
    
    
    
    40.725,277
    
    
    
    100.0
    
    
    
    18,175
    
    
    
    100.0
    
    
    
    73,425
    
    
    
    100.0
    
    
    
    53,952
    
    
    
    100.0Cost of product sales
    
    
    10,226
    
    
    
    40.5
    
    
    
    5,140
    
    
    
    28.3
    
    
    
    27,479
    
    
    
    37.4
    
    
    
    13,527
    
    
    
    25.1Cost of services
    
    
    2,551
    
    
    
    10.1
    
    
    
    2,565
    
    
    
    14.1
    
    
    
    8,192
    
    
    
    11.2
    
    
    
    8,696
    
    
    
    16.1Gross Profit
    
    
    12,500
    
    
    
    49.5
    
    
    
    10,470
    
    
    
    57.6
    
    
    
    37,754
    
    
    
    51.4
    
    
    
    31,729
    
    
    
    58.8Operating Expenses:Patient acquisition and related costs
    
    
    523
    
    
    
    2.1
    
    
    
    1,242
    
    
    
    6.8
    
    
    
    1,580
    
    
    
    2.2
    
    
    
    2,661
    
    
    
    4.9Patient service and fulfillment
    
    
    3,531
    
    
    
    14.0
    
    
    
    2,340
    
    
    
    12.9
    
    
    
    10,182
    
    
    
    13.9
    
    
    
    6,708
    
    
    
    12.4General and administrative
    
    
    5,215
    
    
    
    20.6
    
    
    
    7,898
    
    
    
    43.5
    
    
    
    17,392
    
    
    
    23.7
    
    
    
    19,093
    
    
    
    35.4Provision for doubtful accounts
    
    
    880
    
    
    
    3.5
    
    
    
    226
    
    
    
    1.2
    
    
    
    2,933
    
    
    
    4.0
    
    
    
    1,489
    
    
    
    2.8Depreciation and amortization
    
    
    1,050
    
    
    
    4.2
    
    
    
    1,717
    
    
    
    9.4
    
    
    
    4,161
    
    
    
    5.7
    
    
    
    4,571
    
    
    
    8.5Gain on sale of business line
    
    
    
    
    
    
    
    
    
    
    (338
    )
    
    
    (1.9
    )
    
    
    
    
    
    
    
    
    
    
    (338
    )
    
    
    (0.6
    )Restructuring costs
    
    
    426
    
    
    
    1.7
    
    
    
    
    
    
    
    
    
    
    
    1,933
    
    
    
    2.6
    
    
    
    
    
    
    
    11,625
    
    
    
    46.0
    
    
    
    13,085
    
    
    
    72.0
    
    
    
    38,181
    
    
    
    52.0
    
    
    
    34,184
    
    
    
    63.4Income (Loss) from Operations
    
    
    875
    
    
    
    3.5
    
    
    
    (2,615
    )
    
    
    (14.4
    )
    
    
    (427
    )
    
    
    (0.6
    )
    
    
    (2,455
    )
    
    
    (4.6
    )Other expense, net
    
    
    (1,361
    )
    
    
    (5.4
    )
    
    
    (1,156
    )
    
    
    (6.4
    )
    
    
    (3,895
    )
    
    
    (5.3
    )
    
    
    (3,029
    )
    
    
    (5.6
    )Net loss
    
    
    ($486
    )
    
    
    (1.9
    %)
    
    
    ($3,771
    )
    
    
    (20.7
    %)
    
    
    ($4,322
    )
    
    
    (5.9
    %)
    
    
    ($5,484
    )
    
    
    (10.2
    %)
 Three Months Ended September 30, 2008 Compared to Three Months Ended September 30, 2007
 Revenue.
  16




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Cost of Product Sales .
 Cost of Services .
 Gross Profit Margin .
 Patient Acquisition and Related Costs.
 Patient Service and Fulfillment Expenses .
 General and Administrative Expenses . stock-based
  17




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Provision for Doubtful Accounts.
 Depreciation and Amortization .
 Gain on Sale of Business Line.
 Restructuring Costs.
 Other Expense, net.
 Nine Months Ended September 30, 2008 Compared to Nine Months Ended September 30, 2007
 Revenue.
   18




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Cost of Product Sales .
 Cost of Services .
 Gross Profit Margin .
 Patient Acquisition and Related Costs.
 Patient Service and Fulfillment Expenses .
 General and Administrative Expenses .
  19




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Provision for Doubtful Accounts.
 Depreciation and Amortization .
 Gain on Sale of Business Line.
 Restructuring Costs.
 Other Expense, net.
 LIQUIDITY AND CAPITAL RESOURCES
      20




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Off-Balance-Sheet Arrangements
  Recently Adopted Accounting Standards
 Fair Value Measurements
 The Fair Value Option for Financial Assets
and Financial Liabilities
 Business Combinations
 Determination of the Useful Life of
Intangible Assets
 Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement) APB
14-1
  23




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NASDAQ Delisting
    
 Item 4. Controls and Procedures
 Disclosure Controls and Procedures .
 Changes in Internal Control over Financial Reporting .
  24




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PART IIOTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
 The results of our Insurance Services segment are heavily dependent on revenue derived under our
agreement with CIGNA.
  one-year
 Our debt agreements impose restrictions on us that may adversely affect our ability to operate
our business.
   25




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cross-default cross-acceleration cross-default
  
 Item 3. Defaults Upon Senior Securities
  
 Item 6. Exhibits
    26




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SIGNATURES
  NATIONSHEALTH, INC.Date: November 14, 2008
    By:
    /s/ Glenn M. ParkerName:
    Glenn M. ParkerTitle:
    Chief Executive Officer
(Principal Executive Officer) Date: November 14, 2008
    By:
    /s/ Bryan HappName:
    Bryan HappTitle:
    Chief Financial Officer
(Principal Financial Officer)  27




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##### Table of Contents



NATIONSHEALTH, INC.
 
 EXHIBIT INDEX
 ExhibitNo.
    
    Description31.1
    
    
    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.
 *
    
    Portions of this Exhibit have been omitted and filed separately with the Securities and
Exchange Commission pursuant to a request for confidential treatment pursuant to Rule 24b-2 of the
Securities Exchange Act of 1934.  28