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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 March 31, 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
    
    (I.R.S. Employerincorporation or organization)
    
    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
  o o þ
 o þ




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##### 



NATIONSHEALTH, INC.
 FORM 10-Q
 FOR THE QUARTER ENDED MARCH 31, 2007
 INDEX
 PagePART I.Item 1.
    
    Financial StatementsCondensed Consolidated Balance Sheets as of March 31, 2007 (Unaudited) and December
31, 2006
    
    
    2Condensed Consolidated Statements of Operations (Unaudited) for the Three Months
Ended March 31, 2007 and 2006
    
    
    3Condensed Consolidated Statements of Cash Flows (Unaudited) for the Three Months
Ended March 31, 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
    
    
    19Item 4T.
    
    Controls and Procedures
    
    
    19PART II.Item 1.
    
    Legal Proceedings
    
    
    20Item 1A.
    
    Risk Factors
    
    
    20Item 6.
    
    Exhibits
    
    
    21Signatures
    
    
    
    
    22Exhibit 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 31,2007
    
    
    2006(Unaudited)ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    2,393
    
    
    $
    4,224Accounts receivable, net of allowances of $13,219 and $12,451, respectively
    
    
    8,044
    
    
    
    6,075Inventory
    
    
    1,384
    
    
    
    1,636Costs related to billings in process, net
    
    
    533
    
    
    
    565Prepaid expenses and other current assets
    
    
    769
    
    
    
    748Total current assets
    
    
    13,123
    
    
    
    13,248Property and equipment, net
    
    
    4,123
    
    
    
    3,557Customer contract intangible, net
    
    
    10,663
    
    
    
    11,632Other assets, net
    
    
    2,021
    
    
    
    1,951Total assets
    
    $
    29,930
    
    
    $
    30,388LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Accounts payable
    
    $
    4,325
    
    
    $
    3,026Accrued expenses
    
    
    7,467
    
    
    
    9,069Promissory note payable, net
    
    
    1,364
    
    
    
    Line of credit
    
    
    2,500
    
    
    
    2,500Total current liabilities
    
    
    15,656
    
    
    
    14,595Long-Term Liabilities:Convertible notes, related party, net
    
    
    6,639
    
    
    
    6,316Promissory note payable, net
    
    
    
    
    
    
    1,328Other long-term liabilities
    
    
    1,103
    
    
    
    782Total long-term liabilities
    
    
    7,742
    
    
    
    8,426Stockholders Equity:Common stock
    
    
    3
    
    
    
    3Additional paid-in capital
    
    
    71,169
    
    
    
    70,816Accumulated deficit
    
    
    (64,640
    )
    
    
    (63,452
    )Total stockholders equity
    
    
    6,532
    
    
    
    7,367Total liabilities and stockholders equity
    
    $
    29,930
    
    
    $
    30,388
 The accompanying notes are an integral part of these condensed consolidated financial statements.
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NATIONSHEALTH, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited)
(In thousands, except per share data)
 For the Three Months EndedMarch 31,2007
    
    
    2006Revenue:Net product sales
    
    $
    11,074
    
    
    $
    10,854Prescription drug card revenue
    
    
    
    
    
    
    1,973Service revenue
    
    
    7,678
    
    
    
    12,18818,752
    
    
    
    25,015Cost of product sales
    
    
    4,398
    
    
    
    5,284Cost of services
    
    
    3,735
    
    
    
    19,082Gross Profit
    
    
    10,619
    
    
    
    649Operating Expenses:Patient acquisition and related costs
    
    
    736
    
    
    
    1,081Patient service and fulfillment
    
    
    2,227
    
    
    
    2,444General and administrative
    
    
    5,871
    
    
    
    7,842Provision for doubtful accounts
    
    
    735
    
    
    
    856Depreciation and amortization
    
    
    407
    
    
    
    344Amortization of customer contract intangible
    
    
    969
    
    
    
    96910,945
    
    
    
    13,536Loss from Operations
    
    
    (326
    )
    
    
    (12,887
    )Other Income (Expense):Interest expense, related party
    
    
    (650
    )
    
    
    (591
    )Other interest expense, net
    
    
    (212
    )
    
    
    (52
    )(862
    )
    
    
    (643
    )Net Loss
    
    $
    (1,188
    )
    
    $
    (13,530
    )Loss per share  basic and diluted
    
    $
    (0.04
    )
    
    $
    (0.49
    )Weighted average shares outstanding  basic and diluted
    
    
    28,043
    
    
    
    27,808
 The accompanying notes are an integral part of these condensed consolidated financial statements.
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NATIONSHEALTH, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
(In thousands)
 For the Three Months EndedMarch 31,2007
    
    
    2006Cash Flows from Operating Activities:Net Loss
    
    $
    (1,188
    )
    
    $
    (13,530
    )Adjustments to reconcile net loss to net cash and cash equivalents used in
operating activities:Provision for doubtful accounts
    
    
    735
    
    
    
    856Provision for sales allowances and returns
    
    
    326
    
    
    
    679Reserve for (recovery of) costs related to billings in process
    
    
    8
    
    
    
    (102
    )Depreciation and amortization
    
    
    572
    
    
    
    458Amortization of note discount
    
    
    359
    
    
    
    264Amortization of deferred loan costs and other non-cash interest charges, net
    
    
    70
    
    
    
    67Amortization of customer contract intangible
    
    
    969
    
    
    
    969Stock-based compensation
    
    
    353
    
    
    
    543Other non-cash charges
    
    
    
    
    
    
    400Changes in operating assets and liabilities:(Increase) decrease in:Accounts receivable
    
    
    (2,892
    )
    
    
    (2,399
    )Inventory
    
    
    253
    
    
    
    118Costs related to billings in process
    
    
    25
    
    
    
    133Prepaid expenses and other assets
    
    
    (187
    )
    
    
    265Increase (decrease) in:Accounts payable and accrued expenses
    
    
    (923
    )
    
    
    137Deferred revenue
    
    
    
    
    
    
    658Net cash and cash equivalents used in operating activities
    
    
    (1,520
    )
    
    
    (10,484
    )Cash Flows from Investing Activities:Maturity (purchase) of available for sale investments, net
    
    
    
    
    
    
    (1,496
    )Acquisition of property and equipment
    
    
    (258
    )
    
    
    (540
    )Net cash and cash equivalents used in investing activities
    
    
    (258
    )
    
    
    (2,036
    )Cash Flows from Financing Activities:Proceeds from exercise of warrants
    
    
    
    
    
    
    1,999Proceeds from exercise of stock options
    
    
    
    
    
    
    17Principal payments under capital lease obligations
    
    
    (53
    )
    
    
    (32
    )Net cash and cash equivalents (used in ) provided by financing activities
    
    
    (53
    )
    
    
    1,984Net Decrease in Cash and Cash Equivalents
    
    
    (1,831
    )
    
    
    (10,536
    )Cash and Cash Equivalents, Beginning of Period
    
    
    4,224
    
    
    
    13,971Cash and Cash Equivalents, End of Period
    
    $
    2,393
    
    
    $
    3,435Non-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.
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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. CREDIT FACILITY
   Balance Sheet Classification of Borrowings Outstanding
under Revolving Credit Agreements That Include both a Subjective Acceleration Clause and a Lock-Box
Arrangement.
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5. CONVERTIBLE NOTES
     7




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6. COMMITMENTS AND CONTINGENCIES
 Capital Lease
  Employment Separation Agreement
    8




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Medicare Audit
   7. SEGMENT INFORMATION
    9




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Three Months Ended March 31,2007
    
    
    2006Revenue:Medical Products (1)
    
    $
    11,074
    
    
    $
    12,827Insurance Services
    
    
    7,678
    
    
    
    12,188Consolidated revenue
    
    $
    18,752
    
    
    $
    25,015Segment profit (loss):Medical Products
    
    $
    1,601
    
    
    $
    2,255Insurance Services
    
    
    3,059
    
    
    
    (7,969
    )Unallocated amounts:Amortization of customer contract intangible
    
    
    (969
    )
    
    
    (969
    )Other corporate expenses
    
    
    (4,017
    )
    
    
    (6,204
    )Consolidated loss from operations
    
    $
    (326
    )
    
    $
    (12,887
    )
 (1)
    
    Revenue for the Medical Products segment includes net product sales and prescription drug
card revenue.
  8. INCOME TAXES
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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
    
    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) and supplies may reduce our revenues and earnings.
    
    We have invested significant capital and dedicated substantial resources to
launch our insurance services to Medicare prescription drug and managed care
providers, which may not be successful.
    
    If we do not have sufficient capital to fund additional advertising and 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.
    
    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.
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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
consequence of non-compliance could adversely affect our operations and profit
significantly.
    
    Our accounts receivable are subject to significant collection risk due to
third-party payors.
    
    Our business could suffer from rising insurance costs, the unavailability of
insurance or other events.
    
    Future sales of our common stock may depress our stock price.
    
    Voting control by our executive officers, directors and other affiliates may
limit your ability to influence the outcome of director elections and other matters
requiring stockholder approval.
    
    If we fail to maintain an effective system of internal control in the future, we
may not be able to accurately report our financial results or prevent fraud. As a
result, investors may lose confidence in our financial reporting.
    
    Compliance with changing regulations relating to 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
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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
  2007
    
    
    2006$
    
    
    %
    
    
    $
    
    
    %Revenue:Net product sales
    
    $
    11,074
    
    
    
    59.1
    %
    
    $
    10,854
    
    
    
    43.4
    %Prescription drug card revenue
    
    
    
    
    
    
    
    
    
    
    1,973
    
    
    
    7.9Service revenue
    
    
    7,678
    
    
    
    40.9
    
    
    
    12,188
    
    
    
    48.718,752
    
    
    
    100.0
    
    
    
    25,015
    
    
    
    100.0Cost of product sales
    
    
    4,398
    
    
    
    23.5
    
    
    
    5,284
    
    
    
    21.1Cost of services
    
    
    3,735
    
    
    
    19.9
    
    
    
    19,082
    
    
    
    76.3Gross Profit
    
    
    10,619
    
    
    
    56.6
    
    
    
    649
    
    
    
    2.6Operating Expenses:Patient acquisition and related costs
    
    
    736
    
    
    
    3.9
    
    
    
    1,081
    
    
    
    4.3Patient service and fulfillment
    
    
    2,227
    
    
    
    11.9
    
    
    
    2,444
    
    
    
    9.8General and administrative
    
    
    5,871
    
    
    
    31.3
    
    
    
    7,842
    
    
    
    31.3Provision for doubtful accounts
    
    
    735
    
    
    
    3.9
    
    
    
    856
    
    
    
    3.4Depreciation and amortization
    
    
    407
    
    
    
    2.2
    
    
    
    344
    
    
    
    1.4Amortization of customer contract
intangible
    
    
    969
    
    
    
    5.2
    
    
    
    969
    
    
    
    3.910,945
    
    
    
    58.4
    
    
    
    13,536
    
    
    
    54.1Loss from Operations
    
    
    (326
    )
    
    
    (1.7
    )
    
    
    (12,887
    )
    
    
    (51.5
    )Other expense, net
    
    
    (862
    )
    
    
    (4.6
    )
    
    
    (643
    )
    
    
    (2.6
    )Net Loss
    
    $
    (1,188
    )
    
    
    (6.3
    %)
    
    $
    (13,530
    )
    
    
    (54.1
    %)
 Three Months Ended March 31, 2007 Compared to Three Months Ended March 31, 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 .
 Amortization of Customer Contract Intangible .
 LIQUIDITY AND CAPITAL RESOURCES
      17




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Off-Balance-Sheet Arrangements
   18




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Recently Adopted Accounting Standards
 Accounting for Uncertainty in Income Taxes
 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
     19




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PART IIOTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
 Competitive bidding for DMEPOS and supplies may reduce our revenues and earnings.
      20




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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
    21




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SIGNATURES
  NATIONSHEALTH, INC.Date: May 15, 2007
    By:
    /s/ Glenn M. ParkerName:
    Glenn M. ParkerTitle:
    Chief Executive Officer
(Principal Executive Officer)Date: May 15, 2007
    By:
    /s/ Timothy FairbanksName:
    Timothy FairbanksTitle:
    Chief Financial Officer
(Principal Financial Officer)Date: May 15, 2007
    By:
    /s/ Bryan HappName:
    Bryan HappTitle:
    Chief Accounting Officer
(Principal Accounting Officer)  22




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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.
  23