##### 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 June 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 JUNE 30, 2008
 INDEX
 PagePART I.Item 1. Financial StatementsCondensed Consolidated Balance Sheets  as of June 30, 2008 (Unaudited) and December
31, 2007
    
    
    2Condensed Consolidated Statements of Operations (Unaudited) for the Three and Six
Months Ended June 30, 2008 and 2007
    
    
    3Condensed Consolidated Statements of Cash Flows (Unaudited) for the Six Months
Ended June 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
    
    
    10Item 4. Controls and Procedures
    
    
    20PART II.Item 1. Legal Proceedings
    
    
    21Item 1A. Risk Factors
    
    
    21Item 4. Submission of Matters to a Vote of Security Holders
    
    
    23Item 6. Exhibits
    
    
    23Signatures
    
    
    24Exhibit 10.69Exhibit 10.70Exhibit 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 31,2008
    
    
    2007(Unaudited)ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    843
    
    
    $
    1,925Accounts receivable, net of allowances of $9,838 and $7,974, respectively
    
    
    14,186
    
    
    
    10,993Inventory
    
    
    3,814
    
    
    
    2,557Prepaid expenses and other current assets
    
    
    2,272
    
    
    
    1,253Total current assets
    
    
    21,115
    
    
    
    16,728Property and equipment, net
    
    
    3,768
    
    
    
    4,666Customer contract intangible, net
    
    
    6,219
    
    
    
    7,755Acquired customer lists, net
    
    
    2,479
    
    
    
    3,090Other intangible assets, net
    
    
    737
    
    
    
    907Goodwill
    
    
    1,075
    
    
    
    1,075Restricted cash
    
    
    1,899
    
    
    
    1,899Other assets, net
    
    
    1,212
    
    
    
    1,360Total assets
    
    $
    38,504
    
    
    $
    37,480LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Accounts payable
    
    $
    6,000
    
    
    $
    6,314Accrued expenses
    
    
    6,364
    
    
    
    4,553Promissory note payable, net
    
    
    
    
    
    
    1,478Current portion of long-term debt
    
    
    4,704
    
    
    
    3,489Line of credit
    
    
    6,304
    
    
    
    2,500Total current liabilities
    
    
    23,372
    
    
    
    18,334Long-Term Liabilities:Convertible notes, related party, net
    
    
    8,531
    
    
    
    7,715Long-term debt
    
    
    3,594
    
    
    
    5,376Other long-term liabilities
    
    
    1,405
    
    
    
    1,212Total long-term liabilities
    
    
    13,530
    
    
    
    14,303Stockholders Equity:Common stock
    
    
    3
    
    
    
    3Additional paid-in capital
    
    
    74,813
    
    
    
    74,218Accumulated deficit
    
    
    (73,214
    )
    
    
    (69,378
    )Total stockholders equity
    
    
    1,602
    
    
    
    4,843Total liabilities and stockholders equity
    
    $
    38,504
    
    
    $
    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 Six MonthsEnded June 30,
    
    
    Ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Revenue:Net product sales
    
    $
    16,341
    
    
    $
    10,201
    
    
    $
    31,339
    
    
    $
    21,276Service revenue
    
    
    8,315
    
    
    
    6,824
    
    
    
    16,808
    
    
    
    14,50224,656
    
    
    
    17,025
    
    
    
    48,147
    
    
    
    35,778Cost of product sales
    
    
    9,474
    
    
    
    3,990
    
    
    
    17,252
    
    
    
    8,388Cost of services
    
    
    2,481
    
    
    
    2,395
    
    
    
    5,641
    
    
    
    6,131Gross Profit
    
    
    12,701
    
    
    
    10,640
    
    
    
    25,254
    
    
    
    21,259Operating Expenses:Patient acquisition and related costs
    
    
    537
    
    
    
    683
    
    
    
    1,056
    
    
    
    1,418Patient service and fulfillment
    
    
    3,378
    
    
    
    2,141
    
    
    
    6,650
    
    
    
    4,364General and administrative
    
    
    5,511
    
    
    
    5,325
    
    
    
    12,178
    
    
    
    11,199Provision for doubtful accounts
    
    
    1,084
    
    
    
    528
    
    
    
    2,054
    
    
    
    1,263Depreciation and amortization
    
    
    1,348
    
    
    
    1,477
    
    
    
    3,111
    
    
    
    2,854Restructuring costs
    
    
    1,507
    
    
    
    
    
    
    
    1,507
    
    
    
    13,365
    
    
    
    10,154
    
    
    
    26,556
    
    
    
    21,098Income (Loss) from Operations
    
    
    (664
    )
    
    
    486
    
    
    
    (1,302
    )
    
    
    161Other Expense:Interest expense , related party
    
    
    (745
    )
    
    
    (668
    )
    
    
    (1,470
    )
    
    
    (1,318
    )Other interest expense, net
    
    
    (532
    )
    
    
    (342
    )
    
    
    (1,063
    )
    
    
    (555
    )(1,277
    )
    
    
    (1,010
    )
    
    
    (2,533
    )
    
    
    (1,873
    )Net Loss
    
    $
    (1,941
    )
    
    $
    (524
    )
    
    $
    (3,835
    )
    
    $
    (1,712
    )Loss per share  basic and diluted
    
    $
    (0.07
    )
    
    $
    (0.02
    )
    
    $
    (0.13
    )
    
    $
    (0.06
    )Weighted average shares outstanding  basic and
diluted
    
    
    28,819
    
    
    
    28,080
    
    
    
    28,910
    
    
    
    28,062
 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 30,2008
    
    
    2007Cash Flows from Operating Activities:Net Loss
    
    $
    (3,835
    )
    
    $
    (1,712
    )Adjustments to reconcile net loss to net cash and cash equivalents
used in operating activities:Provision for doubtful accounts
    
    
    2,054
    
    
    
    1,263Provision for sales allowances and returns
    
    
    979
    
    
    
    547Depreciation and amortization
    
    
    3,573
    
    
    
    3,185Amortization of note discount and other non-cash interest charges, net
    
    
    1,219
    
    
    
    974Stock-based compensation
    
    
    664
    
    
    
    698Changes in operating assets and liabilities:(Increase) decrease in:Accounts receivable
    
    
    (5,956
    )
    
    
    (3,197
    )Inventory
    
    
    (1,257
    )
    
    
    82Prepaid expenses and other assets
    
    
    (665
    )
    
    
    (561
    )Increase (decrease) in:Accounts payable and accrued expenses
    
    
    1,240
    
    
    
    (3,684
    )Net cash and cash equivalents used in operating activities
    
    
    (1,984
    )
    
    
    (2,405
    )Cash Flows from Investing Activities:Asset acquisitions
    
    
    
    
    
    
    (2,686
    )Acquisition of property and equipment
    
    
    (747
    )
    
    
    (515
    )Net cash and cash equivalents used in investing activities
    
    
    (747
    )
    
    
    (3,201
    )Cash Flows from Financing Activities:Net draws on line of credit
    
    
    3,804
    
    
    
    Draws on term loan
    
    
    
    
    
    
    4,151Principal payments on long-term debt
    
    
    (567
    )
    
    
    (117
    )Payment of promissory note
    
    
    (1,500
    )
    
    
    Deposit of restricted cash under credit facility
    
    
    
    
    
    
    (1,500
    )Repurchases of common stock
    
    
    (69
    )
    
    
    (16
    )Payment of debt issuance costs
    
    
    (19
    )
    
    
    Net cash and cash equivalents provided by financing activities
    
    
    1,649
    
    
    
    2,518Net Decrease in Cash and Cash Equivalents
    
    
    (1,082
    )
    
    
    (3,088
    )Cash and Cash Equivalents, Beginning of Period
    
    
    1,925
    
    
    
    4,224Cash and Cash Equivalents, End of Period
    
    $
    843
    
    
    $
    1,136Non-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. CIGNA AGREEMENT
    4. 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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5. CONVERTIBLE NOTES
    7




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6. RESTRUCTURING COSTS
  7. COMMITMENTS AND CONTINGENCIES
    8




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8. SEGMENT INFORMATION
    Three Months Ended June 30,
    
    
    Six Months Ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Revenue:Medical Products
    
    $
    16,341
    
    
    $
    10,201
    
    
    $
    31,339
    
    
    $
    21,276Insurance Services
    
    
    8,315
    
    
    
    6,824
    
    
    
    16,808
    
    
    
    14,502Consolidated revenue
    
    $
    24,656
    
    
    $
    17,025
    
    
    $
    48,147
    
    
    $
    35,778Segment profit (loss):Medical Products
    
    $
    (81
    )
    
    $
    1,492
    
    
    $
    20
    
    
    $
    3,093Insurance Services (1)
    
    
    4,594
    
    
    
    2,689
    
    
    
    8,208
    
    
    
    4,778Unallocated amounts:Restructuring costs
    
    
    (1,507
    )
    
    
    
    
    
    
    (1,507
    )
    
    
    Other corporate expenses
    
    
    (3,670
    )
    
    
    (3,695
    )
    
    
    (8,023
    )
    
    
    (7,710
    )Consolidated income (loss) from operations
    
    $
    (664
    )
    
    $
    486
    
    
    $
    (1,302
    )
    
    $
    161
 (1)
    
    Segment profit for Insurance Services for the three and six month periods ended June 30,
2008 includes a gain of $500,000 realized pursuant to the CIGNA Second Amendment (See Note 3).  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
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
 
    
    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
  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
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007$
    
    
    %
    
    
    $
    
    
    %
    
    
    $
    
    
    %
    
    
    $
    
    
    %Revenue:Net product sales
    
    $
    16,341
    
    
    
    66.3
    %
    
    $
    10,201
    
    
    
    59.9
    %
    
    $
    31,339
    
    
    
    65.1
    %
    
    $
    21,276
    
    
    
    59.5
    %Service revenue
    
    
    8,315
    
    
    
    33.7
    
    
    
    6,824
    
    
    
    40.1
    
    
    
    16,808
    
    
    
    34.9
    
    
    
    14,502
    
    
    
    40.524,656
    
    
    
    100.0
    
    
    
    17,025
    
    
    
    100.0
    
    
    
    48,147
    
    
    
    100.0
    
    
    
    35,778
    
    
    
    100.0Cost of product sales
    
    
    9,474
    
    
    
    38.4
    
    
    
    3,990
    
    
    
    23.4
    
    
    
    17,252
    
    
    
    35.8
    
    
    
    8,388
    
    
    
    23.5Cost of services
    
    
    2,481
    
    
    
    10.1
    
    
    
    2,395
    
    
    
    14.1
    
    
    
    5,641
    
    
    
    11.7
    
    
    
    6,131
    
    
    
    17.1Gross Profit
    
    
    12,701
    
    
    
    51.5
    
    
    
    10,640
    
    
    
    62.5
    
    
    
    25,254
    
    
    
    52.5
    
    
    
    21,259
    
    
    
    59.4Operating Expenses:Patient acquisition and related costs
    
    
    537
    
    
    
    2.2
    
    
    
    683
    
    
    
    4.0
    
    
    
    1,056
    
    
    
    2.2
    
    
    
    1,418
    
    
    
    4.0Patient service and fulfillment
    
    
    3,378
    
    
    
    13.7
    
    
    
    2,141
    
    
    
    12.6
    
    
    
    6,650
    
    
    
    13.8
    
    
    
    4,364
    
    
    
    12.2General and administrative
    
    
    5,511
    
    
    
    22.4
    
    
    
    5,325
    
    
    
    31.3
    
    
    
    12,178
    
    
    
    25.3
    
    
    
    11,199
    
    
    
    31.3Provision for doubtful accounts
    
    
    1,084
    
    
    
    4.4
    
    
    
    528
    
    
    
    3.1
    
    
    
    2,054
    
    
    
    4.3
    
    
    
    1,263
    
    
    
    3.5Depreciation and amortization
    
    
    1,348
    
    
    
    5.5
    
    
    
    1,477
    
    
    
    8.7
    
    
    
    3,111
    
    
    
    6.5
    
    
    
    2,854
    
    
    
    8.0Restructuring costs
    
    
    1,507
    
    
    
    6.1
    
    
    
    
    
    
    
    
    
    
    
    1,507
    
    
    
    3.1
    
    
    
    
    
    
    
    13,365
    
    
    
    54.2
    
    
    
    10,154
    
    
    
    59.6
    
    
    
    26,556
    
    
    
    55.2
    
    
    
    21,098
    
    
    
    59.0Income (Loss) from Operations
    
    
    (664
    )
    
    
    (2.7
    )
    
    
    486
    
    
    
    2.9
    
    
    
    (1,302
    )
    
    
    (2.7
    )
    
    
    161
    
    
    
    0.4Other expense, net
    
    
    (1,277
    )
    
    
    (5.2
    )
    
    
    (1,010
    )
    
    
    (5.9
    )
    
    
    (2,533
    )
    
    
    (5.3
    )
    
    
    (1,873
    )
    
    
    (5.2
    )Net loss
    
    $
    (1,941
    )
    
    
    (7.9
    %)
    
    $
    (524
    )
    
    
    (3.1
    %)
    
    $
    (3,835
    )
    
    
    (8.0
    %)
    
    $
    (1,712
    )
    
    
    (4.8
    %)
 Three Months Ended June 30, 2008 Compared to Three Months Ended June 30, 2007
 Revenue.
   14




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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 .
 Provision for Doubtful Accounts.
 Depreciation and Amortization .
  15




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Restructuring costs.
 Other Expense, net.
 Six Months Ended June 30, 2008 Compared to Six Months Ended June 30, 2007
 Revenue.
  Cost of Product Sales .
 Cost of Services .
 Gross Profit Margin .
 Patient Acquisition and Related Costs.
  16




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Patient Service and Fulfillment Expenses .
 General and Administrative Expenses .
 Provision for Doubtful Accounts.
 Depreciation and Amortization .
 Restructuring costs.
 Other Expense, net.
  17




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LIQUIDITY AND CAPITAL RESOURCES
          18




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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
  19




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Business Combinations
 NASDAQ Delisting
    
 Item 4. Controls and Procedures
 Disclosure Controls and Procedures .
 Changes in Internal Control over Financial Reporting .
  20




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PART IIOTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
 We could experience significantly reduced revenues and earnings if Medicare changes, delays,
reduces or denies reimbursement.
  Competitive bidding for DMEPOS and supplies may reduce our revenues and earnings.
    21




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Certain executive officers have rights under employment agreements that could require us to make
substantial payments to them.
       22




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Item 4. Submission of Matters to a Vote of Security Holders
  For
    
    
    Against
    
    
    WithheldGary D. Small, D.P.M.
    
    
    24,671,727
    
    
    
    
    
    
    
    524,766Michael D. Tabris
    
    
    24,653,727
    
    
    
    
    
    
    
    542,766Raymond N. Steinman
    
    
    24,682,027
    
    
    
    
    
    
    
    514,466Mark H. Rachesky, M.D.
    
    
    24,713,277
    
    
    
    
    
    
    
    483,216
 
 Item 6. Exhibits
    23




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SIGNATURES
  NATIONSHEALTH, INC.Date: August 14, 2008
    By:
    /s/ Glenn M. ParkerName:
    Glenn M. ParkerTitle:
    Chief Executive Officer
(Principal Executive Officer)Date: August 14, 2008
    By:
    /s/ Bryan HappName:
    Bryan HappTitle:
    Chief Financial Officer
(Principal Financial Officer)  24




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##### Table of Contents



NATIONSHEALTH, INC.
 
 EXHIBIT INDEX
 ExhibitNo.
    
    Description10.69
    *
    

Second Amended and Restated Preferred Vendor Agreement By and Among
Connecticut General Life Insurance Company and United States
Pharmaceutical Group, LLC and NationsHealth, Inc. as of May 1, 2008.10.70
    
    
    Sixth Amendment to Third Amended and Restated Revolving Credit, Term Loan
and Security Agreement, among United States Pharmaceutical Group, L.L.C.,
NationsHealth, Holdings, L.L.C., NationsHealth, Inc., Diabetes Care and
Education, Inc. and CapitalSource Finance LLC, dated as of May 14, 2008.31.1
    
    
    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.
 *
    
    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.  25