##### 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 March 31, 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 MARCH 31, 2008
 INDEX
 PagePART I.Item 1.
    
    Financial StatementsCondensed Consolidated Balance Sheets  as of March 31, 2008 (Unaudited) and December 31, 2007
    
    
    2Condensed Consolidated Statements of Operations (Unaudited)  for the Three Months EndedMarch 31, 2008 and 2007
    
    
    3Condensed Consolidated Statements of Cash Flows (Unaudited)  for the Three Months EndedMarch 31, 2008 and 2007
    
    
    4Notes to Condensed Consolidated Financial Statements (Unaudited)
    
    
    5Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    10Item 4.
    
    Controls and Procedures
    
    
    18PART II.Item 1.
    
    Legal Proceedings
    
    
    19Item 1A.
    
    Risk Factors
    
    
    19Item 6.
    
    Exhibits
    
    
    20Signatures
    
    
    21Exhibit 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)
 March 31,
    
    
    December 31,2008
    
    
    2007(Unaudited)ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    1,412
    
    
    $
    1,925Accounts receivable, net of allowances of $8,667 and $7,974, respectively
    
    
    13,467
    
    
    
    10,993Inventory
    
    
    2,946
    
    
    
    2,557Prepaid expenses and other current assets
    
    
    1,633
    
    
    
    1,253Total current assets
    
    
    19,458
    
    
    
    16,728Property and equipment, net
    
    
    4,204
    
    
    
    4,666Customer contract intangible, net
    
    
    6,785
    
    
    
    7,755Acquired customer lists, net
    
    
    2,756
    
    
    
    3,090Other intangible assets, net
    
    
    822
    
    
    
    907Goodwill
    
    
    1,075
    
    
    
    1,075Restricted cash
    
    
    1,899
    
    
    
    1,899Other assets, net
    
    
    1,286
    
    
    
    1,360Total assets
    
    $
    38,285
    
    
    $
    37,480LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Accounts payable
    
    $
    6,235
    
    
    $
    6,314Accrued expenses
    
    
    6,388
    
    
    
    4,553Promissory note payable, net
    
    
    
    
    
    
    1,478Current portion of long-term debt
    
    
    3,978
    
    
    
    3,489Line of credit
    
    
    4,619
    
    
    
    2,500Total current liabilities
    
    
    21,220
    
    
    
    18,334Long-Term Liabilities:Convertible notes, related party, net
    
    
    8,112
    
    
    
    7,715Long-term debt
    
    
    4,490
    
    
    
    5,376Other long-term liabilities
    
    
    1,305
    
    
    
    1,212Total long-term liabilities
    
    
    13,907
    
    
    
    14,303Stockholders Equity:Common stock
    
    
    3
    
    
    
    3Additional paid-in capital
    
    
    74,427
    
    
    
    74,218Accumulated deficit
    
    
    (71,272
    )
    
    
    (69,378
    )Total stockholders equity
    
    
    3,158
    
    
    
    4,843Total liabilities and stockholders equity
    
    $
    38,285
    
    
    $
    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 EndedMarch 31,2008
    
    
    2007Revenue:Net product sales
    
    $
    14,998
    
    
    $
    11,074Service revenue
    
    
    8,493
    
    
    
    7,67823,491
    
    
    
    18,752Cost of product sales
    
    
    7,778
    
    
    
    4,398Cost of services
    
    
    3,160
    
    
    
    3,735Gross Profit
    
    
    12,553
    
    
    
    10,619Operating Expenses:Patient acquisition and related costs
    
    
    519
    
    
    
    736Patient service and fulfillment
    
    
    3,273
    
    
    
    2,227General and administrative
    
    
    6,666
    
    
    
    5,871Provision for doubtful accounts
    
    
    970
    
    
    
    735Depreciation and amortization
    
    
    1,763
    
    
    
    1,37613,191
    
    
    
    10,945Loss from Operations
    
    
    (638
    )
    
    
    (326
    )Other Income (Expense):Interest expense , related party
    
    
    (724
    )
    
    
    (650
    )Other interest expense, net
    
    
    (532
    )
    
    
    (212
    )(1,256
    )
    
    
    (862
    )Net Loss
    
    $
    (1,894
    )
    
    $
    (1,188
    )Loss per share  basic and diluted
    
    $
    (0.07
    )
    
    $
    (0.04
    )Weighted average shares outstanding  basic
and diluted
    
    
    29,001
    
    
    
    28,043
 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 Three Months EndedMarch 31,2008
    
    
    2007Cash Flows from Operating Activities:Net Loss
    
    $
    (1,894
    )
    
    $
    (1,188
    )Adjustments to reconcile net loss to net cash and cash equivalents used in
operating activities:Provision for doubtful accounts
    
    
    970
    
    
    
    735Provision for sales allowances and returns
    
    
    374
    
    
    
    326Depreciation and amortization
    
    
    2,015
    
    
    
    1,541Amortization of note discount and other non-cash interest charges, net
    
    
    606
    
    
    
    429Stock-based compensation
    
    
    271
    
    
    
    353Changes in operating assets and liabilities:(Increase) decrease in:Accounts receivable
    
    
    (3,706
    )
    
    
    (2,892
    )Inventory
    
    
    (389
    )
    
    
    253Prepaid expenses and other assets
    
    
    (384
    )
    
    
    (154
    )Increase (decrease) in:Accounts payable and accrued expenses
    
    
    1,587
    
    
    
    (923
    )Net cash and cash equivalents used in operating activities
    
    
    (550
    )
    
    
    (1,520
    )Cash Flows from Investing Activities:Acquisition of property and equipment
    
    
    (165
    )
    
    
    (258
    )Net cash and cash equivalents used in investing activities
    
    
    (165
    )
    
    
    (258
    )Cash Flows from Financing Activities:Net draws on line of credit
    
    
    2,119
    
    
    
    Principal payments on long-term debt
    
    
    (397
    )
    
    
    (53
    )Payment of promissory note
    
    
    (1,500
    )
    
    
    Payment of debt issuance costs
    
    
    (20
    )
    
    
    Net cash and cash equivalents provided by (used in ) financing activities
    
    
    202
    
    
    
    (53
    )Net Decrease in Cash and Cash Equivalents
    
    
    (513
    )
    
    
    (1,831
    )Cash and Cash Equivalents, Beginning of Period
    
    
    1,925
    
    
    
    4,224Cash and Cash Equivalents, End of Period
    
    $
    1,412
    
    
    $
    2,393Non-cash Investing and Financing Activities:Property and equipment acquired under capital leases
    
    $
    
    
    
    $
    847
 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.
    
    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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4.
    
    CONVERTIBLE NOTES
      7




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5.
    
    COMMITMENTS AND CONTINGENCIES
 Employment Separation Agreement
    6.
    
    SEGMENT INFORMATION
   8




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Three Months Ended March 31,2008
    
    
    2007Revenue:Medical Products
    
    $
    14,998
    
    
    $
    11,074Insurance Services
    
    
    8,493
    
    
    
    7,678Consolidated revenue
    
    $
    23,491
    
    
    $
    18,752Segment profit (loss):Medical Products
    
    $
    101
    
    
    $
    1,601Insurance Services
    
    
    3,614
    
    
    
    2,090Unallocated corporate expenses
    
    
    (4,353
    )
    
    
    (4,017
    )Consolidated loss from operations
    
    $
    (638
    )
    
    $
    (326
    )
 7.
    
    SUBSEQUENT EVENT
    9




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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.
   
    
    Our ability to successfully maintain our Insurance Services segment
    
    Competitive bidding 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
    
    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
 
  10




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
    
    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
    
    Transfer of listing of our common stock from the NASDAQ Capital Market to the
Over-The-Counter Bulletin Board may result in reduced liquidity
  Business
    11




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Medical Products Segment
    Insurance Services Segment
   12




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Critical Accounting Policies
   13




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Results of Operations
  2008
    
    
    2007$
    
    
    %
    
    
    $
    
    
    %Revenue:Net product sales
    
    $
    14,998
    
    
    
    63.8
    %
    
    $
    11,074
    
    
    
    59.1
    %Service revenue
    
    
    8,493
    
    
    
    36.2
    
    
    
    7,678
    
    
    
    40.923,491
    
    
    
    100.0
    
    
    
    18,752
    
    
    
    100.0Cost of product sales
    
    
    7,778
    
    
    
    33.1
    
    
    
    4,398
    
    
    
    23.5Cost of services
    
    
    3,160
    
    
    
    13.5
    
    
    
    3,735
    
    
    
    19.9Gross Profit
    
    
    12,553
    
    
    
    53.4
    
    
    
    10,619
    
    
    
    56.6Operating Expenses:Patient acquisition and related costs
    
    
    519
    
    
    
    2.2
    
    
    
    736
    
    
    
    3.9Patient service and fulfillment
    
    
    3,273
    
    
    
    13.9
    
    
    
    2,227
    
    
    
    11.9General and administrative
    
    
    6,666
    
    
    
    28.4
    
    
    
    5,871
    
    
    
    31.3Provision for doubtful accounts
    
    
    970
    
    
    
    4.1
    
    
    
    735
    
    
    
    3.9Depreciation and amortization
    
    
    1,763
    
    
    
    7.5
    
    
    
    1,376
    
    
    
    7.313,191
    
    
    
    56.2
    
    
    
    10,945
    
    
    
    58.4Loss from Operations
    
    
    (638
    )
    
    
    (2.7
    )
    
    
    (326
    )
    
    
    (1.7
    )Other expense, net
    
    
    (1,256
    )
    
    
    (5.3
    )
    
    
    (862
    )
    
    
    (4.6
    )Net Loss
    
    $
    (1,894
    )
    
    
    (8.1
    %)
    
    $
    (1,188
    )
    
    
    (6.3
    %)
 Three Months Ended March 31, 2008 Compared to Three Months Ended March 31, 2007
 Revenue.
  Cost of Product Sales .
  14




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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.
 Depreciation and Amortization .
 Other Expense, net.
  15




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LIQUIDITY AND CAPITAL RESOURCES
         16




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Off-Balance-Sheet Arrangements
  Recently Adopted Accounting Standards
 Fair Value Measurements
  17




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The Fair Value Option for Financial Assets
and Financial Liabilities
 NASDAQ Delisting
    
 Item 4.
    
    Controls and Procedures
 Disclosure Controls and Procedures .
 Changes in Internal Control over Financial Reporting .
  18




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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.
    19




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Certain executive officers have rights under employment agreements that could require us to make
substantial payments to them.
     
 Item 6.
    
    Exhibits
 (a)
    
    Exhibits
   20




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SIGNATURES
  NATIONSHEALTH, INC.Date: May 14, 2008
    By:
    /s/ Glenn M. ParkerName:
    Glenn M. ParkerTitle:
    Chief Executive Officer
(Principal Executive Officer)Date: May 14, 2008
    By:
    /s/ Timothy FairbanksName:
    Timothy FairbanksTitle:
    Chief Financial Officer
(Principal Financial Officer)Date: May 14, 2008
    By:
    /s/ Bryan HappName:
    Bryan HappTitle:
    Chief Accounting Officer
(Principal Accounting Officer)  21




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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.
  22