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**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

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**FORM 10-K**

 

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**(Mark One)**

 

**x****     ****Annual Report Pursuant to Section 13 or 15(d) of the SecuritiesExchange Act of 1934.**

** **

**For the fiscal year ended: December 31,2009**

** **

**o****        ****Transition Report Pursuant to Section 13 or 15(d) of theSecurities Exchange Act of 1934.**

** **

**For the transition period from                  to                    .**

** **

**Commission File Number: 000-51731**

** **

**NATIONAL HEALTH PARTNERS,INC.**

(ExactName of Registrant as Specified in Its Charter)

 

| **Indiana**(State or Other Jurisdiction

of Incorporation or Organization) |   | **04-3786176**(I.R.S. Employer Identification No.) |
|----------------------------------------------------------------------------|--------|----------------------------------------------------|

 

| **120 Gibraltar Road, Suite 107**

**Horsham, PA** |   | **19044**  |
|---------------------------------------------------------|--------|------------|
| (Address of Principal  Executive Offices)               |   | (Zip Code) |

 

**(215) 682-7114**

(Registrant’s TelephoneNumber, Including Area Code)

 

Securities registered underSection 12(b) of the Act:

 

| ** **                             | ** ** | **Name of Each Exchange** |
|----------------------------------------|------------|------------------------------------------|
| **Title of Each Class** | ** ** | **On Which Registered**        |
| None                                   |       | None                                     |

 

Securities registered under Section 12(g) of the Act:

 

**CommonStock, $.001 par value per share**

(Titleof Class)

 

Indicate by check mark if the registrant is awell-known seasoned issuer, as defined in Rule 405 of the SecuritiesAct.   oYes x No

 

Indicate by check mark if the registrant is notrequired to file reports pursuant to Section 13 or 15(d) of theAct.  oYes x No

 

**Note** — Checking the box above will notrelieve any registrant required to file reports pursuant to Section 13 or15(d) of the Exchange Act from their obligations under those Sections.

 

Indicate by check mark whether the registrant: (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.   Yes x Noo

 

Indicate by check mark whether the registrant hassubmitted electronically and posted on its corporate Web site, if any, everyInteractive Data File required to be submitted and posted pursuant to Rule 405of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (orfor such shorter period that the registrant was required to submit and postsuch files).   Yes x No o

 

Indicate by check mark if the disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is notcontained herein, and will not be contained herein, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form 10-K.  o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company.  See the definitions of “large acceleratedfiler,” “accelerated filer” and “smaller reporting company” in Rule 12b-2of the Exchange Act.

** **

| Large accelerated filer o                                         |   | Accelerated filer o    |
|------------------------------------------------------------------------|--------|-----------------------------|
|                                                                   |   |                        |
| Non-accelerated filer o  (Do not check if a smaller reporting company) |   | Smaller reporting company x |

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theAct).   Yes o No x

 

The aggregatemarket value of the voting common equity held by non-affiliates of theregistrant computed by reference to the price at which the common equity wassold as of the last business day of the registrant’s most recently completedsecond fiscal quarter, which was June 30, 2009, was $10,732,278.

 

As of March 24,2010, 82,094,070 shares of the registrant’s common stock were outstanding.

 

**DOCUMENTSINCORPORATED BY REFERENCE**

 

None.

 

 

 

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**TABLE OF CONTENTS**

 
| ** **                    | ** **                                                                                                          | **Page** |
|-------------------------------|---------------------------------------------------------------------------------------------------------------------|----------|
|                          |                                                                                                                |     |
| PART I                   |                                                                                                                |     |
|                          |                                                                                                                |     |
| Item 1.                       | Business                                                                                                            | 2        |
|                          |                                                                                                                |     |
| Item 1A.                      | Risk Factors                                                                                                        | 21       |
|                          |                                                                                                                |     |
| Item 2.                       | Properties                                                                                                          | 36       |
|                          |                                                                                                                |     |
| Item 3.                       | Legal Proceedings                                                                                                   | 36       |
|                          |                                                                                                                |     |
| PART II                  |                                                                                                                |     |
|                          |                                                                                                                |     |
| Item 4.                       | Market For  Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases  of Equity Securities | 36       |
|                          |                                                                                                                |     |
| Item 6.                       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                         | 39       |
|                          |                                                                                                                |     |
| Item 7.                       | Financial  Statements and Supplementary Data                                                                        | 51       |
|                          |                                                                                                                |     |
| Item 8.                       | Changes in  and Disagreements With Accountants on Accounting and Financial Disclosure                               | 51       |
|                          |                                                                                                                |     |
| Item 8A(T).                   | Controls and  Procedures                                                                                            | 51       |
|                          |                                                                                                                |     |
| Item 8B.                      | Other Information                                                                                                   | 54       |
|                          |                                                                                                                |     |
| PART III                 |                                                                                                                |     |
|                          |                                                                                                                |     |
| Item 9.                       | Directors,  Executive Officers and Corporate Governance                                                             | 55       |
|                          |                                                                                                                |     |
| Item 10.                      | Executive  Compensation                                                                                             | 58       |
|                          |                                                                                                                |     |
| Item 11.                      | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters                    | 64       |
|                          |                                                                                                                |     |
| Item 12.                      | Certain  Relationships and Related Transactions, and Director Independence                                          | 67       |
|                          |                                                                                                                |     |
| Item 13.                      | Principal  Accountant Fees and Services                                                                             | 68       |
|                          |                                                                                                                |     |
| Item 14.                      | Exhibits and Financial  Statement Schedules                                                                         | 69       |
|                          |                                                                                                                |     |
| Index to Financial Statements | F-1                                                                                                                 |

 

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**DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS**

 

Thisreport contains “forward-looking statements” within the meaning of Section 27Aof the Securities Act of 1933, as amended (the “Securities Act”) and Section 21Eof the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  All statements other than statements ofhistorical facts included or incorporated by reference in this report,including, without limitation, statements regarding our future financialposition, business strategy, budgets, projected revenue and costs, and plansand objectives of management for future operations, are forward-lookingstatements.  In addition, forward-lookingstatements generally can be identified by the use of forward-lookingterminology such as “may,” “will,” “expects,” “intends,” “plans,” “projects,” “estimates,”“anticipates,” or “believes” or the negative thereof or any variation thereonor similar terminology or expressions.

 

Theseforward-looking statements are subject to risks and uncertainties that could causeactual results to differ materially from results proposed in suchstatements.  Although we believe that theexpectations reflected in such forward-looking statements are reasonable, wecan give no assurance that such expectations will prove to have beencorrect.  Important factors that couldcause actual results to differ materially from our expectations include, butare not limited to:

 

·                  our ability tofund future growth and implement our business strategy;

 

·                  our dependenceon a limited number of preferred provider organizations (“PPOs”) and otherhealthcare provider networks;

 

·                  our dependenceon a single insurance company for the insurance benefits offered as part of ourCARExpress PlusÔ programs;

 

·                  our dependenceupon a limited number of marketing and distribution partners for substantiallyall of our revenue;

 

·                  our ability tomarket our membership programs and develop and expand the market for ourmembership programs;

 

·                  demand for andacceptance of our membership programs;

 

·                  competition inthe health discount membership market;

 

·                  our ability toattract and retain qualified personnel;

 

·                  legislative orregulatory changes in the healthcare industry;

 

·                  the conditionof the securities and capital markets;

 

·                  generaleconomic and business conditions, either nationally or internationally or inthe jurisdictions in which we are doing business;

 

and statements of assumption underlying any of theforegoing, as well as any other factors set forth herein under *“Item 1A.  Risk Factors”*and *“Item 6. Management’s Discussion and Analysis of Financial Condition and Resultsof Operations”* below.  Allsubsequent written and oral forward-looking statements attributable to us, orpersons acting on our behalf, are expressly qualified in their entirety by theforegoing.  Except as required by law, weassume no duty to update or revise our forward-looking statements.

 

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**Item1.  Business.**

 

**Overview**

 

NationalHealth Partners, Inc. is a national healthcare membership organizationthat was formed to address the need for affordable healthcare nationwide.  We create, market and sellmembership programs targeted toward underserved markets in the healthcareindustry through a national healthcare savings network called CARExpressÔ.  CARExpressÔ is a network of over 1,000,000 participatinghospitals, doctors, dentists, pharmacists and other healthcare providers thathave agreed to render their services and products to our members at discountedprices.  CARExpressÔ enables our members to engage in point-of-servicetransactions directly with participating healthcare providers and paydiscounted prices.

 

**Background**

 

We were incorporated inIndiana on March 10, 1989 as “Spectrum Vision Systems of Indiana, Inc.”  In 2001, we changed our name to “NationalHealth Partners, Inc.” and entered the discount medical plan industry toaddress the need for affordable healthcare nationwide.  From 2001 to 2004, we engaged in limitedoperations due to our lack of available capital.  During that time, our employees performedrelatively limited duties and our operations were focused almost exclusively onbuilding CARExpressÔ.  In early 2004, we took a number of steps toincrease our business and generate revenue, including raising capital throughprivate placements of our equity securities and marketing our membershipprograms to the public through mail, print ad, television and internetcampaigns.  We also moved into a largerfacility that provides us with 17 offices, a fully equipped state-of-the-artcomputer and telecommunications room, and the capacity to expand our customerservice base to approximately 80 customer service representatives.  Since 2004, we have actively pursuedopportunities to sell our membership programs. During this period, we engaged in our first test marketing campaign andentered into agreements with several marketing and distribution partners tomarket and sell our membership programs. During 2007, we completed the development of our CARExpress PlusÔ programs andhave been actively marketing and selling these programs to the public.

 

Our strategy is tosustain and expand our position as a provider of unique healthcare membershipprograms.  We are currently activelyengaged in marketing our membership programs to the public and are focused ongenerating increased sales of our membership programs.  Through product design, competitivemembership pricing and a variety of marketing and distribution partners, weintend to pursue opportunities in the healthcare market that health insurancecompanies have not addressed.

 

**Healthcare Industry**

 

TheU.S. Department of Commerce estimates that 15.4% of all Americans, or 46.3million individuals, were without health insurance coverage in 2008.  The Kaiser Commission estimates that thenumber of people who are underinsured increased 60% between 2003 and 2007.  According to the National Coalition onHealthcare (the “NHC”), the primary reason for this increase is that rapidlyrising health insurance premiums have caused many employers to reduce 

 

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or discontinue healthinsurance coverage.  The NHC stated thathealth care spending in the United States reached $2.4 trillion in 2008 and isexpected to reach $4.3 trillion by 2016. The NHC also stated that the average cost of family coverage is now nearly$12,700 per year, including worker contributions of nearly $3,400.

 

Several factors havecontributed to the increase in the cost of healthcare, including the following:

 

*OverUtilization of the Healthcare System*.  Over-utilizationof the healthcare system is one of the factors behind these trends. Americansare utilizing healthcare services at an ever-increasing rate. Behind thisphenomenon is the fact that insurance plans and HMOs are structured to encourage usage.  Small co-payments, generally from $10 or$25 per office visit, encourage insured consumers to use the healthcaresystem more frequently because they do not perceive themselves ultimately ashaving to pay the full costs of the medical services received.

 

*Strict State Insurance Regulations*.  Another factor is that a number of insurancecompanies have pulled out of certain states due to state regulations that nolonger provide a viable operating environment. As a result of these health coverage cancellations, those formerlyinsured individuals and families are required to pay more for their insurancecoverage, cannot obtain any coverage because of pre-existing conditions, orsimply remain uninsured.

 

These increasing costshave led to limitations on reimbursement from insurance companies, HMOs andgovernment sources.  Many employers haveresponded to the increased cost of providing health insurance to theiremployees by reducing or eliminating available insurance coverage and/or byrequiring employees to contribute heavily in cost sharing through higherpremiums, deductibles and payment.  As aresult, more Americans are being forced to self-insure and pay a growingportion of the cost of their healthcare. Some are entirely uninsured. Others can only afford or choose only a high deductible or limitedbenefit health insurance policy.  Ineither case, this patient population increasingly forgoes medical procedures orrelies on emergency care for its healthcare needs and often incurs prohibitiveexpenses.  Additionally, costs ofhealthcare for this patient population are often far higher than the amount aninsurance company would pay for the same healthcare services for its insuredsbecause the uninsured and underinsured patients have had no one to negotiatehealthcare costs on their behalf.

 

Webelieve market demand is significant for any product that can accomplish one ormore of the following:

 

·                  provide alow-cost alternative to health insurance for the millions of Americans who haveeither no insurance or only catastrophic insurance coverage;

 

·                  provide smallbusinesses with an affordable way to provide benefits to their employees;

 

·                  provide qualityhealthcare to consumers at a price that is both affordable to consumers andthat will pay healthcare providers a reasonable fee for their services; and

 

·                  providesupplemental benefits, such as dental, vision, elective surgery, chiropracticand alternative care, that are not covered by insurance plans.

 

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We believe that our membership programs accomplisheach of these tasks.

 

**Our CARExpress****Ô********Healthcare Solution**

 

Overview

 

We offer membershipprograms to uninsured and underinsured people through a national healthcaresavings network called “CARExpressÔ”. We designed our programs in response to the growing number of people whocan no longer obtain adequate health insurance. Our programs provide a lower-cost alternative to individuals who areseeking to reduce their out-of-pocket healthcare costs not covered by insuranceor who are unable to obtain healthcare insurance due to their medical history,age or occupation.  Acceptance into ourhealth programs is unrestricted and our programs may be utilized by the member’sentire household.

 

OurCARExpressÔ Membership Programs

 

Wehave designed membership programs that range from our traditional healthdiscount programs that provide access to networks of providers that have agreedto provide our members with a reduced rate for services, to membership programsthat include limited liability insurance benefits.** **We currently offer two families ofCARExpressÔ membership programs to our members: (i) our CARExpressÔ health discount programs, and (ii) our CARExpress PlusÔ membership programs.

 

OurCARExpressÔ health discount programs encompass all aspects ofhealthcare, including physicians, hospitals, ancillary services, dentists,prescription drugs, vision care, hearing aids, chiropractic services,alternative care, 24-hour nurseline, medical supplies and equipment, andlong-term care facilities which include skilled nursing facilities, assistedliving facilities, respite care and home health care.  We provide our members with access to over1,000,000 healthcare providers through our agreements with CareMark, Aetna,Optum, Outlook Vision, Integrated Health, Three Rivers, International Med-Careand HealthFi International, which are some of the largest and most prestigiousnational medical networks in the country.

 

Our CARExpressÔ health discount programs are not insurance. There is no undertaking byus to pay a portion of any fee for services or prescriptions purchased usingour CARExpressÔmembership cards.  Rather, our health discount programs provide consumers with access tohealthcare providers who, through their affiliations with PPOs, have agreed inadvance to honor our membership cards and accept the discounted fees set by thePPOs.  Our health discount programsrequire members to pay the provider at the time of service, thereby eliminatingthe need to file any insurance claims.  Our members simply present theirmembership card to the participating provider at the time of the service toreceive the discounted price.

 

Our CARExpress PlusÔ programs are membership programs comprised of our CARExpressÔ health discount programs and limited liability insurancebenefits underwritten by U.S. Life. Examples of the limited liability insurance benefits included in theseprograms are accidental death and dismemberment coverage (“AD&D”), accidentmedical expense coverage (“AME”), accident disability coverage, a dailyhospital and intensive care unit (“ICU”) benefit, 

 

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doctor visit benefits, inpatient/outpatient surgicalvisit benefits, as well as emergency room and ambulance benefits.  With CARExpress PlusÔ, our health discount programs provide our members with a “pointof service” discount on their healthcare expenses at the time of service.  Then, the limited liability insurancebenefits reimburse our members for some, if not all, of the remaining portionof their healthcare expenses.

 

We believe that millionsof Americans can benefit in some manner from joining CARExpressÔ,whether they have health insurance or not. We believe that our membership programs are most attractive to thefollowing people and organizations:

 

·                  people withoutinsurance coverage, including self-employed individuals and part-time ortemporary employees;

 

·                  people withgaps in their insurance coverage;

 

·                  people who havebeen turned down for insurance because of age, occupation, medical history, apre-existing condition, lifestyle or other reasons;

 

·                  people who havereached the yearly and/or lifetime benefit limits of their insurance policies;

 

·                  people whochoose alternative healthcare solutions that are often not covered by HMOs,PPOs, or other insurance, or who seek providers not covered by their presenthealth plans;

 

·                  employers thatwant to provide their employees with a low-cost healthcare program;

 

·                  employees whoseemployers have terminated or curtailed their health benefits;

 

·                  people who maybe underinsured because of restrictions or provisions in their managed careplans, such as limited coverage, high deductibles or co-insurance limits;

 

·                  smallbusinesses, chambers of commerce, employers of temporary or part-time personneland other businesses seeking affordable health benefits for their employees inorder to promote employee loyalty and differentiate their companies in themarketplace; and

 

·                  unions,associations, trade groups and other organizations seeking to increasemembership and promote member/customer loyalty by providing or offering ahealth discount benefit.

 

How CARExpressÔWorks

 

People gain access to ournetwork of healthcare providers by paying us monthly membership fees.  Most members pay for our programs on amonthly basis, either through automatic bank drafts or credit cards.  People who do not wish to use either of thesepayment methods are required to pay annually at the time of enrollment.  Members may cancel their membership at anytime.  We also offer a 30-day money-backguarantee so that if a member is not completely satisfied with the program thepurchased, the member may cancel their membership and receive a refund of themembership fees paid.

 

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Upon enrollment, newmembers receive a membership kit that includes their CARExpressÔmembership card(s) along with instructions on how to use theprograms purchased and how to access providers in their area.  Except with respect to hospitals, membersselect a participating provider, make an appointment with the provider, presenttheir membership card to the provider at the time of service and receive theirdiscount at the time of service.  Theprovider may verify an individual’s membership status by calling a phone numberimprinted on the membership card or reviewing electronic files that we havesubmitted to the provider.  There are noclaim forms or bills to be processed.

 

With regard to hospitals,we utilize the services of a hospital savings company to negotiate discountswith the providers and arrange financing with the members for the payment ofthe hospital services.  Members may useany accredited hospital in the United States. Members make no payments to the hospital at the time services arerendered.  Instead, they simply presenttheir membership card to the provider at the hospital at the time of service.  The members contact the hospital savingscompany prior to or after their hospital stay and the hospital savings companynegotiates a discounted rate for the hospital services.  The hospital savings company then pays thebill in full for the member and arranges financing with the member directly.

 

In theevent a member purchases one of our CARExpress PlusÔ programs, the process is similar.  The member presents his or her CARExpressÔmembership card at any of the one millionparticipating providers nationwide to receive their discount in the mannerspecified above.  After they have received their discount, the membercontacts our in-house customer service staff to request a claim form.  We provide a claim form to the member thatthe member completes and submits directly to the insurance company. Reimbursement is made directly to the member by the insurance company inaccordance with the benefits schedule of their plan.

 

Benefits of UsingCARExpressÔ

 

Our membership programsprovide benefits to our members, unions, associations and businesses, andhealthcare providers and provider networks.

 

*Benefitsto Members*.  Our membership programs areattractive to our members because our programs provide them with access to avariety of healthcare products and services at discounted prices and, in thecase of our CARExpress PlusÔ programs,reimbursement for some, if not all, of the remaining portion of theirhealthcare expenses.  Membership in ourmembership programs is unrestricted and provides benefits to individuals who,because of their medical history, age, occupation or financial condition, areunable to obtain traditional health insurance. Our membership programs covereach person in the member’s household and can be used as often as they wish.

 

*Benefitsto Unions, Associations and Businesses*.  Our membershipprograms are attractive to unions, associations, businesses and otherorganizations with large numbers of members or employees because our programscan assist these organizations in their efforts to attract and retain membersand employees by enabling them to offer a more complete healthcare benefitspackage.

 

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*Benefitsto Healthcare Providers and Provider Networks*.  Our membershipprograms are attractive to physicians, hospitals and other healthcare providersbecause our programs help healthcare providers and provider networks increasetheir customer base. Our membership programs are also attractive to providernetworks because they increase the likelihood that healthcare providers willaffiliate with them to gain access to a greater number of potential customersand patients.

 

**Strategy**

 

Our strategy is tosustain and expand our position as a provider of unique healthcare membershipprograms.  We intend to focuspredominantly in underserved markets where individuals either have limited orno healthcare benefits. We have developed healthcare membership programs thatenable people to access healthcare providers throughout the country for a lowercost.  Through product design,competitive membership pricing and strong distribution channel partners, weplan to fill a significant void in the healthcare market that insurance companieshave not addressed.

 

Key elements of ourstrategy are as follows:

 

*Continueto Develop Unique Healthcare Programs For Broad Markets. *Our focus is on the continued development andintroduction of unique programs that address the health and lifestyle needs oftargeted consumer groups.  By varying the features of ourprograms, including discounts (medical, consumer and business services) andlimited liability insurance benefits, we are able to meet the product andpricing needs of a broad market.  We anticipatethat this will allow us to capture a larger share of the healthcare marketthrough existing marketing channels and through establishment of new clientrelationships.  We intend to continuedeveloping programs for affinity groups, such as unions, small businesses,trade associations and charitable organizations, and intend to enhance our program offeringsby combining variations of our current programs with such otherhealthcare-related programs as health savings accounts and health reimbursementarrangements.

 

*Recruitand Retain Marketing and Distribution Partners*.  Growth insales of our membership programs is dependent upon our marketing anddistribution partners continuing to market our membership programs toprospective customers and recruit additional marketing and distributionpartners to market our membership programs to prospective customers.  We intend to continue to focus our efforts onretaining our existing marketing and distribution partners and obtaining newmarketing and distribution partners by expanding our in-house sales andmarketing staff.  We also plan to improvethe productivity of our marketing and distribution partners through leaddevelopment, marketing support, sales assistance and training.

 

*Leverageour PPOs and Provider Networks. *While we currently havecontractual relationships with several large, well-recognized and fullydeveloped PPO and provider networks, we intend to continuously assess the capabilities ofour PPOs and provider networks and work towards making alternative healthcaresolutions available to our members.  Webelieve

 

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that our large providerbase enhances our membership programs with market credibility, and we intend toleverage this credibility to further our market penetration.

 

*ProvideHigh Quality Customer Service*.  In order toachieve our anticipated growth and to ensure member, healthcare provider andmarketing and distribution partner loyalty, we intend to continue to developand invest significantly in our customer service systems.  Our in-house customer service staff providesmembers, healthcare providers and marketing and distribution partners withprompt, courteous, and complete information about all aspects of our membershipprograms.  We have also developed aproprietary computer database system that provides customer servicerepresentatives with immediate access to provider demographic data and memberinformation, including the components of each member program or plan and thedetails a member requires to properly utilize the program.

 

*Develop Private-Label ProductOfferings**. *To complement individual and group sales and leadgeneration accomplished through our marketing and distribution partners, we areattempting to promote sales of our membership programs to groups andself-funded employers.  We have implemented a number ofprivate-label program offerings for specific markets and entities.  We plan to leverage off our currentadministrative and product development systems to continue to provideprivate-label availability to organizations that can commit to significantlevels of sales of these programs.

 

**Customers**

 

Ourprimary target customer group is comprised of the approximately 46 millionAmericans who have no health insurance of any kind.  This group includes self-employed individualsand part-time or temporary employees, and people who have been turned down forinsurance because of age, occupation, medical history, lifestyle or otherreasons. Our secondary target customer group is comprised of the millions of Americanswho lack complete health insurance coverage. This group includes people withgaps in their insurance coverage, employees paying large deductibles orpremiums, and employees who do not receive adequate insurance coverage throughtheir employers. It also includes people who are underinsured because ofrestrictions or provisions in their managed care plans, such as limitedcoverage, high deductibles or co-insurance limits, people who have been turneddown for insurance coverage for a medical procedure due to a pre-existingcondition clause, and people who have been turned down for insurance because ofage, occupation, medical history, lifestyle or other reasons.

 

**OurCARExpress****Ô********Membership Programs**

 

We have designed two distinct groups of membershipprograms that we currently offer to our members: (i) our CARExpressÔ health discount programs, and (ii) ourCARExpress PlusÔ membershipprograms.  Our CARExpressÔ health discount programs enable our members toengage in point-of-service transactions directly with participating healthcareproviders and pay discounted prices that are similar in amount to those paid byinsurance companies on behalf of their insureds.  Our CARExpress PlusÔ programs are comprised of variations ofour comprehensive CARExpressÔhealth discount program and limitedliability insurance benefits underwritten by U.S. Life.  With CARExpress PlusÔ, ourhealth discount programs provide our 

 

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members with a point-of-service discount on their medical expenses atthe time of service.  Then, the limitedliability insurance benefits reimburse our members for some, if not all, of theremaining portion of their medical expenses.

 

CARExpressÔHealth Discount Programs

 

Wesell our CARExpressÔ healthdiscount programs directly and indirectly through a variety of marketing anddistribution partners.  Our programstypically range in price from $9.95 to $39.95 per month, depending upon theprogram selected. We also offer features to encourage potential members to tryout our CARExpressÔ healthdiscount programs, including refund guarantees and “trial” periods of free ordiscounted membership.  Healthcareproducts and services are bundled, priced and marketed using relationshipmarketing strategies or direct marketing to target the profiled needs of ourcustomers. The discounted prices paid by our members typically range from 10%to 50% off providers’ usual and customary fees. These discounts are designed to save the individual substantially morethan the cost of the program itself.

 

We currently offer sixstandard CARExpressÔhealth discount programs that providebenefits that range from prescription drug and vision care to comprehensivephysician, hospital, vision, dental and other care.  A description of each of our six standardprograms is provided below.

 

*ComprehensiveCare Program. *This program isdesigned for individuals and families with no health insurance.  It provides members with access to almost allof the products and services accessible through our PPOs and provider networks,including physician, hospital and ancillary care, dental and vision care,retail and mail order pharmacy, 24-hour nurseline, hearing care, chiropracticand complementary alternative care, medical supplies and equipment, andlong-term care facilities.  Ourcomprehensive care program targets those with little or no insurance, or thosewith only catastrophic coverage.  Webelieve that our comprehensive care program is of particular interest toconsumers who are not covered by group health or individual benefit plans.  The monthly retail price for this membershipprogram is $39.95 per household.

 

*SupplementalCare Program. *This program isdesigned for individuals and families who are underinsured and offerseverything our comprehensive care program offers, except for access to doctorsand hospitals.  Our supplemental careprogram generally presumes the member has some level of basic health insurancecoverage.  It offers services that aretypically not covered under a traditional health insurance plan or an insuranceplan that may have certain coverage limits. This program typically is marketed as an add-on service alongside anexisting health insurance plan or as a stand-alone product for those who havehealth insurance but with minimal benefits for prescription or other ancillaryservices.  The monthly retail price forthis membership program is $29.95 per household.

 

*PreferredProgram.*  This programis designed for individuals and families who are underinsured and need to saveon the basic health services not covered under a traditional health insuranceplan.  It offers savings onprescriptions, vision and dental care, and a 24-hour nurseline.  The monthly retail price for this membershipprogram is $19.95 per household.

 

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*Dental &Vision Care Program.*  This programis designed for individuals and families who typically have health insurance,but who do not have either dental care or vision care.  The monthly retail price for this membershipprogram is $14.95 per household.

 

*Prescription &Vision Care Program.*** **This program isdesigned to offer members an inexpensive way to save money on prescriptions andvision care.  This program is ourlow-cost entry program.  The monthlyretail price for this program is $9.95 per household.

 

*TieredPharmacy Discount Program.*  This programis designed to provide members with access to discounts on brand name andgeneric prescription drugs and features a formulary that organizes both brandname and generic prescription drugs into four pricing tiers.  Tiers1, 2 and 3 includes all brand and generic drugs that have a maximum allowablecost of up to $10, $20 and $40, respectively. Tier 4 consists of all brand and generic drugs above $40.  This program is offered as a stand aloneprogram as well as an add-on program to our existing CARExpressÔhealth discount programs and CARExpress PlusÔmembership programs.  The monthly retailprice for this program is $19.95 per household.

 

CARExpress PlusÔ MembershipPrograms

 

We sell our CARExpressÔhealth discount programs in combination with limited liabilityinsurance benefits underwritten by U.S. Life as part of our CARExpress PlusÔmembership programs.  Limited insurance benefitpolicies are less expensive than traditional comprehensive healthcare insuranceand do not require the member to undergo any medical underwriting.  As a result, they are generally available toeveryone, regardless of their health conditions.  The policies usually operate on an indemnitybasis, reimbursing the member for certain of his or her incurred healthcarecosts.  These policies pay a certainamount for designated healthcare services. For instance, a member could choose a program entitling him or her to$250, $500 or $1,000 per day of hospitalization, with additional scheduledbenefits for intensive care stays and surgery, for up to 180 days in acalendar year.

 

Our CARExpress PlusÔ programs typically range in price from $99 to $498per month, depending upon the program selected. We market these programs directly and indirectlythrough insurance companies and independent third parties.  Our CARExpress PlusÔprograms provide an innovative and affordable solution to individuals whopreviously could not afford a comprehensive medical plan.  These programs are bundled, priced andmarketed utilizing relationship marketing strategies to target the profiledneeds of the clients’ particular member base.

 

We currently offer threestandard CARExpress PlusÔprograms.  A description of each of theseprograms is provided below.

 

*CARExpress Plus**Ô**Platinum Program. *This program is our premium CARExpress PlusÔprogram.  It is comprised of a variationof our CARExpressÔComprehensive Care Program that includeson-line physician and psychologist services, and limited liability insurancebenefits consisting of AD&D coverage of $50,000, AME coverage of $2,500,accident disability coverage of $400 per month for up to 12 months, a dailyhospital benefit of $1,000 for up to 180 days, a daily ICU benefit of $1,000for up to 14 days, $75 for up to eight doctor visits, 

 

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inpatient/outpatient surgical visits of up to $20,000per year, $100 for emergency room visits for up to three visits per person peryear and $100 for ambulance services for up to three times per person peryear.  The monthly retail price for thismembership program is $228 for an individual and $498 for a family.

 

*CARExpress Plus**Ô**GoldProgram. *This program is our mid-level CARExpress PlusÔprogram.  It is comprised of a variationof our CARExpressÔComprehensive Care Program that includeson-line physician services, and limited liability insurance benefits consistingof AD&D coverage of $25,000, AME coverage of $2,500, accident disabilitycoverage of $400 per month for up to 12 months, a daily hospital benefit of$500 for up to 180 days, a daily ICU benefit of $500 for up to 14 days, $50 forup to six doctor visits, inpatient/outpatient surgical visits of up to $20,000 peryear, $75 for emergency room visits for up to three visits per person per yearand $100 for ambulance services for up to three times per person per year.  The monthly retail price for this membershipprogram is $137 for an individual and $285 for a family.

 

*CARExpress Plus**Ô**SilverProgram. *This program is our low-cost entry CARExpress PlusÔprogram.  It is comprised of our CARExpressÔComprehensive Care Program and limited liability insurance benefitsconsisting of AD&D coverage of $10,000, AME coverage of $1,000, a dailyhospital benefit of $250 for up to 180 days, a daily ICU benefit of $250 for upto 14 days, $50 for up to five doctor’s visits, inpatient/outpatient surgicalvisits of up to $20,000 per year, $50 for emergency room visits for up to threevisits per person per year and $100 for ambulance services for up to threetimes per person per year.  The monthlyretail price for this membership program is $99 for an individual and $225 fora family.

 

**Healthcare Providers**

 

We do not contractdirectly with any of the physicians, dentists, hearing care specialists, eyecare specialists or other healthcare providers that participate in our CARExpressÔhealth savings network.  Instead,we contract with PPOs or their affiliates and other provider networks foraccess to the discounted rates they have negotiated with their healthcareproviders.  We select and utilize onlythose provider networks that we believe can deliver adequate savings to ourmembers while providing adequate support for our membership programs with thehealthcare providers.  We typically pay aper member per month fee for use of a provider network that is determined inpart based on the number of providers participating in the network, the numberof our members accessing the network, and the particular products and servicesutilized by our members.  We only payfees for those members authorized to utilize the network.  The agreements through which we havecontracted for access to the PPO or other provider networks are generally for aterm of between one and two years, may be terminated by either party on between45 and 180 days’ prior written notice, and renew automatically for additionalterms unless so terminated.  Most ofthese agreements are not exclusive as it is not customary in the discountmedical plan industry for PPOs to agree to work exclusively with a singlehealthcare savings organization, and most contain provisions maintaining theconfidentiality of the terms of the agreement.

 

The principal suppliersof the over 1,000,000 healthcare providers that comprise CARExpressÔare CareMark, Aetna, Optum, Outlook Vision, Integrated Health, Three Rivers 

 

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and HealthFi.  Under our various agreements with these PPOsor their respective affiliates, our members are provided with access to theirnetwork of healthcare providers in varying combinations of specialties and at varyingdiscounts from the scheduled prices for covered products and services.  Although we have arrangements in place withseveral secondary networks, these PPOs currently supply the providercommitments for almost all of our members. If we lose our arrangement with any of these PPOs for any reason, wewould attempt to establish a primary relationship with one of our secondarysuppliers.  If we are unable to replacethe lost arrangement with a similar arrangement with another provider network,however, our business may be adversely affected.

 

We can provide noassurance that our contracts with these PPOs and their affiliates will notexpire or be terminated by us or them, nor can we provide any assurance that wewill be able to replace the services available to our members under these agreementsin the event they do expire or are terminated. In addition, we can provide no assurance that these organizations willrefrain from partnering with one of our competitors or competing directly withour membership programs.  Accordingly,the expiration or termination of these relationships, or the decision by any ofthese organizations to partner with one of our competitors or compete directlywith us, may have a material adverse effect on our business, financialperformance and results of operations.

 

**Marketing and Distribution**

 

We market our membershipprograms directly to individual consumers through our direct sales force,television, radio, newspapers, magazines and the Internet.  We also market and support our membershipprograms through our CARExpressÔWeb site at www.carexpresshealth.com.  Our CARExpressÔWeb site enables consumers to review our membership programs, ourhealthcare providers and their locations, the products and services availablethrough our healthcare providers, and the discounts and special promotionsavailable to members for their products and services.  Consumers can also purchase our membershipprograms through our CARExpressÔWeb site by filling out an applicationonline.  Direct sales to consumersprovide us with higher long-term margins on sales because we do not have to paycommissions to any intermediary organization. In addition, the advertising and marketing campaigns that we engage into target consumers provide us with increased market awareness and support forthe brokers, agents, small businesses, unions and associations comprising ourother marketing and distribution channels.

 

We also market ourmembership programs indirectly through brokers and agents, small businesses andtrade associations, unions and associations, and marketing companies.

 

*Brokersand Agents*.  We sell our membership programs throughlicensed insurance brokers and agents by entering into commission-sharingarrangements with them under which they market and sell our membership programsto individual consumers through large employer groups, life insurance companiesand associations.  Our membershipprograms are not competitive with the insurance products they sell, but insteadare complementary program offerings. Brokers and agents typically offer our membership programs as acomplementary value-added program to the traditional insurance products thatthey sell.  We estimate that a total

 

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of between 250 and 300such brokers and agents currently market our membership programs to prospectivecustomers.  The brokers and agents thatwe utilize typically offer and sell our membership programs on a part-time basisand may engage in other related or unrelated business activities, includingselling the products or services of our competitors.  Most of the prospective customers to whombrokers and agents market our programs are current clients of the brokers and agentswho have purchased products or services through the brokers and agents in thepast.  The other prospective customersare new clients that the brokers and agents have identified through their ownefforts.

 

*SmallBusinesses and Trade Associations*.  We use smallbusinesses, trade associations, charitable organizations and similarorganizations to market our membership programs to their members andemployees.  Under these types ofarrangements, we customize our health membership cards by adding the sponsoringorganization name and/or logo on the card and provide access to our networks aswell as all required fulfillment services. We believe that these private label cards are attractive to theseorganizations because the cards will enable them to more closely identifythemselves with the benefits provided to their members.  Moreover, we believe that the preexistingrelationship between the sponsor and its employees or members will enhance thelikelihood that the employee or member will purchase our health membershipcards.  These organizations may purchaseour membership programs for their employees or members, or subsidize a portionof the monthly membership fees of our programs for their employees or members.  No fee will typically be paid by us to such organizationsif the organizations opt to purchase or subsidize our programs.  Alternatively, these organizations may simplyoffer their employees or members the opportunity to purchase our programsdirectly from us or through a payroll deduction plan.  In this event, we will typically pay suchorganizations a marketing fee for each membership sold.

 

*Unionsand Associations. *We market our membership programs tounions, associations, corporations and similar organizations.  These organizations provideus with the opportunity to acquire a large group of members.  Group accounts provide us with higherretention rates for memberships because of factors such as organizationsponsorship of its members or employees, subsidizing of monthly membership feesby such organizations, and lower cost memberships to members or employeesresulting from significantly lower prices charged to the organization.  These organizations may purchase our membershipprograms for their employees or members, or subsidize a portion of the monthlymembership fees of our programs for their employees or members.  We do not typically pay a marketing fee tothe organizations if the organizations opt to purchase or subsidize ourprograms.  Alternatively, theseorganizations may simply offer their employees or members the opportunity topurchase our programs directly from us or through a payroll deductionplan.  In this case, we typically pay theorganizations a marketing fee for each membership sold.

 

*MarketingOrganizations*.  We utilize the services of marketingorganizations, such as web marketing firms, to market our membership programsto prospective customers, such as individual consumers and employers typicallyhaving less than 50 employees.  Marketingorganizations are groups of sales persons that market our membership programsdirectly to prospective customers through face-to-face contact and such mediaas television, radio, internet and print ads. We pay our marketing organizations fees that are typically comprised ofa 

 

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commission on the saleprice of the membership program and/or an up-front fee per membergenerated.  The amount of the commissionsand up-front fees that we pay to marketing organizations are determined basedon the type of membership programs being sold by the marketing organizationsand the number of members being generated over a set period of time by themarketing organizations.

 

**Customer Service, Training andSupport**

 

We believe that providingsuperior customer support is critical to our business.  Currently, we maintain an in-house customerservice center at our corporate headquarters in Horsham, Pennsylvania, where weemploy full-time customer service representatives and utilize the services oftemporary customer service representatives on an as-needed basis.  Our customer service center is available tomembers and may be accessed via e-mail or toll-free numbers, Monday throughFriday, from 8:00 a.m. to 11:00 p.m. Eastern Standard Time.  We also utilize an outside call center forafter-hours calls so that we are able to provide full 24-hour toll-freecoverage for our members.  Our customerservice center provides dependable and timely resolution of customer technicalinquiries and is available to customers by telephone and e-mail.  Our customer service center staff deliverseducation, training and pre-sales support to our members, employers and othersponsoring organizations, and healthcare providers and provider networks.  We also offer online training to ourcustomers and resellers to provide them with the knowledge and skills tosuccessfully deploy, use and maintain our products.  Our customer service staff is responsible forhandling general customer inquires, answering questions about the orderingprocess, updating and maintaining customer account information, investigatingthe status of orders and payments, as well as processing customer orders.  In addition, our customer service staffproactively updates customers on a variety of topics, including release datesof new products and updates to existing products.

 

We operate in afully-equipped facility with a state-of-the-art computer and telecommunicationsroom that is wired to handle our growing needs and provides us with thecapacity to expand our customer service base to approximately 80 customerservice agents.** **Our proprietary computer database systemprovides our customer service representatives with immediate access to providerdemographic data and member information, including the components of eachmember program or plan and the details a member requires to properly utilizethe program.  All new customer servicerepresentatives are required to complete a training course before beginning totake calls and attend on-the-job training thereafter.  Through our training programs, systems andsoftware, we seek to provide members with friendly, rapid and effective answersto questions.  We continue to workclosely with our healthcare providers and organizations to ensure that theirrepresentatives are knowledgeable about our membership programs.

 

We provide extensivetraining to our marketing and distribution partners to assure that theyaccurately represent our products and services. This training is available in a variety of forms, including a trainingmanual, audiotapes and videotapes, local and regional training meetings andweekly conference calls.  The trainingencompasses both product training as well as marketing training and salestechniques.  We have also implementedpolicies and procedures in place to control any advertising or promotions thatare utilized by our marketing and

 

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distributionpartners.  We believe these policies andprocedures are necessary to assure the proper representation of the program atall times and include the pre-approval of all advertising, adherence toanti-spamming and anti-fax blasting rules, and limits where the representativescan advertise our programs.  The failureof a representative to follow these rules can result in termination of therepresentative’s relationship with us.

 

**Technology**

 

Wehave made substantial investments in our proprietary technology and managementinformation systems.  We have a state-of-the-arttelecommunication network and computer system for our executive officers andcustomer service staff. Our management information systems were designedin-house and are used in most aspects of our business, including maintainingmember eligibility and demographic information maintaining representativeinformation paying commissions, maintaining a database of all healthcareproviders and providing healthcare provider locator services, drafting members’accounts on a monthly basis, and tracking of cash receipts and revenue.  We have also created an extensive CARExpressÔ Web site for our membership programs atwww.carexpresshealth.com that provides information about the various healthcareproducts and services available, allows for healthcare provider searches,answers questions, provides savings schedules, and allows new members andrepresentatives to enroll online.  Italso allows our marketing and distribution partners to access support andtraining files and to view their genealogy and commission information through apassword-protected area.  Our CARExpressÔWeb site is set up as a “self-replicating” websiteto allow our marketing and distribution partners to obtain a copy of thewebsite under a unique web address.

 

**Competition**

 

The discount medical planindustry is rapidly evolving and competition for members is becomingincreasingly intense.  Competitors varyin size and in scope and breadth of the products and services they offer.  We offer membership programs that provideproducts and services similar to or directly in competition with products andservices offered by PPOs, HMOs, healthcare membership programs, retailpharmacies, mail order prescription companies, and other ancillary healthcareinsurance organizations.  Competition fornew representatives is also intense, as these individuals have a variety ofproducts that they can choose to market, whether competing with us in the healthcaremarket or not.

 

We believe that successin the discount medical plan industry is dependent upon the ability ofcompanies to:

 

·                  identify retailmarkets and outlets, unions and associations, and consumers that may benefitfrom healthcare membership programs;

 

·                  maintaincontracts with reputable PPOs and provider networks that offer substantialhealthcare savings and reputable insurance companies that offer affordablehealth insurance policies;

 

·                  develop andimplement effective marketing and advertising campaigns;

 

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·                  provideprograms comparable or superior to those of competitors at competitive prices;

 

·                  enhance thequality and breadth of the membership programs offered;

 

·                  provide highquality customer service;

 

·                  offersubstantial savings on the major-medical costs such as hospital and surgicalcosts;

 

·                  combine theprograms with affordable insurance policies that have high deductibles or setpre-defined payment for hospitalization;

 

·                  adapt quicklyto evolving industry trends or changing market requirements;

 

·                  satisfyinvestigations on the part of state attorney generals, insurance commissionersand other regulatory bodies; and

 

·                  hire and retainmarketing and distribution partners and finance promotions for the recruitingof new members and marketing and distribution partners.

 

Our principal competitorsinclude Alliance HealthCard, Inc., AmeriPlan, Best Benefits, CareingtonInternational, Family Care, Full Access Medical, International Association ofBusinesses, New Benefits, Inc. and People’s Benefit Services.  People’s Benefit Services focuses generallyon the provision of retail and mail order pharmacy services and vision anddental care, and thus competes with only a portion of our membershipprograms.  Alliance HealthCard, Inc.,AmeriPlan, Best Benefits, Careington International, Family Care, Full AccessMedical and New Benefits provide a broader range of products and servicesincluding hospital, physician, 24-hour nurseline, chiropractic and nursing homecare, and thus compete with our full range of membership programs.  Our principal competitors generally offer theirmembership programs at a monthly or annual fee that is equal to or greater thanthe monthly fees that we charge for comparable membership programs, and offercancellation privileges, refund guarantees, and trial periods of free ordiscounted memberships similar in nature and amount to those that we offer.

 

Wealso face current and potential competition from insurance carriers,third-party administrators, retail pharmacies, financial institutions, federaland state governments, PPOs, HMOs and other healthcare networks.  We face additional competition due to a trend amonghealthcare providers and insurance companies to combine and form networks inorder to contract directly with small businesses and other prospectivecustomers to provide healthcare services. A number ofcompanies offer health membership programs that are localized geographically,or specialized in certain service categories such as dental, chiropractic, orpharmacy only.  Recently, several of themajor drug manufacturers have begun, or announced plans to begin, offeringprescription discount cards for their own drug brands.

 

Some of our current andpotential competitors have longer operating histories and significantly greaterfinancial, technical, marketing, administrative and other resources than wedo.  They may have significantly greatername recognition, established marketing relationships and access to a largerinstalled base of customers.  Inaddition, current and potential competitors have established or may establishcooperative relationships among themselves or with third parties to designcustomized products to better address customer needs.  Accordingly, new competitors or alliancesamong competitors may emerge and rapidly acquire significant market share.  Increased competition may result in pricereductions, reduced gross margins and loss of 

 

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market share, any ofwhich could have a material adverse affect on our business, financial conditionand results of operations.

 

**Regulatory and Legislative Issues**

 

We are subject to avariety of laws and regulations applicable to companies engaged in thehealthcare industry.  Because the natureof our services is relatively new and the discount medical plan industry israpidly evolving, we may not be able to accurately predict which regulationswill be applied to our business and we may become subject to new or amendedregulations.

 

*State Discount Health ProgramRegulations.*  In recent years, more than 20 states have enactedlegislation that specifically addresses the operation and marketing of discounthealth programs like ours.  Additionalstates are expected to enact such legislation in the future.  The laws vary in scope.  Some apply to discounts on all health carepurchases.  Some regulate onlyprescription discounts.  Some excludeprescription discounts but regulate other services.  The laws also vary in operation.  Some contain only provisions that relate tothe operation and marketing of discount health plans and some require licensingand registration.  Because suchlegislation and regulations are newly enacted or adopted, we do not know thescope and full effect on our operations. There is also the risk that a state will adopt regulations or enactlegislation restricting or prohibiting the sale of our health discount programsin the state.  Compliance with these lawsand regulations on a state-by-state basis is costly and cumbersome and may havea material adverse effect on our financial position in the future.

 

Compliancewith federal and state regulations is generally our responsibility.  The discount medical plan industry isespecially susceptible to charges by the media of regulatory noncompliance andunfair dealing.  As is often the case,the media may publicize perceived non-compliance with consumer protectionregulations and violations of notions of fair dealing with consumers.  Our failure to comply with current, as wellas newly enacted or adopted, federal and state regulations could have a materialadverse effect upon our business, financial condition and results of operationsin addition to the following:

 

·                  non-compliance may cause us tobecome the subject of a variety of enforcement or private actions;

 

·                  compliance with changes inapplicable regulations could materially increase the associated operatingcosts;

 

·                  non-compliance with any rules andregulations enforced by a federal or state consumer protection authority maysubject us or our management personnel to fines or various forms of civil orcriminal prosecution; and

 

·                  non-compliance or allegednon-compliance may result in negative publicity potentially damaging ourreputation and the relationships we have with our members, provider networksand consumers in general.

 

*InsuranceRegulations*.  Our membership programs are not insurance programs andwe are not subject to regulation as an insurance company or as a seller ofinsurance in connection

 

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with the sale of our membership programs. Occasionally, we receive inquires from insurance commissioners invarious states that require us to supply them with information about our membership programs.  To date, these agencies have concurred withour view that our health discount programs are not a form of insurance.  We can provide no assurance that thissituation will not change in the future, or that an insurance commissioner willnot successfully challenge our ability to offer our membership programs without compliance with stateinsurance regulations in the future. Furthermore, states may adopt regulations or enact legislation that mayaffect the manner by which we sell our membership programs or restrict or prohibit the saleof our membershipprograms.  If we do not comply with theregulations or legislation of these states, we may be prevented from sellingour programs in these states or may be subject to fines and penalties thatcould have a material adverse affect on our operations and financial condition.

 

Government regulation of health insurance,healthcare coverage and health membership plans is a changing area of law andvaries from state to state.  The sale of insurance products and thelicensing of insurance brokers and agents are subject to regulation andsupervision, predominantly by state authorities.  While the scope of regulation and form ofsupervision may vary from state to state, insurance laws relating to the saleof insurance products and licensing of insurance brokers and agents are oftencomplex and generally grant broad discretion to supervisory authorities inadopting regulations.  These regulations extensivelycover operations, including scope of benefits, rate formula, delivery systems,utilization review procedures, quality assurance, enrollment requirements,claim payments, marketing and advertising.  States havebroad powers over the granting, renewing and revoking of licenses and approvals,marketing activities and the receipt of commissions.  Although we are not an insurance company, theinsurance companies from which we obtain the limited insurance benefitsincluded in our CARExpress PlusÔ membership programs are subjectto various federal and state regulations applicable to their operations.  We must rely on the insurance companies thatprovide the limited insurance benefits that we offer as part of our CARExpress PlusÔ membership programs to carefully monitor state and federal legislativeand regulatory activity as it affects their insurance products andservices.  These insurance companies mustcomply with constantly evolving regulations and make changes occasionally toservices, products, structure or operations in accordance with the requirementsof those regulations.  We may also belimited in how we market and distribute our CARExpress PlusÔ membership programs as a result of these laws and regulations.  Additional governmental regulation or futureinterpretation of existing regulations may increase the cost of compliance ormaterially affect the insurance products and services offered by us and, as aresult, our results of operations.

 

We market our CARExpress PlusÔmembership programs through an association that has been formed to providevarious consumer benefits to its members. This association may include in its benefit packages insurance productsthat are issued under group or blanket policies covering the association’smembers.  Our ability to offer limitedinsurance benefits for inclusion in these benefit packages may be affected bygovernmental regulation or future interpretation of existing regulations thatmay increase the cost of regulatory compliance or affect the nature and scopeof products that we may make available to such associations.  In addition, most states allow these programsto be sold under certain circumstances without a licensed insurance agentmaking each sale.  If a state laterdetermines that our sales of these programs do not comply with its regulations,our ability to continue selling these programs would be affected and we mightbe 

 

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subject to fines andpenalties and may have to issue refunds or provide restitution to theassociation and its members.

 

*ProductClaims and Advertising Laws.*  The FederalTrade Commission and certain states regulate advertising, product claims, andother consumer matters.  The FederalTrade Commission may institute enforcement actions against companies for falseand misleading advertising of consumer products.  In addition, the Federal Trade Commission hasincreased its scrutiny of the use of testimonials, similar to those used by usand the marketing companies, brokers and agents marketing our membershipprograms.  While we have not been thetarget of any Federal Trade Commission enforcement actions, we can provide noassurance that:

 

·                  the FederalTrade Commission will not question our advertising or other operations in thefuture;

 

·                  a state willnot interpret product claims presumptively valid under federal law as illegalunder that state’s regulations; or

 

·                  future FederalTrade Commission regulations or decisions will not restrict the permissiblescope of such claims.

 

We are also subject tothe risk of claims by brokers and agents and their respective customers who mayfile actions on their own behalf, as a class or otherwise, and may filecomplaints with the Federal Trade Commission or state or local consumer affairsoffices.  These agencies may take actionon their own initiative against us for alleged advertising or product claimviolations, or on a referral from brokers, agents, customers or others.  Remedies sought in these actions may includeconsent decrees and the refund of amounts paid by the complaining brokers,agents or consumer, refunds to an entire class of brokers, agents or customers,client refunds, or other damages, as well as changes in our method of doingbusiness.  A complaint based on thepractice of one broker or agent, whether or not we authorized the practice,could result in an order affecting some or all of the brokers and agents thatwe use in a particular state.  Also, anorder in one state could influence courts or government agencies in otherstates considering similar matters. Proceedings resulting from these complaints could result in significantdefense costs, settlement payments or judgments and could have a materialadverse effect on us.

 

*Healthcare Regulation and Reform.*  Government regulationand reform of the healthcare industry may also affect the manner in which weconduct our business in the future. There continues to be diverse legislativeand regulatory initiatives at both the federal and state levels to affectaspects of the nation’s health care system. Many states have enacted, or are considering, various healthcare reformstatutes.  These reforms relate to, amongother things, managed care practices, prompt pay payment practices, healthinsurer liability and mandated benefits. Most states have also enacted patient confidentiality laws that prohibitthe disclosure of confidential information. As with all areas of legislation, the federal regulations establishminimum standards and preempt conflicting state laws that are less restrictivebut will allow state laws that are more restrictive.  We expect this trend of increased legislationto continue. We are unable to predict what state reforms will be enacted or howthey would affect our business.

 

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Numerousproposals to reform the current healthcare system have been introduced in theU.S. Congress and in various state legislatures.  Recently, President Obama and members of Congress haveproposed significant reforms to the U.S. healthcare system. The Obamaadministration has stated as a top priority its desire to reform theU.S. health care system with the goal of providing affordable, accessiblehealth care for all Americans. Proposals that have been considered include costcontrols on hospitals, insurance market reforms to increase the availability ofgroup health insurance to small businesses, and mandatory health insurancecoverage for employees. In addition, some members of Congress have proposed agovernment health insurance option to compete with private plans and otherexpanded public healthcare measures. Various healthcare reform proposals havealso emerged at the state level. Both the U.S. Senate and House ofRepresentatives have conducted hearings about U.S. healthcare reform. We cannotpredict what healthcare initiatives, if any, will be implemented at the federalor state level, or the effect any future legislation or regulation will have onus.  However, an expansion of thegovernment’s role in the U.S. healthcare industry could have a material adverseaffect on our financial condition and results of operations.

 

**Intellectual Property Rights**

 

Our intellectual propertyrights are important to our business.  We rely upon confidentiality procedures andcontractual provisions to protect our business, proprietary technology and CARExpressÔbrand. Our generalpolicy is to enter into confidentiality agreements with our employees andconsultants, and nondisclosure agreements with all other parties to whom wedisclose confidential information.  Wehave obtained registered trademarks from the United States Patent and TrademarkOffice for the words “CARExpress” and “CARExpress Plus” as well as our CARExpressÔbrand.  We may apply for legal protection for certain ofour other intellectual property in the future. We can provide no assurance, however, that we will receive such legalprotection or that, if received, such legal protection will be adequateto protect our intellectual property rights.

 

**Employees**

 

As of March 24, 2010we had 15 employees.  Of this number, 12were full-time employees and three were part-time employees.  We utilize the services of consultants andadvisors as well as after-hours call center representatives and temporarycustomer service representatives.  We donot employ the individuals working for our after-hours call center or the temporarycustomer service representatives.  Noneof our employees are represented by a labor union, and we have neverexperienced a work stoppage.  We believethat our relations with our employees are good.

 

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**Item1A.  Risk Factors**

 

An investment inour common stock involves a high degree of risk.  You should carefully consider the followingrisk factors in addition to other information in this report before purchasingour common stock.  The risks anduncertainties described below are those that we currently deem to be materialand that we believe are specific to our company, our industry and ourstock.   In addition to these risks, ourbusiness may be subject to risks currently unknown to us.  If any of these or other risks actuallyoccurs, our business may be adversely affected, the trading price of our commonstock may decline and you may lose all or part of your investment.

 

Risks Associated With OurBusiness

 

*We are an early-stage companywith an unproven business model, which makes it difficult for us to evaluateour current business and future prospects.*

 

While we are activelyengaged in marketing our membership programs to the public and are experiencingrapid growth in sales of our membership programs, we have generated only asmall amount of revenue to date.  Inaddition, since we have only been offering our membership programs to thepublic since 2003, we have very limited historical data with respect to salesof our health membership cards.  As aresult of these factors, the revenue and income potential of our business isunproven, and we have only a limited operating history upon which to base anevaluation of our current business and future prospects.  Because of our limited operating history andbecause the discount medical plan industry is rapidly evolving, we have limitedinsight into trends that may emerge and affect our business.  We may make errors in predicting and reactingto relevant business trends, which could harm our business.

 

Before purchasing our common stock, you should consider an investmentin our common stock in light of the risks, uncertainties and difficultiesfrequently encountered by early-stage companies in new and rapidly evolvingmarkets such as ours, including those described herein.  We may not be able to successfully addressany or all of these risks.  Failure toadequately address such risks could cause our business, financial condition andresults of operations to suffer.

 

*We have a history of losses and the report of ourindependent accountants issued in connection with the audit of our financialstatements contained a qualification raising a substantial doubt about ourability to continue as a going concern.*

 

We have recognized net losses in each fiscal quarter since ourinception and as of December 31, 2009, had an accumulated deficit ofapproximately $26.6 million.  We incurrednet losses to common shareholders of approximately $2.2million for the year ended December 31, 2009, approximately $3.0 million for the year ended December 31,2008 and approximately $3.5 million for the year ended December 31,2007.  As a result of these conditions,the report of our independent accountants issued in connection with the auditof our financial statements as of and for our fiscal year ended December 31,2009 contained a qualification raising a substantial doubt about our ability tocontinue as a going concern.  We canprovide no assurance regarding when, if ever, we will become profitable.  As a result, we may continue to generatelosses for the foreseeable future.

 

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*We will need to raise additional funds in thefuture to cover our long-term contractual obligations and operating expenses,which funds may not be available or, if available, may not be available onacceptable terms.*

 

We have significantlong-term contractual obligations that we must satisfy over the next severalyears.  We are a party to employmentagreements with David M. Daniels, Alex Soufflas and Patricia S. Bathurstpursuant to which they are currently entitled to receive annualized basesalaries of approximately $421,000, $351,000 and $193,000 respectively.  We must also make payments under theoperating lease for our office space in Horsham, Pennsylvania in the aggregateamount of approximately $167,000 over the next 12 months.  A summary of the material terms of these employment agreementsand the lease and our financial obligations thereunder is provided herein under*“Item. 10. Executive Compensation — Employment Contracts and Arrangements” and “Item.6. Management’s Discussion and Analysis of Financial Condition and Results ofOperations — Contractual Obligations.”*  If we are unable to satisfy these obligationsas they become due, our business may be materially and adversely affected.

 

We also expect to continue to incur significant operating expenses overthe next 12 months as we:

 

·                  develop new membership programs;

 

·                  recruit additional marketing and distribution partnersand hire additional personnel, including sales personnel, customer servicestaff and support staff;

 

·                  leverage and develop relationships with additionalpreferred provider organizations (“PPOs”) and provider networks;

 

·                  upgrade our operational and financial systems,procedures and controls; and

 

·                  comply with state and federal laws governing ourbusiness operations, comply with Securities and Exchange Commission (“SEC”)reporting requirements and fulfill the other responsibilities that we have as apublic company.

 

We may also experience a material decrease in liquidity due tounforeseen capital requirements or other events and uncertainties.

 

We believe that our current cash resources will not be sufficient tosustain our current operations for the next 12 months.  As a result, we will need to raise additionalfunds during the next 12 months.  We havenot made arrangements to obtain additional financing and we can provide noassurance that additional financing will be available in an amount or on termsacceptable to us, if at all.  If wecannot raise funds when they are needed or if such funds cannot be obtained onacceptable terms, we may not be able to pay our costs and expenses as they areincurred, sell or create new membership programs, execute our business plan,take advantage of future opportunities or respond to competitive pressures orunanticipated requirements.  This mayseriously harm our business, financial condition and results of operations.

 

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*We currently generate almost all of our revenuethrough a limited number of marketing and distribution partners.*

 

A limited number of marketing and distribution partners currentlygenerate almost all of our revenue for us. Although we are in the process of expanding the number of marketing anddistribution partners selling our membership programs, we can provide noassurance that we will be successful in doing so.  In the event any of our significant marketingand distribution partners stops selling our programs to prospective members, orif prospective members do not purchase our programs through these marketing anddistribution partners, our business, financial condition and results ofoperations could be materially and adversely affected.

 

*We must develop and expand our use of marketing anddistribution partners to increase revenue and improve our operating results.*

 

Our success will depend in large part upon our ability to attract,retain and motivate the marketing and distribution partners that market ourmembership programs.   We will need toexpand our existing relationships and enter into new relationships withmarketing and distribution partners in order to increase our current and futuremarket share and revenue.  We competewith all types of healthcare companies throughout the United States formarketing and distribution partners.  Wecan provide no assurance that we will be able to maintain and expand ourexisting relationships or enter into new relationships, or that any newrelationships will be available on commercially reasonable terms.  If we are unable to maintain and expand ourexisting relationships or enter into new relationships with marketing anddistribution partners, we may lose customer introductions, co-marketingbenefits and sales, and our operating results may suffer.

 

***Our reliance on brokers, agents, unions,associations and other organizations for sales of our membership programs couldresult in reduced revenue growth because we have little control over them.***

** **

Brokers, agents, unions, associations and other organizations currently account for most of ourrevenue.  None of these parties isobligated to continue selling our membership programs.  Ourability to generate increased revenue depends significantly upon the abilityand willingness of these parties to market and sell our membershipprograms throughout the UnitedStates.  If they are unsuccessful intheir efforts or are unwilling or unable to market and sell our programs, ouroperating results may suffer.

 

We cannot control the level of effort theseparties expend or the extent to which any of them will be successful inmarketing and selling our membership programs.  These parties typically offer and sellour programs on a part-time basis, and may engage in other businessactivities.  They also may give higherpriority to the products or services of our competitors and reduce theamount of effort they devote to marketing our programs.  Wemay not be able to prevent these parties from devoting greater resources tosupport our competitors’ products and reducing or eliminating their efforts tosell our programs.

 

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*We are dependent upon insurancebrokers and agents to offer and sell our**CARExpress****Plus**Ô**programs.*

 

Werely primarily upon insurance brokers and agents to offer and sell our CARExpress PlusÔ programs. These insurance brokers and agents may offer and sell membershipprograms that are competitive with ours and may give higher priority andgreater incentives (financial or otherwise) to other membership programs,reducing their efforts devoted to the marketing and distribution of our CARExpress PlusÔ programs. Also, our ability to attract and retain independentinsurance agencies could be negatively affected by adverse publicity relatingto our products and services or our operations. Development and maintenance of the relationships with insurance brokersand agents may in part be based on professional relationships and thereputation of our management and marketing personnel.  Consequently, these relationships may beadversely affected by events beyond our control, including departures of keypersonnel and alterations in professional relationships.  The loss of a significant number of insurancebrokers and agents or the loss of a key insurance broker or agent for anyreason could adversely affect our revenue and operating results, or couldimpair our ability to establish new relationships or continue strategicrelationships with other insurance brokers and agents.

 

*We currently rely on a small number of PPOs andother provider networks, the loss of any one of which or the change in ourrelationship with any one of which could have a material adverse effect on ourbusiness.*

 

CareMark, Aetna, Optum, Outlook Vision, Integrated Health, ThreeRivers and HealthFi are the principal PPOs and provider networks through whichour members receive savings on healthcare products and services through ourmembership programs.  Our agreements withthese parties are not exclusive, so they may choose to partner with one of ourcompetitors or compete directly with our programs.  In addition, these agreements may beterminated by either party on between 45 and 180 days’ prior writtennotice.  While we currently have a goodrelationship with each of these parties, we can provide no assurance that wewill continue to have a good relationship with any of them in the future.  If these organizations choose to partner withour competitors or compete directly with our programs, our business could beadversely affected.  In addition, if, forany reason, we should lose a provider relationship and be unable to promptlyreplace it with a new one, we may be unable to offer certain benefits tomembers, which could have a negative impact on our sales.

 

We must develop and maintain relationships with PPOs and other providernetworks within each market area that our services are offered.  Developing and maintaining relationships withPPOs and provider networks is based in part on professional relationships andthe reputation of our management and marketing personnel.  Our PPO and provider network relationshipsmay be adversely affected by events beyond our control, including departures ofkey personnel and alterations in professional relationships.  The loss of a PPO or provider network withina geographic market area that is not be replaced on a timely basis, or at all,could have a material adverse effect on our business, financial condition, andresults of operations.

 

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*We must develop and maintainrelationships with insurance companies**for the insurance benefits included in ourCARExpress****Plus**Ô**programs.*

 

We are not an insurance company.  The insurance benefits that we offer as partof our CARExpress PlusÔ programs are developed and offered by a third-partyinsurance company.  We currently relyupon TheUnited States Life Insurance Company in the City of New York (“U.S. Life”) forall of the insurance benefits that we include in our CARExpressPlusÔprograms.  The loss or termination ofthis strategic relationship could adversely affect our revenues and operatingresults and may also impair our ability to maintain and attract new insurancebrokers and agents to offer our CARExpress PlusÔ programs to the public.

 

Wemust develop and maintain relationships with several insurance companies so that we can continue offeringinsurance benefits as part of our CARExpressPlusÔ programs.  Development and maintenance of relationshipswith insurance companies may in part be based on professional relationships andthe reputation of our management and marketing personnel.  Consequently, the relationships withinsurance companies may be adversely affected by events beyond our control,including departures of key personnel and alterations in professionalrelationships.  Our success and growthwill depend in large part upon our ability to establish and maintain thesestrategic relationships, contractual or otherwise, with various insurancecompanies to provide their products and services.

 

*Because we expect to derive substantially all ofour future revenue from our membership programs, any failure of these programsto satisfy customer demands or to achieve meaningful market acceptance mayseriously harm our business.*

 

Substantially all of our revenue comes from monthly membership feesthat we receive from the sale of our membership programs.  We expect our membership programs to continueto account for substantially all of our revenue for the foreseeablefuture.  If, for any reason, revenuederived from sales of our membership programs declines or does not grow asrapidly as we anticipate, our operating results and our business may besignificantly impaired.  If ourmembership programs fail to meet the needs of our target customers, or if theydo not compare favorably in breadth and price to competing products, our growthmay be limited.  We cannot assure youthat our membership programs will achieve meaningful market acceptance.  If we cannot develop a market for theseprograms, or if a market develops more slowly than expected, our business,financial condition and results of operations may suffer.

 

*We may not be able to develop new membershipprograms at a rate required by our rapidly changing market.*

 

Our future success depends on our ability to develop new membershipprograms that keep pace with the rapidly evolving discount medical planindustry and that address the changing needs of our customers.  We may not be successful in either developingsuch programs or achieving market acceptance of any new programs that wedevelop.  Uncertainties about the timingand nature of changes to healthcare regulations and the evolution of thediscount medical plan industry could delay our development of new programs orincrease the expenses in developing them. The failure of our membership programs to satisfy the needs of ourcustomers

 

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may limit or reduce the market for these programs, result in customerdissatisfaction, and seriously harm our business, financial condition andresults of operations.

 

*Government regulation mayadversely affect our financial position and operations.*

 

We marketand sell our membership programs without the need for an insurance license byany federal, state or local regulatory licensing agency or commission.  By contrast, companies that provide insurancebenefits and operate health maintenance organizations (“HMOs”) and PPOs areregulated by state licensing agencies and commissions. These regulationsextensively cover operations, including scope of benefits, rate formulas,delivery systems, utilization review procedures, quality assurance, enrollmentrequirements, claim payments, marketing and advertising.  Several states have enacted laws andregulations governing membership programs such as ours and additional states may, in the future,determine that our membership programs are subject to governmental regulation,which may adversely affect or limit our future operations.  Compliance with these statutes and regulationsis costly and may limit our operations.  The cost of complying with theselaws and regulations has and will likely continue to have a material effect onour financial position.

 

Government regulation of health insurance,healthcare coverage and health membership plans is a changing area of law andvaries from state to state.  The sale of insurance products and thelicensing of insurance brokers and agents are subject to regulation andsupervision, predominantly by state authorities.  While the scope of regulation and form ofsupervision may vary from state to state, insurance laws relating to the saleof insurance products and licensing of insurance brokers and agents are oftencomplex and generally grant broad discretion to supervisory authorities in adoptingregulations.  States have broad powersover the granting, renewing and revoking of licenses and approvals, marketingactivities and the receipt of commissions. Althoughwe are not an insurance company, the insurance company from which we obtain thelimited insurance benefits included in our CARExpressPlusÔ membership programs is subjectto various federal and state regulations applicable to its operations.  This insurance company must comply withconstantly evolving regulations and make changes occasionally to services,products, structure or operations in accordance with the requirements of thoseregulations.  We may also be limited inhow we market and distribute our CARExpressPlusÔ membership programs as a resultof these laws and regulations.

 

We marketour CARExpressPlusÔ membership programs through an association that has been formed toprovide various consumer benefits to its members.  This association may include in its benefitpackages insurance products that are issued under group or blanket policiescovering the association’s members.  Moststates allow these programs to be sold under certain circumstances without alicensed insurance agent making each sale. If a state later determines that our sales of these programs do notcomply with their regulations, our ability to continue selling these programswould be affected and we might be subject to fines and penalties and may haveto issue refunds or provide restitution to the association and its members.

 

Numerous proposals toreform the current healthcare system have been introduced in the U.S. Congressand in various state legislatures. Recently, President Obama and members of Congress have proposedsignificant reforms to the U.S. healthcare system. The Obama 

 

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administration has statedas a top priority its desire to reform the U.S. health care system withthe goal of providing affordable, accessible health care for all Americans.Proposals that have been considered include cost controls on hospitals,insurance market reforms to increase the availability of group health insuranceto small businesses, and mandatory health insurance coverage for employees. Inaddition, some members of Congress have proposed a government health insuranceoption to compete with private plans and other expanded public healthcaremeasures. Various healthcare reform proposals have also emerged at the statelevel. Both the U.S. Senate and House of Representatives have conductedhearings about U.S. healthcare reform. We cannot predict what healthcareinitiatives, if any, will be implemented at the federal or state level, or theeffect any future legislation or regulation will have on us.  However, an expansion of the government’srole in the U.S. healthcare industry could have a material adverse affect onour financial condition and results of operations.

 

***Our continued growth could strain our personnel andinfrastructure resources, and if we are unable to implement appropriatecontrols and procedures to manage our growth, we may not be able tosuccessfully implement our business plan.***

** **

**We are experiencing rapidgrowth in our operations which is placing, and will continue to place, asignificant strain on our management, administrative, operational and financialinfrastructure.  Our future success willdepend in part upon the ability of our management to manage growth effectively.  This may require us to hire and trainadditional personnel to manage our expanding operations.  In addition, we will be required to continueto improve our operational, financial and management controls and our reportingsystems and procedures.  If we fail tosuccessfully manage our growth, we may be unable to execute upon our businessplan.**

** **

*We face increasing competition from moreestablished companies that have significantly greater resources than we do thatmay place pressure on our pricing and that could prevent us from increasingrevenue or attaining profitability.*

 

The discount medical plan industry is rapidly evolving and competitionfor members is becoming increasingly intense. Our membership programs are similar to or directly in competition withproducts and services offered by many of our direct and potentialcompetitors.  Some of our healthcareproviders may provide, either directly or through third parties, programs thatdirectly compete with our programs.  Ifdiscount medical plan programs become standard features of healthcarecompanies, the demand for our membership programs may decrease.  In addition, the PPOs and provider networksthat we use may decide to develop or sell competing products instead of ourmembership programs.  Moreover, even ifour membership programs provide a greater breadth of products and services andgreater price discounts than programs offered by other companies operating inthe discount medical plan industry, potential customers might accept thislimited offering in lieu of purchasing our membership programs due to theirlack of familiarity with our programs.

 

Some of our competitors enjoy substantial competitive advantages, suchas:

 

·                  programs that are functionally similar or superior toour membership programs;

 

·                  established reputations relating to membershipprograms;

 

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·                  greater name recognition and larger marketing budgets and resources;

 

·                  established marketing relationships and access to larger customerbases; and

 

·                  substantially greater financial, personal and other resources.

 

We compete with numerouswell-established companies that design, market and sell discount medical planprograms.  Our current principalcompetitors include companies that offer healthcare products and servicesthrough membership programs, as well as insurance companies, PPOs, providernetworks and other organizations that offer health benefit programs to theircustomers.  Some of our competitors maybe companies that have programs that are functionally similar or superior toour membership programs.  Most of ourcompetitors possess substantially greater financial, marketing, personnel andother resources than us.

 

We can provide noassurance that our current or future competitors will not:

 

·                  provide discountmedical plan programs comparable or superior to our programs at lowermembership prices;

 

·                  adapt morequickly to evolving healthcare industry trends or changing industryrequirements;

 

·                  respond morequickly and effectively to new or changing opportunities, technologies,standards or customer requirements;

 

·                  increase theiremphasis on programs similar to ours to more effectively compete with us; or

 

·                  successfullyrecruit marketing companies, brokers and agents by offering more attractivecompensation plans.

 

For these and other reasons, we may not be able tocompete successfully against our current and future competitors.  Increased competition may result in pricereductions, reduced gross margins, and loss of market share, any of which couldhave a material, adverse effect on our business, financial condition andresults of operations.

 

***We aredependent on our management team, and the loss of any key member of this teammay prevent us from implementing our business plan in a timely manner.***

** **

**Oursuccess depends largely upon the continued services of our executive officersand other key management and development personnel.  While we have entered into employmentagreements with**each of our executive officers,they may each terminate their employment with us at any time withoutpenalty.  We do not maintain keyperson life insurance policies on any of our employees.  The loss of one or more of our key employeescould seriously harm our business, financial condition or results ofoperations.  In such an event we may beunable to recruit personnel to replace these individuals in a timely manner, orat all, on acceptable terms.

** **

**OnMarch 1, 2010, Alex Soufflas provided us with notice of his resignation asour Chief Financial Officer, Executive Vice President and Secretary effective March 31,2010.  Prior to his resignation, Mr. Soufflaswas performing virtually all aspects of our financial accounting**

** **

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** **

**functions.  We have appointed David M. Daniels, ourPresident and Chief Executive Officer, as our interim Chief Financial Officerand Secretary, and are currently seeking to hire an accountant or bookkeeper toassist Mr. Daniels with the financial accounting functions.  We are also seeking to obtain the services ofa third-party accounting and consulting firm to assist with the preparation ofour financial statements and supporting schedules.  While Mr. Soufflas is assisting us withthe transition of his responsibilities to the aforementioned persons, we may beunable to adequately complete the work previously performed by Mr. Soufflas.  As a result, we may be unable to complete ourfinancial statements in an accurate and timely manner which may harm ourbusiness, financial condition and results of operations.**

** **

*We have experienced periodsduring which we were unable to bill our members due to service interruptionsfrom our merchant processors.*

 

Our ability to collect monthlymembership fees from our members is largely dependent upon our ability tocharge our monthly membership fees to our members’ credit cards.  Substantially all of our members pay theirmonthly membership fees to us through monthly debits to their creditcards.  We utilize the services ofmerchant processors to process these credit card transactions for us.  In the past, we have been subject to servicedisruptions as the result of our merchant processors terminating theiragreements with us.  While we have takenseveral precautions to prevent such actions from disrupting our ability toprocess credit cards in the future, it is possible that we may experienceadditional service interruptions by the merchant processors that we use.  Any such disruptions may result in our lossof a significant number of members and a significant amount of revenue, eitherof which would have a material adverse affect on our results of operations.

 

***Oursystems may be vulnerable to security risks or service disruptions that couldharm our business.***

** **

Although we have takenmeasures to secure our systems against security risks and other causes ofdisruption of electronic services, our servers are vulnerable to physical orelectronic break-ins and service disruptions, which could lead tointerruptions, delays, loss of data or the inability to process customerrequests.  In addition, certain of our services are basedupon the collection, distribution, and protection of sensitive privatedata.  Unauthorized users might accessthat data, and human error or technological failures might cause the wrongfuldissemination of that data.  If weexperience a security breach, the integrity of certain of our services may beaffected and such a breach could violate certain of our marketing partner agreements,which could give our marketing and distribution partners the right to terminatetheir agreements with us.  We haveincurred, and may incur in the future, significant costs to protect against thethreat of a security breach.  We may alsoincur significant costs to solve problems that may be caused by future breachesor to prevent such breaches.  Any breachor perceived breach could subject us to legal claims from our marketing anddistribution partners or customers and/or regulatory or law enforcementauthorities under laws that govern the protection of non-public personalinformation.   Moreover, any publicperception that we have engaged in the unauthorized release of, or have failedto adequately protect, private information could adversely affect our abilityto attract and retain members and customers. Such eventscould be very expensive to remedy, could damage our reputation and coulddiscourage existing and potential customers from 

 

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purchasing our membershipprograms.  Any such events couldsubstantially harm our business, results of operations and financial condition.

 

***Ourfailure to adequately protect our****CARExpress**Ô****brandand other intellectual property could have an adverse effect on our business.*

** **

Intellectualproperty is important to our success.  Werely upon confidentiality procedures and contractual provisions to protect ourbusiness, proprietary technology and CARExpressÔbrand.  Our general policy is to enter into confidentialityagreements with our employees and consultants, and nondisclosure agreementswith all other parties to whom we disclose confidential information.  We have obtained registered trademarks fromthe United States Patent and Trademark Office for the words “CARExpress” and “CARExpressPlus” as well as our CARExpressÔbrand. We may apply for legalprotection for certain of our other intellectual property in the future.   These trademarks and any additional legalprotection we may obtain in the future may be challenged by others orinvalidated through administrative process or litigation.  As a result, our means of protecting ourproprietary technology and brands may be inadequate.  Furthermore, despite our efforts, we may beunable to prevent third parties from infringing upon or misappropriating ourintellectual property.  Any suchinfringement or misappropriation could have a material adverse effect on ourbusiness, financial condition and results of operations.

 

***Becausecompetition for our target employees is intense, we may not be able to attractand retain the highly-skilled employees that we need to support our plannedgrowth.***

** **

**Toexecute our growth plan, we must attract and retain highly-qualifiedpersonnel.  We need to hire additionalpersonnel in virtually all operational areas, including selling and marketing,operations and technical support, customer service and administration.  Competition for these personnel remainsintense, especially for individuals with high levels of experience in designingand developing health membership programs. We may not be successful in attracting and retaining qualifiedpersonnel.  Many of the companies withwhich we compete for experienced personnel have greater resources than wehave.  If we fail to attract newpersonnel or retain and motivate our current personnel, our business and futuregrowth prospects could be severely harmed.**

** **

*If we acquire any healthcarecompanies or products in the future, such companies and products could provedifficult to integrate, disrupt our business, dilute shareholder value andadversely affect our operating results.*

 

We may acquire or makeinvestments in complementary healthcare companies, businesses, assets, productsand services in the future.  We have notmade any such acquisitions or investments to date, and therefore, our abilityto make acquisitions or investments is unproven.  Acquisitions and investments involve numerousrisks, including:

 

·                  difficulties in integrating operations,technologies, services and personnel;

 

·                  the diversion of financial and managementresources from existing operations;

 

·                  the risk of entering new markets;

 

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·                  the potential loss of key employees; and

 

·                  the inability to generate sufficientrevenue to offset acquisition or investment costs.

 

In addition, if wefinance any acquisitions by issuing convertible debt or equity securities, ourexisting shareholders may be diluted which could affect the market price of ourstock.  As a result, if we fail toproperly evaluate and execute any acquisitions or investments, our business andprospects may be seriously harmed.

 

Risks Associated With OurIndustry

 

*The discount medical planindustry is rapidly evolving and if we are not successful in promoting thebenefits of our membership programs and CARExpress**Ô****brand, our growth may be limited.*

 

Based on our experiencewith consumers, we believe that many consumers are not familiar with thediscount medical plan industry and the benefits provided by these membershipprograms.  In addition, there may be alimited-time opportunity to achieve and maintain a significant share of themarket for these membership programs due in part to the rapidly evolving natureof the discount medical plan industry and the substantial resources availableto our existing and potential competitors. If people do not recognize or acknowledge these benefits, the market forour CARExpressÔmembership programs may develop moreslowly than we expect, which could adversely affect our operating results.

 

Developing andmaintaining consumer awareness of our CARExpressÔbrand is critical to achieving widespread acceptance of our membershipprograms.  Furthermore, we believe thatthe importance of brand recognition will increase as competition in our marketdevelops.  Successful promotion of ourCARExpressÔbrand will depend largely on theeffectiveness of our marketing efforts and on our ability to develop reliableand useful membership programs at competitive prices.  If we fail to successfully promote ourCARExpressÔbrand, or if our expenses to promote andmaintain our CARExpressÔbrand are greater than anticipated, ourfinancial condition and results of operations could suffer.

 

*The success of our businessdepends upon the continued growth and acceptance of discount medical planprograms as a suitable alternative or supplement to traditional healthinsurance.*

 

Growth in sales of ourmembership programs will depend on the acceptance of discount medical planprograms as a suitable alternative or supplement to traditional healthinsurance.  Discount medical planprograms could lose their viability as an alternative to health insurance dueto changes in healthcare laws and regulations, an inadequate number ofhealthcare providers participating in the programs, customer dissatisfactionwith the method of making payments and receiving discounts, and new alternativehealthcare solutions.  If discountmedical plan programs do not gain widespread market acceptance, the demand forour membership programs could be significantly reduced, which could have amaterial adverse effect on our business, financial condition and results ofoperations.

 

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** **

***Evolvingregulation of the discount medical plan industry may affect us adversely.***

** **

Asthe discount medical plan industry continues to evolve, increasing regulationby federal and state agencies becomes more likely.  The marketing and sale ofdiscount medical plan programs is subject to federal, state and localregulation, including the prohibition of business corporations from providingmedical care, the fraud and abuse provisions of the Medicare and Medicaidstatutes, state laws that prohibit referral fees and fee splitting, andregulations applicable to insurance companies and organizations that providehealthcare services.  Compliance withchanges in applicable laws and regulations could materially increase theassociated operating costs. Non-compliance with these laws and regulations could cause us to becomethe subject of a variety of enforcement or private actions, subject us or ourmanagement personnel to fines or various forms of civil or criminalprosecution, and result in negative publicity potentially damaging ourreputation, our PPO and network relationships, and our relationships withmembers and consumers in general.  Ourfailure to comply with current, as well as newly enacted or adopted, federaland state regulations could have a material adverse effect upon our business,financial condition and results of operations.

 

Risks Associated With OurStock

 

*Future sales of our common stockmay cause our stock price to decline.*

 

As of March 24,2010, we had 82,879,070 shares of common stock outstanding.  Of this amount, 48,371,946 shares were freelytradable without restriction, unless the shares are purchased by ouraffiliates.  The remaining 34,507,124shares were “restricted securities” as that term is defined under Rule 144of the Securities Act.  None of ourdirectors, executive officers or employees is subject to lock-up agreements ormarket stand-off provisions that limit their ability to sell shares of ourcommon stock.  The sale of a large numberof shares of our common stock, or the belief that such sales may occur, couldcause a drop in the market price of our common stock.

 

*We intend to raise additionalfunds in the future through issuances of securities and such additional fundingmay be dilutive to shareholders or impose operational restrictions.*

 

We intend to raiseadditional capital in the future to help fund our operations through sales ofshares of our common stock or securities convertible into shares of our commonstock, as well as issuances of debt. Such additional financing may be dilutive to our shareholders, and debtfinancing, if available, may involve restrictive covenants which may limit ouroperating flexibility.  If additionalcapital is raised through the issuances of shares of our common stock orsecurities convertible into shares of our common stock, the percentageownership of existing shareholders will be reduced.  These shareholders may experience additionaldilution in net book value per share and any additional equity securities mayhave rights, preferences and privileges senior to those of the holders of ourcommon stock.

 

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*We identified material weaknessesin our internal control over financial reporting during the initial assessmentof our internal controls that we performed**inconnection with the preparation of the audited consolidated financialstatements included in this report**.*

 

Rules adopted by theSEC pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 requiremanagement to complete an annual assessment of our internal control overfinancial reporting.  During thepreparation of our audited consolidated financial statements for the year endedDecember 31, 2009, we identified control deficiencies that have beenclassified as material weaknesses in our internal control over financialreporting.  A material weakness is acontrol deficiency that results in a more than remote likelihood that amaterial misstatement of the annual or interim financial statements will not beprevented or detected on a timely basis by employees in the normal course oftheir assigned functions.  Based on thematerial weaknesses identified, management concluded that our internal controlover financial reporting was not effective as of December 31, 2009.

 

The standards that mustbe met for management to assess the internal control over financial reportingare new and complex, and require significant documentation, testing andpossible remediation to meet the detailed standards.  We may encounter problems or delays incompleting the activities necessary to make future assessments of our internalcontrol over financial reporting and completing the implementation of anynecessary improvements.  Futureassessments may require us to incur substantial costs and may require asignificant amount of time and attention of management, which could seriouslyharm our business, financial condition and results of operations.  If we are unable to assess our internalcontrol over financial reporting as effective in the future, investors may loseconfidence in us and our stock may be negatively impacted.

 

*If ourindependent registered public accounting firm is unable to provide anunqualified attestation report on our assessment**of ourinternal control over financial reporting**, investors may lose confidence in us and our stockmay be negatively impacted.*

 

Rules adopted by theSEC pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 will requireour independent registered public accounting firm to complete an attestationreport on our assessment of our internal control over financial reporting. The first attestation report of our assessment that our independentregistered public accounting firm must complete will be required in connectionwith the preparation of our annual report for our fiscal year ending December 31,2010.  The attestation process that mustbe performed by our independent registered public accounting firm is also newand complex.  We may encounter problemsor delays in receiving an unqualified attestation of our assessment by ourindependent registered public accountants. Compliance with these new rules could require us to incursubstantial costs and may require a significant amount of time and attention ofmanagement, which could seriously harm our business, financial condition andresults of operations.  If ourindependent registered public accounting firm is unable to provide anunqualified attestation report on our assessment, investors may lose confidencein us and our stock may be negatively impacted.

 

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*We arenot subject to certain of the corporate governance provisions of theSarbanes-Oxley Act of 2002 and, without voluntary compliance with suchprovisions, will not receive the benefits and protections they were enacted toprovide.*

 

Since our common stock is not listed for trading on anational securities exchange, we are not subject to certain of the corporategovernance rules established by the national securities exchanges pursuantto the Sarbanes-Oxley Act of 2002.  Theserules relate to independent director standards, director nominationprocedures, audit and compensation committees standards, the use of an auditcommittee financial expert and the adoption of a code of ethics.

 

Our board of directors currently consists of David M.Daniels, who is our President and Chief Executive Officer.  Mr. Daniels is not an “independentdirector” as such term is defined by any of the national securities exchangesor inter-dealer quotation systems.  Ourboard of directors has not created a separately-designated standing auditcommittee and Mr. Daniels does not qualify as an “audit committeefinancial expert” as that term is defined in Item 407(d)(5)(ii) ofRegulation S-K promulgated under the Securities Act.  Unless we voluntarily elect to fully complywith all of these rules, we will not receive the benefits and protections theywere enacted to provide.

 

*The market price of our commonstock is likely to be highly volatile and subject to wide fluctuations.*

 

The market price of ourcommon stock is likely to be highly volatile and could be subject to widefluctuations in response to a number of factors that are beyond our control,including:

 

·                  announcements of new programs or servicesby our competitors;

 

·                  demand for our membership programs,including fluctuations in membership renewals; and

 

·                  fluctuations in revenue from themarketing and distribution partners that we use.

 

In addition, the marketprice of our common stock could be subject to wide fluctuations in response to:

 

·                  quarterly variations in our revenues andoperating expenses;

 

·                  announcements of new programs or servicesby us; and

 

·                  our ability to accommodate future growthin our operations.

 

In addition, the stockmarket has experienced significant price and volume fluctuations that haveparticularly affected the market price of the stock of many early-stagecompanies and that often have been unrelated or disproportionate to theoperating performance of these companies. Market fluctuations such as these may seriously harm the market price ofour common stock.  Further, securitiesclass action suits have been filed against companies following periods ofmarket volatility in the price of their securities.  If such an action is instituted against us,we may incur substantial costs and a diversion of management attention andresources, which would seriously harm our business, financial condition andresults of operations.

 

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*Our operating results mayfluctuate significantly, and these fluctuations may cause our stock price tofall.*

 

Our operating resultswill likely vary in the future primarily as the result of fluctuations in ourbillings, revenue and operating expenses. We expect to continue to incur increases in operating expenses in thefuture as we continue engaging in selling and marketing activities, develop newmembership programs, hire additional personnel and comply with state andfederal laws applicable to our business and SEC reporting requirements.  If our results of operations do not meet theexpectations of our shareholders or the investment community, the price of ourcommon stock may decline.

 

*Our shares of common stock arenot listed for trading on a national securities exchange.*

 

Our common stock currently trades on the OTC BulletinBoard and is not listed for trading on any national securities exchange.  Investments in securities trading on the OTCBulletin Board are generally less liquid than investments in securities tradingon a national securities exchange.  The failure of our shares to be approved fortrading on a national securities exchange may have the effect of limiting the trading activity of our common stockand reducing the liquidity of an investment in our common stock.

 

*We have never paid any dividends on our common stock and donot intend to pay any dividends on our common stock in the foreseeable future.*

 

We have never paid anydividends on our common stock and do not intend to pay any dividends on ourcommon stock in the foreseeable future. We intend to use any cash generated from our operations for reinvestmentin the growth of our business.  Anydetermination to pay dividends in the future will be made by our board ofdirectors and will depend upon our results of operations, financial condition,contractual restrictions, restrictions imposed by applicable law and otherfactors deemed relevant by our board of directors.  Accordingly, realization of a gain onshareholders’ investments will depend on the appreciation of the price of ourcommon stock.  We can provide noassurance that our common stock will appreciate in value or even maintain theprice at which shareholders purchased their shares.

 

*If our executive officers,directors and principal**shareholders**choose to act together, they may be able to controlour management and operations, which may prevent us from taking actions thatmay be favorable to you.*

 

Our executive officers, directors and principalshareholders, and their respective affiliates, beneficially own approximately39% of our outstanding common stock. These shareholders, acting together, have the ability to exertsubstantial influence over any matters requiring approval by our shareholders,including the election and removal of directors and any proposed merger,consolidation or sale of all or substantially all of our assets.  In addition, they could dictate themanagement of our business and affairs. This concentration of ownership could have the effect of delaying,deferring or preventing a change in control of us or impeding a merger orconsolidation, takeover or other business combination that could be favorableto you.

 

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** **

***Applicable SEC rules governingthe trading of “penny stocks” may limit the trading and liquidity of our commonstock which may affect the trading price of our common stock.***

** **

Our common stock is a “penny stock” as defined under Rule 3a51-1of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and isaccordingly subject to SEC rules and regulations that impose limitationsupon the manner in which our common stock can be publicly traded.  These regulations require the delivery, priorto any transaction involving a penny stock, of a disclosure schedule explainingthe penny stock market and the associated risks.  Under these regulations, certain brokers whorecommend such securities to persons other than established customers orcertain accredited investors must make a special written suitabilitydetermination regarding such a purchaser and receive such purchaser’s writtenagreement to a transaction prior to sale. These regulations may have the effect of limiting the trading activityof our common stock and reducing the liquidity of an investment in our commonstock.

 

**Item 2.****          ****Properties.**

 

Our corporateheadquarters and sole business office is located at 120 Gibraltar Road, Suite 107,Horsham, Pennsylvania 19044, where we lease approximately 7,100 square feet ofspace for a monthly rent and operating expense payment of approximately$14,700.  On November 13, 2009, weentered into an amendment to this lease to extend the term of the lease from May 31,2010 to May 31, 2013 at an initial monthly rent and operating expensepayment of approximately $13,400.  Webelieve that our office space is adequate to support our current operations andprojected growth in our operations over the next 12 months.

 

**Item3.  Legal Proceedings.**

 

We are not currently aparty to any material legal proceedings.

 

**PART II**

 

**Item4.  Market For Common Equity, RelatedStockholder Matters and Issuer Purchases of Equity Securities.**

 

**Market Information**

 

Ourcommon stock currently trades on the OTC Bulletin Board under the symbol “NHPR”.  The following table sets forth the range ofhigh and low bid prices for shares of our common stock on the OTC BulletinBoard for the periods indicated, as reported by Nasdaq.  The quotations represent inter-dealer prices,without retail mark-up, markdown or commission, and may not represent actualtransactions.

 

 

 

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| **Fiscal  Year Ended December 31, 2008** | ** ** | **High** | ** ** | **Low** | ** ** |
|-----------------------------------------------|------------|----------|------------|---------|------------|
| Quarter ended March 31, 2008             |       | $        | 0.37       |    | $          | 0.20 |   |
| Quarter ended June 30, 2008              |       | $        | 0.60       |    | $          | 0.245 |   |
| Quarter ended September 30, 2008         |       | $        | 0.25       |    | $          | 0.11 |   |
| Quarter ended December 31, 2008          |       | $        | 0.14       |    | $          | 0.05 |   |

 
| **Fiscal  Year Ended December 31, 2009** | ** ** | **High** | ** ** | **Low** | ** ** |
|-----------------------------------------------|------------|----------|------------|---------|------------|
| Quarter ended March 31, 2009             |       | $        | 0.09       |    | $          | 0.045 |   |
| Quarter ended June 30, 2009              |       | $        | 0.16       |    | $          | 0.06 |   |
| Quarter ended September 30, 2009         |       | $        | 0.14       |    | $          | 0.08 |   |
| Quarter ended December 31, 2009          |       | $        | 0.10       |    | $          | 0.061 |   |

 

The last reported tradingprice of our common stock as reported on the OTC Bulletin Board on March 24,2010 was $0.04 per share.

 

**Holders**

 

As of March 24,2010, the number of shareholders of record of our common stock was 77.

 

**Dividends**

 

We have not paid any dividends on our common stock todate, nor do we intend to pay any dividends on our common stock in theforeseeable future.  We intend to retainfuture earnings, if any, to finance the growth of our business.

 

**Transfer Agent**

 

Thetransfer agent for our common stock is Interwest Transfer Company, Inc.,1981 East Murray Holladay Road, Suite 100, P.O. Box 17136, Salt LakeCity, UT 84117.

 

**RecentSales of Unregistered Securities**

 

During our fiscal quarter ended December 31,2009, we sold the following securities without registration under theSecurities Act:

 

In October 2009, wecompleted a private offering of 1,004,560 shares of our commonstock and Class Awarrants exercisable into 502,280 shares of our common stock for aggregate cash consideration of$50,228.  These securities weresold in units comprised of two shares of our common stock and one Class Awarrant at a purchase price of $0.10 per unit. The Class Awarrants are initially exercisable into one share of our common stock at anexercise price of $0.05 per share, are exercisable during the period commencingon the date of grant and ending

 

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May 31, 2010, and expire at the end of theexercise period.  Wepaid finder fees consisting of 150,684 shares of our commonstock and Class A warrants exercisable into 75,342 shares of our commonstock.  We agreedto use our reasonable best efforts to file a registration statement with theSEC by November 18, 2009 to register all of the shares of our common stockissued in the offering and all of the shares of common stock underlying the Class Awarrants issued in this offering.  These securities were issued to a limitednumber of accredited investors in private placement transactions exempt fromthe registration requirements of the Securities Act pursuant to Section 4(2) ofthe Securities Act directly by us without engaging in any advertising orgeneral solicitation of any kind.

 

In November 2009,we completed a private offering of 700,000 shares of our commonstock and Class Awarrants exercisable into 350,000 shares of our common stock for aggregate cash consideration of$35,000.  These securities weresold in units comprised of two shares of our common stock and one Class Awarrant at a purchase price of $0.10 per unit. The Class Awarrants are initially exercisable into one share of our common stock at anexercise price of $0.05 per share, are exercisable during the period commencingon the date of grant and ending May 31, 2010, and expire at the end of theexercise period.  Wepaid finder fees consisting of 105,000 shares of our commonstock and Class A warrants exercisable into 52,500 shares of our commonstock.  We agreedto use our reasonable best efforts to file a registration statement with theSEC by November 18, 2009 to register all of the shares of our common stockissued in the offering and all of the shares of common stock underlying the Class Awarrants issued in this offering.  These securities were issued to a limitednumber of accredited investors in private placement transactions exempt fromthe registration requirements of the Securities Act pursuant to Section 4(2) ofthe Securities Act directly by us without engaging in any advertising orgeneral solicitation of any kind.

 

In November 2009,we completed a private offering of Class A warrants exercisableinto 2,000,000 shares of our common stock for aggregate cash consideration of $1,000.  The Class A warrants are initiallyexercisable into 100,000 shares of our common stock at an exercise price of$0.04 per share, are exercisable during the period commencing on the date ofgrant and ending December 31, 2010, and expire at the end of the exerciseperiod.  We paidfinder fees consisting of Class A warrants exercisable into300,000 shares of our common stock.  We agreed to use our reasonable best effortsto file a registration statement with the SEC by November 18, 2009 toregister all of the shares of common stock underlying the Class A warrantsissued in the offering.  These securities were issued to a limitednumber of accredited investors in private placement transactions exempt fromthe registration requirements of the Securities Act pursuant to Section 4(2) ofthe Securities Act directly by us without engaging in any advertising orgeneral solicitation of any kind.

 

In November 2009, we sold 1,000,000 shares ofcommon stock and Class A warrants exercisable into 1,000,000 shares ofcommon stock to an accredited investor for aggregate gross proceeds of$50,000.  Each warrant gives the holderthe right to purchase one share of our common stock.  The Class A warrants have an exerciseprice of $0.05 per share, are exercisable during the period commencing on thedate of grant and ending May 31, 2010, and expire at the end of theexercise period.  We paid finder feesconsisting of 150,000 shares of common stock and 150,000 Class Awarrants.  We agreed to use ourreasonable best efforts to file a registration 

 

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statement with the SECby November 18, 2009 to register all of the shares of our common stockissued in the offering and all of the shares of common stock underlying the Class Awarrants issued in this offering.  These securities were issued to a limitednumber of accredited investors in private placement transactions exempt fromthe registration requirements of the Securities Act pursuant to Section 4(2) ofthe Securities Act directly by us without engaging in any advertising orgeneral solicitation of any kind.

 

In December 2009, we issued shares of ourcommon stock to David M. Daniels and Alex Soufflas and issued an option toacquire shares of our common stock to Patricia S. Bathurst.  A description of theseshares and the option is set forth under *“Item 10.  Executive Compensation”*of thisreport.  The securities were issued to alimited number of accredited investors in private placement transactions exemptfrom the registration requirements of the Securities Act pursuant to Section 4(2) ofthe Securities Act directly by us without engaging in any advertising orgeneral solicitation of any kind and without payment of underwriting discountsor commissions to any person.

 

**Item6.  Management’s Discussion and Analysisof Financial Condition and Results of Operations.**

 

This Management’sDiscussion and Analysis of Financial Condition and Results of Operations andother parts of this report contain forward-looking statements that involverisks and uncertainties.  Allforward-looking statements included in this report are based on informationavailable to us on the date hereof, and, except as required by law, we assumeno obligation to update any such forward-looking statements.  Our actual results may differ materially fromthose anticipated in these forward-looking statements as a result of a numberof factors, including those set forth under *“Item 1A. Risk Factors”*of this report and elsewhere in this report. The following should be read in conjunction with our auditedconsolidated financial statements beginning on page F-1 of this report.

 

**Overview**

 

We are a nationalhealthcare membership organization that was formed to address the need foraffordable healthcare nationwide.  Wecreate, market and sell membership programs to predominantly underservedmarkets in the healthcare industry through a national healthcare savingsnetwork called CARExpressÔ. CARExpressÔ is a network of hospitals, doctors,dentists, pharmacists and other healthcare providers comprised of over1,000,000 healthcare providers that render their services and products toCARExpressÔ members at discounted prices.  CARExpressÔenables people to engage in point-of-service transactions directly with thesehealthcare providers and pay discounted prices to the providers.

 

Our membership programsoffer savings on healthcare services to persons who are uninsured orunderinsured by providing them with access to the same PPOs that are utilizedby employers that self-fund at least a portion of their employees’ healthcarecosts.  Our membership programs are alsoused to supplement benefit plans and fill in the gaps created by the need toreduce health benefits to keep the costs of health insurance reasonable.  We sell our membership programs directlythrough our sales force and indirectly through brokers and agents, unions andassociations, small businesses and other organizations.

 

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We are actively engagedin marketing our membership programs to the public.  Our primary objective is to generateincreased sales of our membership programs while expanding our position as aprovider of unique healthcare membership service programs.  The target market for our membership programsis comprised of individuals who have either limited health benefits or nohealth benefits.  Our share of thismarket is currently less than one percent and has been less than one percentsince our inception.  Since we are notcurrently large enough to pursue and support the entire market, we intend tocontinue to pursue specific opportunities that we identify in this marketthrough our various marketing and distribution channels.  Through product design, competitivemembership pricing, and a variety of marketing and distribution partners, weare pursuing opportunities in the healthcare market that insurance companieshave not addressed.

 

**Operational Metrics**

 

Our revenue consistsalmost exclusively of recurring monthly membership fees that we receive frommembers of our membership programs.  Ourmembers pay us membership fees each month for the duration of theirmembership.  The average membership feeper member per month that we receive for our CARExpressÔhealth discount programs is approximately $35. Approximately 95% of the CARExpressÔhealth discount programs that we have sold to our current members consist ofour Comprehensive Care Program which is currently sold at a monthly retailprice of $39.95.  The remainingCARExpressÔ health discount programs that we havesold to our current members consist of a mix of our less expensiveprograms.  Approximately 90% of theCARExpress PlusÔ membership programs that we have sold toour current members consist of our CARExpress PlusÔ GoldProgram which is currently sold at a monthly retail price of $137.  The remaining CARExpress PlusÔmembership programs that we have sold to our current members consist of a mixof our other programs.

 

We receive each member’sinitial monthly payment and billing information at the beginning of the firstmonthly membership period.  Monthlypayments for subsequent periods are received at the beginning of the applicableperiod.  The monthly membership fees thatwe receive are recognized as revenue evenly over the applicable monthly membershipperiod.  As a result, there is a delay offour weeks between the date we receive a monthly membership fee and the date werecognize the entire fee as revenue.

 

A key metric that we useto evaluate our success is our member retention rates.  Member retention rates represent thepercentage of new members that we acquire that we are able to retain for aspecified period of time.  Since we incura large portion of our costs up front and receive recurring membership feesthroughout the term of the membership, the longer we are able to retain themembers we acquire, the greater the revenue potential of the membershipprograms that we sell.  We believe thatthe key to obtaining a high member retention rate is to target our marketingcampaigns towards those individuals and organizations that are most in need ofour programs, most capable of paying for our programs, and most loyal to us andour programs.  Member retention rates canbe influenced by a variety of factors, including:

 

·                  the type of membership programs being sold;

 

·                  the marketing campaign being used to sell our membership programs;

 

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·                  the financial condition and loyalty of our members;

 

·                  the distribution channel selling our membership programs; and

 

·                  the type and amount of compensation being paid to our marketing anddistribution partners to sell our membership programs.

 

We have obtained valuableinformation regarding member demographics through the marketing and advertisingcampaigns that we have conducted and are focusing our marketing and advertisingcampaigns on members and member groups that we have identified as being mostsuitable for our membership programs.  Asa result, we expect our retention rates to continue to improve over the next 12months as we pursue these opportunities through our various marketing anddistribution channels.

 

**Financial Results and Outlook**

 

Our strategy is tocontinue to expand our position as a provider of unique discount healthcaremembership programs.  We have implementedseveral strategic growth initiatives during the past 12 months through which weachieved new contracts and strategic partnerships with a number of organizations.  One of these initiatives involved a shift inour sales strategy from sales through marketing companies to sales throughemployers and affinity groups, such as unions, associations, chambers ofcommerce, small business networks and internet marketing firms.  These organizations typically have a largenumber of members and customers and thus, each one provides us with theopportunity to obtain a large number of sales.

 

We generated revenue of$1,898,947 for the year ended December 31, 2009 compared to revenue of$2,671,420 for the year ended December 31, 2008.  We achieved a gross profit and gross profitmargin of $938,416 and 49%, respectively, for the year ended December 31,2009, compared to a gross profit and gross profit margin of $1,635,344 and 61%,respectively, for the year ended December 31, 2008.  We recognized a net loss and net loss pershare of $(2,156,309) and $(0.03), respectively, for the year ended December 31,2009 compared to a net loss and net loss per share of $(3,050,902) and $(0.07),respectively, for the year ended December 31, 2008.  Net cash used by operating activities was$(823,807) for year ended December 31, 2009 compared to $(1,339,716) forthe year ended December 31, 2008, representing a decrease of 39%.

 

We will generate futurerevenue and members primarily through sales of our CARExpressÔhealth discount programs and our CARExpress PlusÔmembership programs to employees and members of affinity groups through ourdirect sales force, our marketing and distribution partners, and variousmarketing and advertising campaigns.  Weare beginning to experience rapid growth in the number of new members that weare generating through our business partners. We have entered into agreements with several affinity groups through whichwe are generating sales of our CARExpressÔmembership programs and are currently in discussions with several otherorganizations regarding the sale of our CARExpressÔmembership programs.  We are also indiscussions with several organizations regarding the development of customizedCARExpressÔ programs that combine specificCARExpressÔ benefits, like vision, dental, pharmacyand 24-hour nurseline, in a cost-effective manner that can be targeted towardsspecific groups and markets.  We intendto finance each of these projects through cash on hand, internally generatedcash flows from operating activities and, if necessary, 

 

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proceeds from theissuance of equity securities.  We willuse any additional investments that we receive to accelerate the expansion ofeach of our advertising campaigns and programs and increase sales of ourmembership programs.

 

We expect the number ofCARExpressÔ members generated each month to increaseas a number of deals that we have either recently closed or that we expect toclose begin to generate members for us. We also expect the number of CARExpressÔmembers generated each month to continue to increase throughout the year andexpect our retention rates to improve over the next 12 months since membersgenerated through affinity groups have historically remained members ofCARExpressÔ for a much longer period of time thanmembers generated through marketing companies. As a result, we expect to generate an increasing amount of revenue andcash flows from operating activities during our fiscal year ending December 31,2010.  We can provide no assurance,however, that our membership base will increase as projected, that our memberretention rates will improve over the next 12 months, or that we will generateincreased revenue and cash flows from operating activities during our fiscalyear ended December 31, 2010.

 

**CriticalAccounting Policies**

 

OurManagement’s Discussion and Analysis of Financial Condition and Results ofOperations contained herein is based upon our consolidated financial statementsand accompanying notes, which have been prepared in accordance with UnitedStates generally accepted accounting principles (“GAAP”).  The preparation of these financial statementsrequires management to make estimates and assumptions that affect the reportedamounts of assets, liabilities, revenue and expenses, and related disclosure ofcontingent assets and liabilities.  Whenmaking these estimates and assumptions, we consider our historical experience,our knowledge of economic and market factors and various other factors that webelieve to be reasonable under the circumstances.  Actual results may differ under differentestimates and assumptions.

 

Theaccounting estimates and assumptions discussed in this section are those thatwe consider to be the most critical to an understanding of our financialstatements because they inherently involve significant judgments anduncertainties.

 

RevenueRecognition

 

Our revenue consists of the monthly membership feesthat we receive from the sale of our membership programs as well as anyshipping and handling fees that we may receive for the shipment of membershippackages to new members.  The date a monthlymembership begins varies for each individual member depending upon when theparticular member purchased the membership. Members have the right toterminate their membership at any time and may do so at the end of each monthbefore they pay the membership fee for the next month.  Werecognize the membership fees and shipping and handling fees as revenue whenpersuasive evidence of an arrangement exists, delivery or performance hasoccurred, the sales price is fixed and determinable, and collectibility isreasonably assured in accordance with FinancialAccounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”)Topic 605 (“ASC 605”).

 

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The membership fees are paid by members repeatedlyeach month.  The contractual term for themembership fees is equal to the monthly membership period.  The expected period during which the serviceswill be performed in return for the membership fees will never extend beyondthe one-month membership period since the members will pay another monthlymembership fee before the next monthly membership period begins.  As aresult, we recognize the membership fees on a straight-line basis over thecontract term since the relationship with the member is not expected to extendbeyond the contractual term and the member is not expected to continue tobenefit from the payment of the membership fee after the contractual term hasexpired.

 

# **The shipping and handling fees are one-time paymentsreceived by us from the applicable members when they first become amember.  These fees are not paid repeatedly each month.  The monthlycontract term is, therefore, not necessarily equal to the expected periodduring which services will be performed since the period during which serviceswill be performed is the average period during which each person is expected tobe a member.  We calculate the expected period during which we expect ourmembers to remain members as of the end of each fiscal quarter.  We do soby determining the total number of members that we had on such date, thendividing the total number of months for which all of such members had been amember as of that date by the number of such members.  This provides theaverage number of months each member has been a member.  The expectedperiod during which services will be performed (i.e., the expected periodduring which each member will remain a member) has always exceeded the initialmonthly membership period.  Therefore, we recognize shipping and handlingfees on a straight-line basis over the expected period during which theservices will be performed since the relationship with our members is expectedto extend beyond the initial contractual term and our members are expected tocontinue to benefit from the payment of the shipping and handling fees afterthe initial contractual term has expired.**

# ** **

Atthe beginning of each membership period, the monthly membership fee is paid bythe member and recorded as deferred revenue. We then recognize revenue as the services are rendered.  Shipping and handling fees that we receivefor the shipment of membership packages to new members are included in ourmembership fees and recorded as deferred revenue.  We typically receive cash within five days ofthe date the membership fee is charged to a member’s credit card.

 

We offer a free trial to some of our members.  We do not recognize any revenue during thefree-trial period.  In the event themember continues the membership after the free-trial period expires, the memberpays the monthly membership fee and we recognize revenue as services arerendered.

 

We also offer a 30-day money-back guarantee to our members.  Members can cancel their membership duringthe first 30 days of their initial membership period and receive a fullrefund.  After that, members can canceltheir membership at the end of any subsequent monthly membership period.  If a member cancels his or her membership andthe member’s credit card has already been processed for the next monthlymembership period, a refund check will be issued to the member and no revenuewill be recognized for that period.

 

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We recognize refunds as expense in accordance with ASC 605, whichpermits companies to recognize refundable membership fees, net of estimated refunds,as earned revenue over the membership term in limited circumstances if thefollowing criteria are met: (i) the estimate of cancellations and refundedrevenue are being made for a large pool of homogeneous items (membershiptransactions with the same characteristics, such as terms, periods, class ofcustomers, nature of services, etc.), (ii) reliable estimates of theexpected refunds can be made on a timely basis and it is remote that materialadjustments to previously recognized revenue would be required, (iii) thereis a sufficient company-specific historical basis upon which to estimate therefunds and such historical basis is predictive of future events, and (iv) theamount of the membership fees specified in the agreement at the outset of thearrangement is fixed, other than the customer’s right to request a refund.

 

Stock-Based Compensation

 

We account for employee stock-based compensation inaccordance with the fair value recognition provisions of ASC Topic 718 (“ASC718”) using the modified prospective transition method.  Under this method, compensation expenseincludes: (a) compensation expense for all share-based payments granted, but notyet vested, as of January 1, 2006, based on the grant-date fair value, and(b) compensation expense for all share-based payments granted subsequentto January 1, 2006, based on the grant-date fair value.  Such amounts have been reduced by ourestimate of forfeitures of all unvested awards.

 

Weaccount for non-employee stock-based compensation in accordance with ASC 718and ASC Topic 505 (“ASC 505”).  ASC 718and ASC 505 require that we recognize compensation expense based on theestimated fair value of stock-based compensation granted to non-employees overthe vesting period, which is generally the period during which services arerendered by the non-employees.

 

Weuse the Black-Scholes pricing model to determine the fair value of thestock-based compensation that we grant to employees and non-employees.  We are required to make certain assumptionsin connection withthis determination, the most important of which involves the calculation ofvolatility with respect to the price of our common stock.  The computation of volatility is intended toproduce a volatility value that is representative of our expectations about thefuture volatility of the price of our common stock over an expected term.  We used our share price history to determinevolatility and cannot predict how the price of our shares of common stock willreact on the open market in the future since our common stock has only beentrading on the OTC Bulletin Board since March 30, 2006.  As a result, the volatility value that wecalculated may differ from the future volatility of the price of our shares ofcommon stock.

 

For a morecomplete discussion of our accounting policies and procedures, see our notes toconsolidated financial statements beginning on page F-7.

 

**Recent Accounting Pronouncements**

 

In May 2009, the FASB issuedguidance now codified as ASC Topic 855 (“ASC 855”) which establishes general standardsof accounting for, and disclosures of, events that occur after 

 

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the balance sheet date but before financial statementsare issued or are available to be issued. ASC 855 requires the disclosure of the date through which an entity hasevaluated subsequent events and the basis for selecting that date (i.e.,whether that date represents the date the financial statements were issued orwere available to be issued). These new provisions became effective for interimor fiscal periods ending after June 15, 2009.  The adoption of these provisions did not havea material impact on our financial condition and results of operations.

 

In June 2009, the FASB issuedguidance now codified as ASC Topic 105 (“ASC 105”) as the single source ofauthoritative nongovernmental U.S. GAAP. ASC 105 does not change current U.S. GAAP, but is intended to simplifyuser access to all authoritative U.S. GAAP by providing all authoritativeliterature related to a particular topic in one place. All existing accountingstandard documents have been superseded and all other accounting literature notincluded in the FASB ASC is considered non-authoritative.  These new provisions became effective forinterim and annual periods ending after September 15, 2009 and,accordingly, are effective for the Company for the current fiscal reportingperiod.  The adoption of these provisionsdid not have a material impact on our financial condition and results ofoperations.

 

**Comparison ofthe Years Ended December 31, 2009****and 2008**

 

Revenue

 

Revenueconsists almost exclusively of the monthly membership fees that we receive frommembers of our membership programs. Revenue decreased $772,473 to $1,898,947 for the year ended December 31,2009 from $2,671,420 for the year ended December 31, 2008.  The decrease of $772,473 resulted primarilyfrom a decrease in sales of our membership programs through marketing companiesin connection with the shift in our sales strategy from sales through marketingcompanies to sales through employers and affinity groups.  Approximately 75% of the revenue that wegenerated during the year ended December 31, 2009 was derived from salesof our membership programs to first-time members, compared to approximately 20%during the year ended December 31, 2008. The remainder of the revenue that we generated during these years wasderived from existing members.  We expectrevenue to increase over the next 12 months as a result of increased sales ofour membership programs to employees and members of affinity groups through ourdirect sales force, our marketing and distribution partners and our variousmarketing and advertising campaigns.

 

DirectCosts

 

Direct costs consist of sales commissions that we payto our marketing and distribution partners and fees that we pay to our PPOs andprovider networks for access to their networks. Direct costs decreased $75,545 to $960,531 for the year ended December 31,2009, from $1,036,076 for the year ended December 31, 2008.  The decrease of $75,545 was due to a decreaseof $137,438 for PPO and network provider costs resulting from the decrease insales of our membership programs, partially offset by an increase of $61,893for sales commissions.  We expect cost ofsales to increase over the next 12 months as increased sales of our membershipprograms result in higher overall sales commission expenses and network providercosts.

 

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Sellingand Marketing Expenses

 

Sellingand marketing expenses consist of advertising expenses, marketing expenses,salaries and other compensation paid to employees selling and marketing ourmembership programs, rent expense allocated to our selling and marketingactivities, depreciation and amortization expense allocated to our selling andmarketing activities, and all other selling and marketing expenses incurred byus.  Selling and marketing expensesdecreased $113,510 to $111,036 for the year ended December 31, 2009, from$224,546 for the year ended December 31, 2008.  The decrease of $113,510 was due primarily todecreases of $93,203 for salaries and other compensation paid to employeesselling and marketing our membership programs, as well as decreases in othermiscellaneous selling and marketing expenses. We expect selling and marketing expenses to increase during the next 12months as we grow our direct sales force and engage in larger and more frequentmarketing and advertising campaigns and activities.

 

Generaland Administrative Expenses

 

General and administrative expenses consist primarilyof employee compensation expense, professional fees and other general andadministrative expenses.

 

*EmployeeCompensation Expense*.  Employee compensation expense consists of allsalaries and other cash compensation, equity-based compensation, 401(k) contributionsand other compensation that we pay to our employees and the related payrolltaxes that are not associated with our selling and marketing activities.  Employee compensation expense decreased$440,813 to $1,807,311 for the year ended December 31, 2009, from$2,248,124 for the year ended December 31, 2008.  The decrease of $440,813 was due primarily todecreases of $426,185 for salary and equity expense and related taxes and$28,108 for 401(k) matching contributions, partially offset by increasesin other miscellaneous employee compensation. We expect employee compensation expense to increase over the next 12months as we continue to retain additional executive management personnel andother employees in connection with the growth of our business.

 

*Professional Fees*.  Professionalfees consist of fees paid to our independent accountants, lawyers, technologyconsultants and other professionals and consultants.  Professional fees decreased $674,848 to$554,410 for the year ended December 31, 2009 from $1,229,258 for the yearended December 31, 2008.  Thedecrease of $674,848 was due primarily to a decrease of $662,568 for the amountof expense recognized in connection with equity-based compensation paid toservice providers and consultants for various services.  We expect professional fees to increase overthe next 12 months as we incur additional legal, accounting and technology feesin connection with the general expansion of our business and operations.

 

*Other General and Administrative Expenses*. Other general and administrative expenses consist of office suppliesexpense, computer hardware and system costs, bank service charges, filing feesand dues, non-employee customer service representative expense, rent expense,health insurance and other related benefit costs, financial printer costs, transferagent costs, the costs of investor relations campaigns and activities, postageand delivery expenses, severance expenses, general business expenses andmiscellaneous general and administrative expenses that are not 

 

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associated with our selling and marketingactivities.  Other general andadministrative expenses decreased $437,895 to $518,653 for the year ended December 31,2009 from $956,548 for the year ended December 31, 2008.  The decrease of $437,895 resulted primarilyfrom decreases of $160,950 for bank service charges associated with new andrecurring member transactions, $45,543 for repairs, $32,141 for health benefitsand $22,181 for corporate filing fees, as well as decreases in othermiscellaneous general and administrative expenses.  We expect other general and administrativeexpenses to increase over the next 12 months as we continue to incur expensesfor bank service charges, financial printer services, investor relationscampaigns and activities, transfer agent fees, health insurance, rent,non-employee customer service representatives, supplies, computer hardware andsystems, and other miscellaneous items associated with the general operationand growth of our business.

 

Loss on the Extinguishment of Debt

 

Loss on the extinguishment of debt consists of theloss that we recognized in connection with the payment of $20,000 and theissuance of 240,000 shares of common stock to a debt holder in full payment ofall principal and interest that was due and payable under a $50,000 promissorynote and a mutual release from any and all claims arising out of the promissorynote.  We recognized a loss on theextinguishment of debt of $30,000 during the year ended December 31, 2008in connection with the issuance of these shares.  We did not recognize any such loss during theyear ended December 31, 2009.  We donot expect to recognize any additional gains or losses on the extinguishment ofdebt in the foreseeable future.

 

NetLoss

 

Ournet loss decreased $894,593 to $2,156,309 for the year ended December 31,2009, from $3,050,902 for the year ended December 31, 2008.  The decrease of $894,593 was primarily due todecreases of $113,510 for selling and marketing expenses, $440,813 for employeecompensation expense, $674,848 for professional fees and $437,895 for othergeneral and administrative expenses, partially offset by a decrease of $772,473in revenue.  We expect to begingenerating a net profit from operations during 2010 as the recurring membershipfees from our increasing membership base overtake the costs associated withobtaining and retaining members.

 

**Liquidityand Capital Resources**

 

Since our inception, wehave funded our operations primarily through private sales of equity securitiesand the use of short-term debt.  As of December 31,2009, we had cash and cash equivalents of approximately $32,000.

 

Net cash used byoperating activities was $823,807 for the year ended December 31, 2009compared to $1,339,716 for the year ended December 31, 2008.  The $515,909 decrease in cash used byoperating activities was due primarily to a decrease of $894,593 for net lossand an increase of $293,154 for accounts payable and accrued expenses.  This was partially offset by decreases of $471,250for equity-based compensation expense, $48,491 for deferred revenue and$126,461 for deposits.

 

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We did not have any cashflows from investing activities for the years ended December 31, 2009 and2008.

 

Netcash provided by financing activities was $677,953 for the year ended December 31,2009 compared to $1,485,055 for the year ended December 31, 2008.  The $807,102 decrease in cash provided byfinancing activities was due to decreases of $593,665 for proceeds from theexercise of warrants, $183,437 for proceeds from the sale of common stock andwarrants, and $50,000 for proceeds from the issuance of debt, partially offsetby an increase of $20,000 for payments on debt.

 

Our primary sources ofcapital over the past 12 months are set forth below.

 

In April 2009, we completed a private offering of 5,346,000 shares ofour common stock and Class A warrants exercisable into 2,673,000 shares ofour common stock for aggregate gross proceeds of $200,475.  The Class A warrants had an exerciseprice of $0.075 per share, were exercisable until September 30, 2009 andexpired at the end of the exercise period.

 

In May 2009,we sold 2,000,000 shares of our common stock and Class A warrantsexercisable into 1,000,000 shares of our common stock for aggregate grossproceeds of $100,000.  The Class Awarrants have an exercise price of $0.075 per share, are exercisable until December 31,2009 and expire at the end of the exercise period.

 

## **In July 2009, we completed a private offering of500,000 shares of our common stock and Class A warrants exercisable into250,000 shares of our common stock for aggregate cash consideration of$30,000.  The Class A warrants havean exercise price of $0.06 per share, are exercisable until December 31,2009 and expire at the end of the exercise period.**

## ** **

In July 2009,we sold 2,000,000 shares of our common stock and Class A warrantsexercisable into 2,000,000 shares of our common stock for aggregate grossproceeds of $100,000.  The Class Awarrants have an exercise price of $0.05 per share, are exercisable until December 31,2010 and expire at the end of the exercise period.

 

## **In August 2009,we completed a private offering of 2,150,000 shares of our common stock, Class Awarrants exercisable into 1,075,000 shares of our common stock and Class Bwarrants exercisable into 1,075,000 shares of our common stock for aggregatecash consideration of $107,500.  The Class Awarrants have an exercise price of $0.05 per share, are exercisable until December 31,2009 and expire at the end of the exercise period.   The Class B warrants have an exerciseprice of $0.10 per share, are exercisable until December 31, 2010 andexpire at the end of the exercise period.**

## ** **

In October 2009,we completed a private offering of 1,004,560 shares of our common stock and Class Awarrants exercisable into 502,280 shares of our common stock for aggregate cash consideration of$50,228.  The Class A warrants havean exercise price of $0.05 per share, are exercisable during the periodcommencing on the date of grant and ending May 31, 2010, and expire at theend of the exercise period.

 

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In November 2009,we completed a private offering of 700,000 shares of our common stock and Class Awarrants exercisable into 350,000 shares of our common stock for aggregate cash consideration of$35,000.  The Class A warrants havean exercise price of $0.05 per share, are exercisable during the periodcommencing on the date of grant and ending May 31, 2010, and expire at theend of the exercise period.

 

In November 2009, we completed a private offering of 1,000,000shares of our common stock and Class A warrants exercisable into 1,000,000shares of our common stock for aggregate cash consideration of $50,000.  The Class A warrants have an exerciseprice of $0.05 per share, are exercisable during the period commencing on thedate of grant and ending May 31, 2010, and expire at the end of theexercise period.

 

In January 2010, we sold 1,000,000 shares ofour common stock and Class A warrants exercisable into 1,000,000 shares ofour common stock to an accredited investor for aggregate gross proceeds of$40,000.  The Class A warrants havean exercise price of $0.04 per share, are exercisable during the periodcommencing on the date of grant and ending December 31, 2010, and expireat the end of the exercise period.

 

In February 2010, we sold 2,000,000 shares ofour common stock to an accredited investor for aggregate gross proceeds of$40,000.

 

In February 2010, we sold 2,000,000 shares ofour common stock and Class A warrants exercisable into 4,000,000 shares ofour common stock to an accredited investor for aggregate gross proceeds of$40,000.  The Class A warrants havean exercise price of $0.02 per share, are exercisable during the periodcommencing on the date of grant and ending December 31, 2010, and expireat the end of the exercise period.

 

InMarch 2010, we completed a private offering of 450,000 shares of our commonstock for aggregate cash consideration of $10,125.

 

InMarch 2010, we completed a private offering of 3,200,000 shares of ourcommon stock for aggregate cash consideration of $64,000.

 

To date, our capital needs have been met primarily through sales ofequity securities and proceeds received upon the exercise of warrants held by our securityholders.  We do not currently maintain aline of credit or term loan with any commercial bank or other financialinstitution.  We have used the proceedsfrom the exercise of warrants and our private offerings of securities to payvirtually all of the costs and expenses we have incurred.  These costs and expenses were comprised ofoperating expenses, which consisted of the employee compensation expenses,professional fees and other general and administrative expenses discussedabove, and the costs of sales discussed above to the extent such costs of salesexceeded our revenue.

 

We believe thatour current cash resources will not be sufficient to sustain our operations forthe next 12 months.  We will need toobtain additional cash resources within the next 12 months to enable us to payour ongoing costs and expenses as they are incurred and finance the growth ofour business.  We intend to obtain thesefunds through internally generated cash flows from operating activities andproceeds from the issuance of equity securities.  The issuance of 

 

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additional equity would result in dilution to our existingshareholders.  We have not madearrangements to obtain additional financing and we can provide no assurancethat additional financing will be available in an amount or on terms acceptableto us, if at all.  If we are unable toobtain additional funds when they are needed or if such funds cannot beobtained on terms favorable to us, we may be unable to execute upon ourbusiness plan or pay our costs and expenses as they are incurred, which couldhave a material, adverse effect on our business, financial condition andresults of operations.

 

**Contractual Obligations**

 

The followingsummarizes our material long-term contractual obligations as of December 31,2009:

 
| **Contractual********Obligations** | ** ** | **Total** | ** ** | **2010** | ** ** | **2011**             | ** ** | **2012** | ** **    | **2013** | ** ** | **2014**                                       | ** ** |
|------------------------------------|------------|-----------|------------|----------|------------|----------------------|------------|----------|---------------|----------|------------|------------------------------------------------|------------|
| Employment Agreements (1)          |       | $         | 1,053,458  |     | $          |    965,000 |       | $        |   88,458 |     | $          |         -0- |       | $ |       -0- |   | $ | -0- |   |
| Office Lease (2)                   |       | 565,492   |       | 167,122  |       | 162,537              |       | 166,041  |          | 69,792   |       | $                                              | -0-        |   |
| Total                              |       | $         | 1,618,950  |     | $          | 1,132,122            |       | $        | 250,995       |     | $          | 166,041                                        |       | $ | 69,792 |   | $ | -0- |   |

 

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(1) At December 31, 2009, we were a party to employment agreements with DavidM. Daniels, Alex Soufflas and Patricia S. Bathurst.  The information contained herein does notreflect the resignation of Mr. Soufflas as our Chief Financial Officer,Executive Vice President and Secretary effective March 31, 2010.  A summary of these employment agreements andarrangements is provided herein under *“Item. 10. ExecutiveCompensation — Employment Contracts and Arrangeme**nts.”*

 

(2)  At December 31, 2009, we were a party to anoperating lease for our office space in Horsham, Pennsylvania that expires May 31,2013.  A summary of this office lease isprovided herein under *“Item 1. Business —Properties.”*

 

To date, we havemade payments under these obligations with proceeds received from sales of ourequity and debt securities, proceeds received upon the exercise of outstandingwarrants by our security holders and internally generated cash flows fromoperating activities.  We intend to makefuture payments due under these obligations primarily through internallygenerated cash flows from operating activities and proceeds received from theissuance of debt and equity securities.

 

**Off-BalanceSheet Arrangements**

 

As of December 31, 2009, we did not have any relationships withunconsolidated entities or financial partners, such as entities often referredto as structured finance or special purpose entities, that had been establishedfor the purpose of facilitating off-balance sheet arrangements or othercontractually narrow or limited purposes. As such, we are not materially exposed to any financing, liquidity,market or credit risk that could arise if we had engaged in such relationships.

 

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**Item7.  Financial Statements andSupplementary Data.**

 

Our audited consolidated financial statements atand for each of the years ended December 31, 2009 and 2008, respectively,begin on page F-1 of this report located immediately after the signature page hereto.

 

**Item8.  Changes in and Disagreements withAccountants on Accounting and Financial Disclosure.**

 

None.

 

**Item8A(T).  Controls and Procedures.**

 

**Evaluation of Disclosure Controlsand Procedures**

 

Wemaintain disclosure controls and procedures that are designed to ensure thatinformation required to be disclosed in our Exchange Act reports is recorded,processed, summarized and reported within the time periods specified in the SEC’srules and forms and that such information is accumulated and communicatedto our management, including our Chief Executive Officer and Chief FinancialOfficer, as appropriate, to allow for timely decisions regarding requireddisclosure. In designing and evaluating our disclosure controls and procedures,management recognizes that any controls and procedures, no matter how welldesigned and operated, can provide only reasonable assurance of achieving thedesired control objectives, and management is required to apply its judgment inevaluating the cost-benefit relationship of possible controls andprocedures.  Our disclosure controls andprocedures were designed to provide reasonable assurance that the controls andprocedures would meet management’s objectives.

 

As of December 31, 2009, we carried out theevaluation of the effectiveness of our disclosure controls and procedures asdefined by Rule 13a-15(e) under the Exchange Act under thesupervision and with the participation of our management, including our ChiefExecutive Officer and Chief Financial Officer. Based upon that evaluation, our Chief Executive Officer and ChiefFinancial Officer concluded that, as of December 31, 2009, our disclosurecontrols and procedures were effective to provide reasonable assurance thatinformation we are required to disclose in reports that we file or submit underthe Exchange Act is: (i) recorded, processed, summarized and reportedwithin the time periods specified in the SEC’s rules and forms, and (ii) accumulatedand communicated to our management, including our Chief Executive Officer andChief Financial Officer, as appropriate to allow timely decisions regardingrequired disclosure.

 

**Management’s Report on Internal Control Over FinancialReporting**

 

Our management, under the supervision of our Chief Executive Officerand Chief Financial Officer, is responsible for establishing and maintainingadequate internal control over financial reporting.  Internal control over financial reporting isa process designed to provide reasonable assurance regarding the reliability offinancial reporting and the preparation of financial statements for externalpurposes in accordance with GAAP.  Internal control over financialreporting includes policies and procedures that:

 

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(1)           pertain to themaintenance of records that in reasonable detail accurately and fairly reflectthe transactions and dispositions of our assets;

 

(2)           provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with GAAP, and that our receipts andexpenditures are being made only in accordance with authorization of ourmanagement and directors; and

 

(3)           provide reasonable assuranceregarding prevention or timely detection of unauthorized acquisitions, use ordisposition of our assets that could have a material effect on our financialstatements.

 

Internalcontrol over financial reporting cannot provide absolute assurance of achievingfinancial reporting objectives because of its inherent limitations.  Internal control over financial reporting isa process that involves human diligence and compliance and is subject to lapsesin judgment and breakdowns resulting from human failures.  Internal control over financial reportingalso can be circumvented by collusion or improper management override.  Because of such limitations, there is a riskthat material misstatements may not be prevented or detected on a timely basisby internal control over financial reporting. However, these inherent limitations are known features of the financialreporting process.  Therefore, it ispossible to design safeguards to reduce, though not eliminate, this risk.

 

Ourmanagement used the framework set forth in the report entitled, “*Internal Control — Integrated Framework”*publishedby the Committee of Sponsoring Organizations of the Treadway Commission, knownas COSO, to evaluate the effectiveness of our internal control over financialreporting.  Based on this assessment, ourmanagement concluded that our internal control over financial reporting was noteffective at December 31, 2009 due to the existence of material weaknessesin our internal controls.

 

A material weakness is a control deficiency, or a combination ofcontrol deficiencies, that results in a more than remote likelihood that amaterial misstatement of our annual or interim financial statements will not beprevented or detected on a timely basis. Our management, in consultation with our independent registered public accounting firm, concludedthat material weaknesses existed in the following areas as of December 31,2009:

 

(1)           Our Chief Executive Officeralso serves as the sole member of our board of directors.  As a result, there are no independentdirectors monitoring the actions of our senior management.  One of the responsibilities of a company’s board ofdirectors is to act as an independent source for monitoring the actions of acompany’s senior management.  Thelack of independent directors on our board of directors constituted a materialweakness in our internal controls.

 

(2)           Our Chief Executive Officer and solemember of our board of directors resides in the state of Florida and did notvisit our sole business office located in Horsham, Pennsylvania during2009.  Senior management has theresponsibility to monitor the quality of a company’s 

 

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internal controls.  This is most often performed through theregular management and supervisory activities of the company’s day-to-dayoperations.  The lack of monitoring byour Chief Executive Officer constituted a material weakness in the ability oftop management to effectively monitor the quality of our internal controls.

 

(3)           We terminated the employment of oursenior accountant in or around June 2009 and our CEO and Board ofDirectors did not hire a new bookkeeper or accountant or engage the services ofa temporary bookkeeper or accountant or an outside consulting firm.  Instead, our CFO was asked to performvirtually all tasks associated with the bookkeeping and accountingfunctions.  The CEO and Board ofDirectors have the responsibility to ensure that adequate segregation of dutiesexist within the bookkeeping and accounting functions.  The lack of adequate segregation of dutieswithin the bookkeeping and accounting functions constitutes a material weaknessin our internal controls.

 

We are actively seekingto remediate these material weaknesses in the following manner:

 

(1)           We are currently seeking additional,independent directors to join our board of directors.  The addition ofsuch board members would provide us with independent directors who would bemonitoring the actions of our top management. Our efforts to do so have been hindered substantially by the fact thatwe do not have a directors and officers insurance policy in place. Because such policies are very expensive, we believe it is in our best interestto forego the purchase of such a policy and instead focus the use of ourfinancial resources on our development and growth.

 

(2)           Our Chief Executive Officer iscurrently seeking to obtain a residence close in proximity to our Horsham,Pennsylvania business office.  This willenable him to engage in the regular management and supervisory activities ofthe company’s day-to-day operations and, accordingly, adequately monitor thequality of our internal controls.

 

(3)           We are currently seeking to hire anindividual who will serve alongside our Chief Financial Officer and serve asboth an accountant and bookkeeper for us. This will help ensure that adequate segregation of duties exist withinthe bookkeeping and accounting functions.

 

Notwithstandingthe existence of these material weaknesses in internal controls, we believethat our consolidated financial statements fairly present, in all materialrespects, our consolidated balance sheets at December 31, 2009 and2008 and our consolidated statements of operations, stockholders’ equityand cash flows for the years ended December 31, 2009 and 2008 inconformity with GAAP.

 

Thisannual report does not include an attestation report of our independentregistered public accounting firm regarding internal control over financialreporting.  Our management’s report wasnot subject to attestation by our independent registered public accounting firmpursuant to temporary rules of the SEC that permit us to provide only ourmanagement’s report in this annual report.

 

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**Changesin Internal Control Over Financial Reporting**

 

Therehas been no change in our internal control over financial reporting during ourmost recent fiscal quarter that has materially affected, or is reasonablylikely to materially affect, our internal control over financial reporting.

 

**Item 8B. Other Information.**

 

(1)           The description set forth below isincluded herewith for the purpose of providing the disclosure required under “Item5.02 — Departure of Directors or Certain Officers; Election of Directors;Appointment of Certain Officers; Compensatory Arrangements of Certain Officers”of Form 8-K in connection with our issuance of stock to David M. Danielsand Alex Soufflas on December 29, 2009 and our issuance of an option toPatricia S. Bathurst on December 29, 2009.

 

OnDecember 29, 2009, we issued 1,864,286 and 1,556,143 shares of common stock toDavid M. Daniels and Alex Soufflas, respectively, and granted an option toPatricia S. Bathurst to acquire 855,643 shares of our commonstock.  The shares and option were grantedto Messrs. Daniels and Soufflas and Ms. Bathurst, respectively, infull payment of deferred salary compensation that was earned by each of thembetween March 31, 2009 and December 31, 2009, and payable to them asof December 31, 2009.  The option isfor a term of 10 years, has an exercise price of $0.07 per share (the closingmarket price of our common stock on the OTC Bulletin Board on the date ofgrant), and was vested in full on the date of grant.  In the event the employment of Ms. Bathurst is terminatedfor death, disability or retirement, her option may be exercised to the extentexercisable on the date of such termination of employment until the earlier ofthe date that is one year after the date of such termination of employment (90days in the case of termination due to retirement) or the expiration date ofthe option.  In the event her employmentis terminated not for “cause” or is terminated by her for “good reason,” assuch terms are defined in the option, the option vests in full immediately andremains exercisable until the expiration date of the option.  In the event her employment is terminated for“cause,” the option terminates immediately.

 

The foregoing descriptionof the option does not purport to be complete and is qualified in its entiretyby the terms of the option filed as Exhibit 10.32 to this report andincorporated by reference herein.

 

(2)           The description set forth below isincluded herewith for the purpose of providing the disclosure required under “Item5.02 — Departure of Directors or Certain Officers; Election of Directors;Appointment of Certain Officers; Compensatory Arrangements of Certain Officers”of Form 8-K in connection with the resignation of Alex Soufflas as ourChief Financial Officer, Executive Vice President and Secretary and theappointment of David M. Daniels as our Interim Chief Financial Officer andSecretary.

 

OnMarch 1, 2010, Alex Soufflas provided us with notice of his resignation asour Chief Financial Officer, Executive Vice President and Secretary effective March 31,2010.

 

On April 1, 2010, DavidM. Daniels, our President and Chief Executive Officer, was appointed ourInterim Chief Financial Officer and Secretary. Information concerning the 

 

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positions and professional background of Mr. Danielsis provided herein under *“Item 9.  Directors, Executive Officers and CorporateGovernance — Directors and Executive Officers.”*  We have entered into an employment agreementwith Mr. Daniels.  A summary of thematerial terms of this employment agreement is provided herein under *“Item. 10. Executive Compensation — Employment Contracts andArrangements.”*

 

**PART III**

 

**Item 9.  Directors, Executive Officers and CorporateGovernance.**

 

The following chart sets forth certain informationabout each of our directors and executive officers.

 
| **Name**              | ** ** | **Age** | ** ** | **Positions Held**                                                            |
|-----------------------|------------|---------|------------|-------------------------------------------------------------------------------|
| David M. Daniels      |       | 52      |       | Chairman of the  Board of Directors, 

Chief Executive  Officer and President |
|                  |       |    |       |                                                                          |
| Alex Soufflas         |       | 35      |       | Chief Financial  Officer, Executive Vice President and Secretary              |
|                  |       |    |       |                                                                          |
| Patricia S.  Bathurst |       | 55      |       | Vice President —  Marketing                                              |

 

**Directors**

 

We believe thatour board of directors should be composed of individuals with sophisticationand experience in many substantive areas that impact our business.  We believe that experience, qualifications orskills in the following areas are most important: (i) organizationalleadership and vision; (ii) strategic, financial and operational planning;(iii) corporate restructuring and performance enhancement; (iv) corporatefinance; (v) health insurance industry experience; and (vi) experienceas a board member oft other corporations. These areas are in addition to the personal qualifications described inthis section.  We believe that ourcurrent board member possesses the professional and personal qualificationsnecessary for board service, and have highlighted particularly noteworthy attributes for this board member below.  The principal occupation and businessexperience, for at least the past five years, of our current director is asfollows:

 

*David M.Daniels*****has served as our Chief Executive Officerand sole member of our board of directors since February 2004, and hasserved as our President since February 2005.  From 1998 to February 2004, Mr. Danielsprovided financing and management consulting services to several companiesoperating in the manufacturing, technology and services industries, includingMarket Pathways Financial Relations, Inc., a financial consulting firm,from April 2000 until February 2004, The Research Works, Inc.,an equity research firm, from April 2001 until December 2003, andXraymedia, Inc., an advertising agency, from September 2001 until February 2004.  Mr. Daniels served as the ChiefFinancial Officer of North American Technologies Group, Inc., a researchand development company, from 1994 to 1995 and served as the President andChief Operating Officer from 1995 to 1998. Mr. Daniels founded Industrial Pipe Fittings, Inc., amanufacturer of industrial fittings for the high density polyethylene market, 

 

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in 1994 and served as theChairman, President and Chief Executive Officer until 1998.  Prior to 1994, Mr. Daniels served inseveral capacities with Morgan Stanley Dean Witter, achieving the position ofFirst Vice President of the company in 1986. Mr. Daniels is a graduate of the Georgia Military Academy and theUniversity of Houston, where he received a B.A. in finance.

 

As a result of these andother professional experiences, Mr. Daniels possesses particular knowledgeand experience in management, operations and finance that strengthen the board’squalifications, skills and experience.

 

**Executive Officers**

 

*AlexSoufflas* hasserved as our Chief Financial Officer and Secretary since February 2006and has served as our Executive Vice President since August 2005. On March 1,2010, Mr. Soufflas provided us with notice of his resignation from each ofthe aforementioned positions effective March 31, 2010.  Mr. Soufflas served as our GeneralCounsel from August 2005 until February 2006.  From May 2004 to August 2005, Mr. Soufflaswas an attorney at Duane Morris LLP, a national law firm, where he specializedin public and private securities offerings, mergers & acquisitions,contracts and corporate counseling.  Mr. Soufflasspecialized in general corporate law as an attorney at Spector Gadon &Rosen, P.C., a Philadelphia-based law firm, from April 2003 to May 2004,and at Sullivan & Worcester, LLP, a Boston-based law firm, from September 2000to October 2002.  Prior to that, Mr. Soufflaswas an accountant at KPMG LLP, an international accounting and consultingfirm.  Mr. Soufflas received a B.S.in accounting from Purdue University and a juris doctor from Boston College LawSchool.

 

*PatriciaS. Bathurst* hasserved as our Vice President — Marketing since March 2001.** **From 1989 to 2000, Ms. Bathurstserved as the Vice President of Marketing for National Health and SafetyCorporation where she was responsible for all of the marketing, advertising andpromotional functions for the company. From 1985 to 1989, Ms. Bathurst served as the Director of Marketingfor Horizon Healthcare Group, Inc., a provider of healthcare servicesutilizing national provider networks that she co-founded in 1985.  Prior to 1985, Ms. Bathurst served asthe Director of Administration and Customer Service for Phoenix InternationalCorporation, a provider of healthcare services utilizing national providernetworks.  Ms. Bathurst is agraduate of Temple University with a B.A. in business administration.

 

**Board ofDirectors**

 

David M. Daniels,our Chief Executive Officer and President, is the sole member of our board ofdirectors.  Mr. Daniels will serveuntil the next annual meeting of shareholders or until his successor is dulyelected and qualified.  Officers areelected annually by our board of directors and serve at the discretion of ourboard of directors.  We do not currentlyhave any committees of our board of directors.

 

**Shareholder Communications**

 

We have not implemented any formal procedures forshareholder communication with our board of directors. Any matter intended forour board of directors, or for any individual member or members of our board ofdirectors, should be directed to our corporate secretary at 

 

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National Health Partners, Inc., 120 GibraltarRoad, Suite 107, Horsham, PA 19044. In general, all shareholder communication delivered to the corporatesecretary for forwarding to the board of directors or specified members of theboard of directors will be forwarded in accordance with the shareholder’sinstructions.  However, the corporatesecretary reserves the right to not forward to members of the board ofdirectors any abusive, threatening or otherwise inappropriate materials.

 

AuditCommittee and Audit Committee Financial Expert

 

Our board ofdirectors has not created a separately-designated standing audit committee or acommittee performing similar functions. Accordingly, our full board of directors acts as our auditcommittee.  We currently have a smallnumber of employees and have generated only a small amount of revenue todate.  In light of the foregoing, ourboard of directors concluded that the benefits of retaining an individual whoqualifies as an “audit committee financial expert,” as that term is defined inItem 407(d)(5)(ii) of Regulation S-K promulgated under the Securities Act,would be outweighed by the costs of retaining such a person.  As a result, no member of our board ofdirectors is an “audit committee financial expert.”

 

**Code of Business Conduct and Ethics**

 

We have adopted a Code of Business Conduct and Ethics thatapplies to our principal executive officer, principal financial officer,principal accounting officer or controller, and persons performing similarfunctions.  Our Code of Business Conductand Ethics is designed to deter wrongdoing and promote: (i) honest andethical conduct, including the ethical handling of actual or apparent conflictsof interest between personal and professional relationships; (ii) full,fair, accurate, timely and understandable disclosure in reports and documentsthat we file with, or submit to, the SEC and in other public communicationsthat we make; (iii) compliance with applicable governmental laws, rules andregulations; (iv) prompt internal reporting of violations of the code toan appropriate person or persons identified in the code; and (v) accountabilityfor adherence to the code.

 

A copy of our Code of Business Conduct and Ethics isavailable on our corporate website at www.nationalhealthpartners.com.

 

**Section 16(a) Beneficial Ownership ReportingCompliance**

 

Section 16(a) ofthe Exchange Act requires that our officers and directors and persons whobeneficially own more than 10% of our common stock file initial reports of ownership and reportsof changes in beneficial ownership of our common stock with the SEC.  They are also required to furnish us withcopies of all Section 16(a) forms that they file with the SEC.  Based solely on our review of the copies ofsuch forms received by us, or written representations from such persons that noreports were required for those persons, with the exception of Alex Soufflas,who failed to file one or more Form 4s to disclose bona fide gifts of sharesof our common stock that he made during the year, we believe that all Section 16(a) filingrequirements were satisfied in a timely fashion during our fiscal year ended December 31,2009.

 

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**Item 10. Executive Compensation.**

 

The following table provides certain summaryinformation concerning compensation earned by the executive officers namedbelow during the fiscal year ended December 31, 2009.

 

***SummaryCompensation Table***

 
| ** **                                                             | ** ** | ** ** | ** ** | ** **          | ** ** | ** ** | ** ** | ** **       | ** ** | ** **       | ** ** | ** **         | ** ** | ** **         | ** ** |
|------------------------------------------------------------------------|------------|------------|------------|---------------------|------------|------------|------------|------------------|------------|------------------|------------|--------------------|------------|--------------------|------------|
| ** **                                                             | ** ** | ** ** | ** ** | ** **          | ** ** | ** ** | ** ** | **Stock**        | ** ** | **Option**       | ** ** | **All Other** | ** ** | ** **         | ** ** |
| **Name and**                                                      | ** ** | ** ** | ** ** | ** **          | ** ** | **Bonus**  | ** ** | **Awards**       | ** ** | **Awards**       | ** ** | **Compensation**   | ** ** | ** **         | ** ** |
| **Principal Position**                                            | ** ** | **Year**   | ** ** | **Salary ($)** | ** ** | **($)**    | ** ** | **($) (1)** | ** ** | **($) (1)** | ** ** | **($) (2)**   | ** ** | **Total ($)** | ** ** |
|                                                                   |       |       |       |                |       |       |       |             |       |             |       |               |       |               |       |
| David M. Daniels                                                       |       | 2009       |       | 382,800             | (3)        | -0-        |       | -0-              |       | -0-              |       | -0-                |       | 382,800            |       |
| *President  and*

*Chief  Executive Officer*                           |       | 2008       |       | 384,540             |       | -0-        |       | 37,950           |       | 111,987          |       | 10,175             |       | 544,652            |       |
|                                                                   |       |       |       |                |       |       |       |             |       |             |       |               |       |               |
|                                                                   |       |       |       |                |       |       |       |             |       |             |       |               |       |               |       |
| Alex Soufflas                                                          |       | 2009       |       | 319,440             | (4)        | -0-        |       | -0-              |       | -0-              |       | -0-                |       | 319,440            |       |
| *Chief  Financial Officer, Executive Vice President*

*and  Secretary* |       | 2008       |       | 291,720             |       | -0-        |       | 28,793           |       | 111,987          |       | 10,507             |       | 443,007            |       |
|                                                                   |       |       |       |                |       |       |       |             |       |             |       |               |       |               |
|                                                                   |       |       |       |                |       |       |       |             |       |             |       |               |       |               |
|                                                                   |       |       |       |                |       |       |       |             |       |             |       |               |       |               |       |
| Patricia S.  Bathurst                                                  |       | 2009       |       | 175,692             | (5)        | -0-        |       | -0-              |       | -0-              |       | -0-                |       | 175,692            |       |
| *Vice  President — Marketing*                                     |       | 2008       |       | 165,709             |       | -0-        |       | -0-              |       | 127,741          |       | 4,193              |       | 297,643            |       |

 

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(1) Represents thegrant date fair value of the award, calculated in accordance with FinancialAccounting Standards Board Accounting Standard Codification Topic 718.  Asummary of the assumptions made in the valuation of these awards is providedherein under *“Item 6. Management’s Discussion and Analysis of Financial Condition and Resultsof Operations — Critical Accounting Policies”* and *“Item 10.  Executive Compensation— Employment Contracts and Arrangements,”* and in our notes toconsolidated financial statements beginning on page F-7 of this report.

 

(2) Consists of matching contributions made by us on behalf of the applicableexecutive officer under the National Health Partners, Inc. 401(k) Plan.

 

(3) Includes2,364,286 shares of common stock issued to Mr. Daniels in lieu of salaryearned during the year ended December 31, 2009.  A more detailed description of these stockissuances is provided herein under *“Item 10.  Executive Compensation — Employment Contractsand Arrangements.”*

 

(4) Includes1,961,143 shares of common stock issued to Mr. Soufflas in lieu of salaryearned during the year ended December 31, 2009.  A more detailed description of these stockissuances is provided herein under *“Item 10.  Executive Compensation — Employment Contractsand Arrangements.”*

 

(5) Includesoptions to purchase 1,080,643 shares of common stock issued to Ms. Bathurstin lieu of salary earned during the year ended December 31, 2009.  A more detailed description of these optionissuances is provided herein under *“Item 10.  Executive Compensation — Employment Contractsand Arrangements.”*

 

**Narrative Disclosure of Executive Compensation**

 

We are a party to employment agreements with each ofDavid M. Daniels, Alex Soufflas and Patricia M. Bathurst.  Under these agreements, Messrs. Danielsand Soufflas and Ms. Bathurst are currently entitled to receive annualizedbase salaries of $421,080, $351,384 and $193,261, respectively.

 

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We have issued a varietyof equity securities to Messrs. Daniels and Soufflas and Ms. Bathurstduring the course of their employment with us. We have issued options to Messrs. Daniels and Soufflas and Ms. Bathurstto acquire 3,150,000, 2,050,000 and 3,217,143 shares of our common stock,respectively.  In addition, we haveissued restricted stock awards to each of Messrs. Daniels and Soufflas andMs. Bathurst with respect to 1,050,000, 300,000 and 225,000 shares of ourcommon stock, respectively, and have issued Messrs. Daniels and Soufflas3,054,286 and 2,484,643 shares of common stock, respectively.

 

A summary of the material terms of these employmentagreements and the options, restricted stock awards and shares of common stockgranted to each of these individuals is provided below.

 

**Employment Contracts andArrangements**

 

*David M. Daniels*

 

On May 13, 2005, we entered into an employmentagreement with David M. Daniels to serve as our Chief Executive Officereffective February 1, 2005.  Theagreement is for an initial term of five years and renews automatically forsuccessive one-year periods unless earlier terminated or prior notice ofnon-renewal is provided by either party. Under the agreement, Mr. Daniels is entitled to an annual basesalary of $231,000 with annual increases on January 1 of each year of aminimum of 10% of the annual base salary for the immediately preceding year,and is eligible for an annual bonus and incentive compensation awards in anamount and form to be determined by our board of directors in its solediscretion.  Pursuant to the agreement,on May 13, 2005, Mr. Daniels was granted an option to acquire2,500,000 shares of our common stock.

 

On March 28, 2006 and September 4, 2007, wegranted Mr. Daniels a restricted stock award with respect to 450,000 and600,000 shares of our common stock, respectively. On December 12, 2006 andMarch 25, 2008, we granted Mr. Daniels an option to acquire 250,000and 400,000 shares of our common stock, respectively.  On December 30, 2008, we granted Mr. Daniels690,000 shares of our common stock in full payment of deferredsalary compensation that was earned by him during 2008 and payable to him as ofDecember 31, 2008.  On June 15, 2009, we granted Mr. Daniels500,000 shares of our common stock in full payment of deferredsalary compensation that was earned by him during the period commencing January 1,2009 and ending March 31, 2009 and payable to him as of March 31,2009.  On December 29, 2009, we granted Mr. Daniels1,864,286 shares of our common stock in full payment of deferredsalary compensation that was earned by him during the period commencing April 1,2009 and ending December 31, 2009 and payable to him as of December 31,2009.

 

*AlexSoufflas*

 

On March 29, 2006, we entered into an employmentagreement with Alex Soufflas to serve as our Chief Financial Officer andExecutive Vice President effective February 1, 2006.  The agreement is for an initial term of threeyears and renews automatically for successive one-year periods unless earlierterminated or prior notice of non-renewal is provided by either party.  Under the agreement, Mr. Soufflas isentitled to an annual base salary of $210,000 with annual increases on January 1of each year of a minimum of 10% of the annual base salary for the

 

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immediatelypreceding year, and is eligible for an annual bonus and incentive compensationawards in an amount and form to be determined by our board of directors in itssole discretion.

 

On August 15, 2005, we granted Mr. Soufflasan option to acquire 1,000,000 shares of our common stock, and on March 28,2006 we granted Mr. Soufflas a restricted stock award with respect to300,000 shares of our common stock.  On December 12,2006, September 4, 2007 and March 25, 2008, we granted Mr. Soufflasan option to acquire 150,000, 500,000 and 400,000 shares of our common stock,respectively.  On December 30, 2008,we granted Mr. Soufflas 523,500 shares of our common stock in full paymentof deferred salary compensation that was earned by him during 2008 and payableto him as of December 31, 2008.  On June 15,2009, we granted Mr. Soufflas 405,000 shares of our common stock in full paymentof deferred salary compensation that was earned by him during the periodcommencing January 1, 2009 and ending March 31, 2009 and payable tohim as of March 31, 2009.  On December 29,2009, we granted Mr. Soufflas 1,556,143 shares of our common stock in full paymentof deferred salary compensation that was earned by him during the periodcommencing April 1, 2009 and ending December 31, 2009 and payable tohim as of December 31, 2009.

 

On March 1, 2010, Mr. Soufflasprovided us with notice of his resignation as the Chief Financial Officer,Executive Vice President and Secretary effective March 31, 2010.

 

*PatriciaS. Bathurst*

 

On May 13, 2005, we entered into an employmentagreement with Patricia S. Bathurst to serve as our Vice President — Marketingeffective February 1, 2005.  Theagreement is for an initial term of five years and renews automatically for successiveone-year periods unless earlier terminated or prior notice of non-renewal isprovided by either party.  Under theagreement, Ms. Bathurst is entitled to an annual base salary of $132,000with annual increases on January 1 of each year of a minimum of 10% of theannual base salary for the immediately preceding year, and is eligible for anannual bonus and incentive compensation awards in an amount and form to bedetermined by our board of directors in its sole discretion.  Pursuant to the agreement, on May 13,2005, Ms. Bathurst was granted an option to acquire 1,000,000 shares ofour common stock.

 

On March 28, 2006, we granted Ms. Bathurst arestricted stock award with respect to 225,000 shares of our common stock.  On December 12, 2006, September 4,2007 and March 25, 2008, we granted Ms. Bathurst an option to acquire50,000, 400,000 and 400,000 shares of our common stock, respectively.  On March 25, 2008, we granted Ms. Bathurstan option to acquire 286,500 shares of our common stock in full payment ofdeferred salary compensation that was earned by her during 2008 and payable toher as of December 31, 2008.  On June 15, 2009, we granted Ms. Bathurstan option to acquire 225,000shares of our common stock in full payment of deferred salary compensationthat was earned by her during the period commencing January 1, 2009 andending March 31, 2009 and payable to her as of March 31, 2009. On December 29, 2009, we granted Ms. Bathurst and option toacquire 855,643 shares of our common stock in full payment of deferredsalary compensation that was earned by her during the period commencing April 1,2009 and ending December 31, 2009 and payable to her as of December 31,2009.

 

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**TerminationProvisions of Employment Agreements**

 

The employment agreements with Mr. Daniels and Ms. Bathurstprovide that if we terminate the employment of the applicable executive officerwithout “cause” or the officer terminates his or her employment with us for “goodreason,” as such terms are defined in the agreements, the officer isimmediately entitled to two years’ annual base salary, the full annual basesalary to which the officer would otherwise have been entitled during theremainder of the initial term, and all other compensation and benefits to whichthe officer would have been entitled had the officer been employed by us forthe remainder of the initial term.  Theemployment agreement with Mr. Soufflas provides that if we terminate hisemployment without “cause” or he terminates his employment with us for “goodreason,” as such terms are defined in the agreement, he is entitled to receivean amount equal to the annual base salary he was receiving on the date oftermination to be paid over a period of 12 months.

 

**Terms of Options**

 

The options that we granted to Mr. Daniels and Ms. Bathurstin 2005 are for a term of 10 years, have an exercise price of $0.40 per share,and vest in four equal annual installments commencing May 13, 2005.  On December 12, 2006, we accelerated thevesting schedule of the options so that they vested in full on that date.  In the event the employment of the applicableexecutive officer is terminated for any reason other than for “cause,” as suchterm is defined in the employment agreements, the officer’s option may beexercised at any time prior to the expiration date of the option.  In the event we terminate the employment ofthe applicable executive officer without “cause” or the officer terminates hisor her employment with us for “good reason” (including a “change in control”),as such terms are defined in the employment agreements, we are required to useour best efforts to prepare and file a registration statement with the SECwithin 180 days of the date of termination to register the public resale of theshares underlying the officer’s option. In the event the employment of the applicable executive officer isterminated for “cause,” the option terminates immediately.

 

The option that we granted to Mr. Soufflas in2005 is for a term of 10 years, has an exercise price of $0.40 per share, andvests in four equal annual installments commencing on February 1,2006.  On December 12, 2006, weaccelerated the vesting schedule of the options so that they vested in full onthat date.  In the event the employmentof Mr. Soufflas is terminated for any reason other than for “cause,” assuch term is defined in the option, the option may be exercised until theearlier of the date that is 90 days after the date of such termination ofemployment or the expiration date of the option.  In the event the employment of Mr. Soufflasis terminated for “cause,” the option terminates immediately.

 

The options that wegranted to Messrs. Daniels and Soufflas and Ms. Bathurst in 2006 arefor a term of 10 years, have an exercise price of $0.88 per share, and werevested in full on the date of grant.  Inthe event the employment of the applicable executive officer is terminated fordeath, disability or retirement, the officer’s option may be exercised untilthe earlier of the date that is one year after the date of such termination ofemployment (90 days in the case of termination due to retirement) or theexpiration date of the option.  In theevent the employment of the applicable executive officer is terminated not for “cause”or is terminated by the executive for “good reason,” as such terms are definedin the applicable options, the option remains 

 

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exercisable until theexpiration date of the option.  In theevent the employment of the applicable executive officer is terminated for “cause,”the option terminates immediately.

 

The options that wegranted to Mr. Soufflas and Ms. Bathurst in 2007 are for a term of 10years, have an exercise price of $0.50 per share, and vest in four equal annualinstallments commencing on September 4, 2008.  In the event the employment of the applicableexecutive officer is terminated for death, disability or retirement, theofficer’s option may be exercised to the extent exercisable on the date of suchtermination of employment until the earlier of the date that is one year afterthe date of such termination of employment (90 days in the case of terminationdue to retirement) or the expiration date of the option.  In the event the employment of the applicableexecutive officer is terminated not for “cause” or is terminated by theexecutive for “good reason,” as such terms are defined in the applicableoptions, the option vests in full immediately and remains exercisable until theexpiration date of the option.  In theevent the employment of the applicable executive officer is terminated for “cause,”the option terminates immediately.

 

The options that wegranted to Messrs. Daniels and Soufflas and Ms. Bathurst in March 2008are for a term of 10 years, have an exercise price of $0.28 per share, and vestin four equal annual installments commencing on March 25, 2009.  The option that we granted to Ms. Bathurstin December 2008 is for a term of 10 years, has an exercise price of$0.055 per share, and vested in full on the date of grant.  In the event the employment of the applicableexecutive officer is terminated for death, disability or retirement, theofficer’s option may be exercised to the extent exercisable on the date of suchtermination of employment until the earlier of the date that is one year afterthe date of such termination of employment (90 days in the case of terminationdue to retirement) or the expiration date of the option.  In the event the employment of the applicableexecutive officer is terminated not for “cause” or is terminated by theexecutive for “good reason,” as such terms are defined in the applicableoptions, the option vests in full immediately and remains exercisable until theexpiration date of the option.  In theevent the employment of the applicable executive officer is terminated for “cause,”the option terminates immediately.

 

The options that wegranted to Ms. Bathurst in June and December 2009 are for a termof 10 years, have an exercise price of $0.09 per share and $0.07 per share,respectively, and vested in full on the date of grant.  In the event Ms. Bathurst’s employmentis terminated for death, disability or retirement, the option may be exercisedto the extent exercisable on the date of such termination of employment untilthe earlier of the date that is one year after the date of such termination ofemployment (90 days in the case of termination due to retirement) or theexpiration date of the option.  In theevent Ms. Bathurst’s employment is terminated not for “cause” or isterminated by Ms. Bathurst for “good reason,” as such terms are defined inthe applicable options, the option vests in full immediately and remainsexercisable until the expiration date of the option.  In the event Ms. Bathurst’s employmentis terminated for “cause,” the option terminates immediately.

 

**Terms of Restricted Stock Awards**

 

The restricted stock awards that we granted to Messrs. Danielsand Soufflas and Ms. Bathurst in 2006 vest in three equal annualinstallments commencing on March 28, 2007. In the event we terminate the employment of the applicable executiveofficer without “cause” or the 

 

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officerterminates his or her employment with us for “good reason,” as such terms aredefined in such officer’s respective employment agreement, the officer’srestricted stock award vests in full immediately.  In the event the employment of the applicableexecutive officer is terminated for “cause,” any shares of common stock thathave not vested as of the date of termination will be forfeited to us andcancelled.

 

The restricted stock award that we granted to Mr. Danielsin 2007 vests in four equal annual installments commencing on September 4,2008.  In the event we terminate theemployment of Mr. Daniels without “cause” or he terminates his employmentwith us for “good reason,” as such terms are defined in his employmentagreement, his restricted stock award vests in full immediately.  In the event the employment of Mr. Danielsis terminated for “cause,” any shares of common stock that have not vested asof the date of termination will be forfeited to us and cancelled.

 

**National****HealthPartners, Inc. 401(k) Plan**

 

On January 15, 2007, we adopted the National Health Partners, Inc.401(k) Plan.  The purpose of thisplan is to provide our employees with tax-advantaged retirement benefits toassist them in saving and accumulating assets for retirement.  Under the plan, eligible employees may electto contribute up to 100% of their compensation to the plan each year, subjectto certain Internal Revenue Service (“IRS”) limitations.  We match 100% of the first 3% of the employee’scontribution and 50% of the next 2% of the employee’s contribution, subject tocertain IRS limitations.  We contributeda total of $7,206 and $35,707 to the plan during the years ended December 31,2009 and 2008, respectively.

 

**Director Compensation**

 

We do not provide any compensation to our employeedirectors andhave not adopted a standard compensation package for non-employee directorsserving as members of our board of directors. We did not have anynon-employee directors on our board of directors during 2009 and, thus, did notpay any director compensation to any non-employee directors during 2009.  We intend to add non-employee directors toour board of directors in the future.  In the event we do so, we intend toprovide them with remuneration that may consist of one or more of thefollowing: an annual retainer, a fee paid for each board meeting attended, anannual grant of equity compensation, and reimbursement for reasonable travel expenses incurred to attendmeetings of the board of directors.  We mayprovide additional remuneration to board members participating on committees ofour board of directors.

 

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*** ***

***Outstanding Equity Awards atFiscal Year End***

 

Thefollowing table sets forth, for each named executive officer, informationregarding unexercised options, stock that had not vested, and equity incentiveplan awards as of the end of our fiscal year ended December 31, 2009.

*** ***
| ** **            | ** ** | **Option Awards** | ** ** | **Stock Awards** | ** ** |
|-----------------------|------------|------------------------|------------|-----------------------|------------|
| ** **            | ** ** | **Number of**     | ** ** | **Number of**    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **            | ** ** | **Securities**         | ** ** | **Securities**        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **            | ** ** | **Underlying**         | ** ** | **Underlying**        | ** ** | ** ** | ** ** | ** ** | ** ** | **Number of Shares** | ** ** | ** ** | ** ** |
| ** **            | ** ** | **Unexercised**        | ** ** | **Unexercised**       | ** ** | **Option** | ** ** | **Option** | ** ** | **or Units of Stock** | ** ** | **Market Value of Shares** | ** ** |
| ** **            | ** ** | **Options (#)**   | ** ** | **Options (#)**  | ** ** | **Exercise** | ** ** | **Expiration** | ** ** | **That Have Not** | ** ** | **or Units of Stock That** | ** ** |
| **Name**              | ** ** | **Exercisable**        | ** ** | **Unexercisable**     | ** ** | **Price ($)** | ** ** | **Date** | ** ** | **Vested (#)** | ** ** | **Have Not Vested ($) (4)** | ** ** |
|                  |       |                   |       |                  |       |   |   |   |   |   |   |   |   |
| David M. Daniels      |       | 2,500,000              |       | -0-                   |       | 0.40 |   | 5/12/15 |   | 300,000 | (3) | 19,500 |   |
|                  |       | 250,000                |       | -0-                   |       | 0.88 |   | 12/11/16 |   |   |   |   |   |
|                  |       | -0-                    |       | 300,000               | (1)        | 0.28 |   | 3/24/18 |   |   |   |   |   |
|                  |       |                   |       |                  |       |   |   |   |   |   |   |   |   |
| Alex Soufflas         |       | 1,000,000              |       | -0-                   |       | 0.40 |   | 8/14/15 |   |   |   |   |   |
|                  |       | 150,000                |       | -0-                   |       | 0.88 |   | 12/11/16 |   |   |   |   |   |
|                  |       | 125,000                |       | 250,000               | (2)        | 0.50 |   | 9/3/17 |   |   |   |   |   |
|                  |       | -0-                    |       | 300,000               | (1)        | 0.28 |   | 3/24/18 |   |   |   |   |   |
|                  |       |                   |       |                  |       |   |   |   |   |   |   |   |   |
| Patricia S.  Bathurst |       | 1,000,000              |       | -0-                   |       | 0.40 |   | 5/12/15 |   |   |   |   |   |
|                  |       | 50,000                 |       | -0-                   |       | 0.88 |   | 12/11/16 |   |   |   |   |   |
|                  |       | 100,000                |       | 200,000               | (2)        | 0.50 |   | 9/3/17 |   |   |   |   |   |
|                  |       | -0-                    |       | 300,000               | (1)        | 0.28 |   | 3/24/18 |   |   |   |   |   |
|                  |       | 286,500                |       | -0-                   |       | 0.055 |   | 12/29/18 |   |   |   |   |   |
|                  |       | 225,000                |       | -0-                   |       | 0.09 |   | 6/14/19 |   |   |   |   |   |
|                  |       | 855,643                |       | -0-                   |       | 0.07 |   | 12/28/19 |   |   |   |   |   |

 

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(1) These options vest in four equal annual installments commencing on March 25,2009.

 

(2) These options vest in three equal annual installments commencing on September 4,2009.

 

(3) This restricted stock award vests in four equal annual installmentscommencing on September 4, 2008.

 

(4)  The marketvalue of these shares was calculated based on a price per share of $0.065, theclosing market price for our shares of common stock on the OTC Bulletin Boardon December 31, 2009.

 

**Item11.  Security Ownership of CertainBeneficial Owners and Management and Related Stockholder Matters.**

 

The followingtable sets forth, as of March 24, 2010, information with respect to thesecurities holdings of all persons that we have reason to believe, pursuant tofilings with the SEC, may be deemed the beneficial owner of more than 5% of ouroutstanding common stock.  The followingtable also sets forth, as of such date, the beneficial ownership of our commonstock by all executive officers and directors, individually and as a group.

 

The beneficialowners and amount of securities beneficially owned have been determined inaccordance with Rule 13d-3 under the Exchange Act and, in accordancetherewith, includes all shares of our common stock that may be acquired by suchbeneficial owners within 60 days of March 24, 2010 upon the exercise orconversion of any options, warrants or other convertible securities.  Unless otherwise indicated, each person orentity named below has sole voting and investment power with respect to all commonstock beneficially owned by that person or entity, 

 

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subject to the matters set forth in the footnotes to the table below,and has an address of 120 Gibraltar Road, Suite 107, Horsham, Pennsylvania19044.

 
| **Name  and Address of Beneficial Owner**          | ** ** | **Amount and Nature  of Beneficial  Ownership (1)** | ** ** | **Percentage  of Class (1)** | ** ** |
|----------------------------------------------------|------------|-----------------------------------------------------|------------|-----------------------------------|------------|
| David  M. Daniels                                  |       | 8,202,336                                           | (2)        | 9.8                               | %          |
| Patricia  S. Bathurst                              |       | 3,149,743                                           | (3)        | 3.7                               | %          |
| Alex Soufflas                                      |       | 1,600,000                                           | (4)        | 1.9                               | %          |
| Bank Julius Baer & Co., Ltd.              |       | 6,000,000                                           | (5)        | 7.0                               | %          |
| Ronald  F. Westman                                 |       | 15,593,000                                          | (6)        | 17.5                              | %          |
| Pierre  Besuchet                                   |       | 4,325,000                                           | (7)        | 5.2                               | %          |
| All  officers and directors as a group (3 persons) |       | 12,952,079                                          | (8)        | 14.3                              | %          |

 

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*    Less than 1%.

 

(1)  This table hasbeen prepared based on 82,879,070 shares of our common stock outstanding on March 24,2010.

 

(2) Includes 2,500,000 shares issuable upon the exercise of options that have anexercise price of $0.40 per share, 250,000 shares issuable upon the exercise ofoptions that have an exercise price of $0.88 per share, 200,000 shares issuableupon the exercise of options that have an exercise price of $0.28 per share and300,000 shares underlying restricted stock awards.

 

(3)  Includes1,000,000 shares issuable upon the exercise of options that have an exerciseprice of $0.40 per share, 50,000 shares issuable upon the exercise of optionsthat have an exercise price of $0.88 per share, 200,000 shares issuable uponthe exercise of options that have an exercise price of $0.50 per share, 200,000shares issuable upon the exercise of options that have an exercise price of$0.28 per share, 286,500 shares issuable upon the exercise of options that havean exercise price of $0.055 per share, 225,000 shares issuable upon theexercise of options that have an exercise price of $0.09 per share and 855,643shares issuable upon the exercise of options that have an exercise price of$0.07 per share.

 

(4)  Includes1,000,000 shares issuable upon the exercise of options that have an exerciseprice of $0.40 per share, 150,000 shares issuable upon the exercise of optionsthat have an exercise price of $0.88 per share, 250,000 shares issuable uponthe exercise of options that have an exercise price of $0.50 per share and200,000 shares issuable upon the exercise of options that have an exerciseprice of $0.28 per share.

 

(5)  Includes3,000,000 shares issuable upon the exercise of warrants that have an exerciseprice of $0.30 per share.

 

(6)  Includes100,000 shares issuable upon the exercise of options that have an exerciseprice of $0.40 per share, 2,000,000 shares issuable upon the exercise ofwarrants that have an exercise price of $0.05 per share and 4,000,000 sharesissuable upon the exercise of warrants that have an exercise price of $0.02 pershare.

 

(7)  Includes1,000,000 shares issuable upon the exercise of warrants that have an exerciseprice of $0.04 per share.

 

(8)  Includes4,500,000 shares issuable upon the exercise of options that have an exerciseprice of $0.40 per share, 450,000 shares issuable upon the exercise of optionsthat have an exercise price of $0.88 per 

 

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share,450,000 shares issuable upon the exercise of options that have an exerciseprice of $0.50 per share, 600,000 shares issuable upon the exercise of optionsthat have an exercise price of $0.28 per share, 286,500 shares issuable uponthe exercise of options that have an exercise price of $0.055 per share,225,000 shares issuable upon the exercise of options that have an exerciseprice of $0.09 per share, 855,643 shares issuable upon the exercise of optionsthat have an exercise price of $0.07 per share, and 300,000 shares underlyingrestricted stock awards.

 

***EquityCompensation Plan Information***

 

The following table setsforth information regarding the number of options, warrants, rights and similarsecurities that were outstanding at December 31, 2009 under equitycompensation plans that have not been approved by our security holders.  None of our securities were outstanding at December 31,2009 under plans that have been approved by our security holders.

 
| ** **                                                   | ** ** | **Number  of   securities to be   issued upon   exercise of   outstanding   options, warrants********and rights******** (a)** | ** ** | **Weighted-********average   exercise price   of outstanding   options,   warrants and   rights********(b)** | ** ** | **Number of   securities   remaining available   for future issuance********under equity   compensation plans   (excluding   securities reflected   in column (a))********(c)** | ** ** |
|--------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Equity compensation plans approved by security  holders      |       | -0-                                                                                                                                |       | -0-                                                                                                          |       | -0-                                                                                                                                                                             |       |
| Equity compensation plans not approved by security  holders: |       |                                                                                                                               |       |                                                                                                         |       |                                                                                                                                                                            |       |
| Options issued to directors and employees                    |       | 10,057,143                                                                                                                         |       | $                                                                                                            | 0.37       |                                                                                                                                                                            | -0-        |   |
| Total                                                        |       | 10,057,143                                                                                                                         |       | $                                                                                                            | 0.37       |                                                                                                                                                                            | -0-        |   |

 

**Options Issued toEmployees**

 

A description of the options issued to our directorsand employees that were outstanding at December 31, 2009 is set forth aboveunder “*Item 10. Executive Compensation — Terms of Options*” and in Note 10 toour audited consolidated financial statements beginning on page F-1 of thisreport.

 

**Stock Incentive Plans**

 

We have adopted twoadditional equity compensation plans that have not been approved by securityholders.  These consist of the NationalHealth Partners, Inc. 2006 Stock Incentive Plan and the National HealthPartners, Inc. 2008 Stock Incentive Plan. As of March 24, 2010, awards have been granted under each of theplans with respect to all shares of our common stock 

 

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available for issuanceunder the respective plans and there were no securities issuable upon theexercise of outstanding options, warrants or rights under either of theplans.  A description of the NationalHealth Partners, Inc. 2006 Stock Incentive Plan and the National HealthPartners, Inc. 2008 Stock Incentive Plan is set forth in Notes 6 and 7,respectively, to our audited consolidated financial statements beginning on page F-1of this report.

 

**Item 12. Certain Relationships and Related Transactions, and DirectorIndependence.**

 

**Certain Relationships and Related Transactions**

 

We have entered into employment agreements with eachof David M. Daniels, Alex Soufflas and Patricia S. Bathurst and have issuedoptions, restricted stock awards and/or shares of common stock to each ofthem.  A description of the employmentagreements, options, restricted stock awards and common stock grants is setforth under *“Item 10. Executive Compensation”* of this report.

 

**DirectorIndependence**

 

David M. Daniels,our President and Chief Executive Officer, is the sole member of our board ofdirectors.  Mr. Daniels will serveuntil the next annual meeting of shareholders or until his successor is dulyelected and qualified.  Pursuant to Item407(a)(1)(ii) of Regulation S-K promulgated under the Securities Act, wehave adopted the definition of “independent director” as set forth in Rules 5000(a)(19)and 5605(a)(2) of the rules of the Nasdaq Stock Market.  Mr. Daniels does not qualify as an “independentdirector” pursuant to such rules.  Ourboard of directors has not created separately-designated standing committeesand Mr. Daniels is not “independent” for purposes of Rule 5605(c)(2) ofthe rules of the Nasdaq Stock Market. Officers are elected annually by our board of directors and serve at thediscretion of our board of directors.

 

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**Item 13. Principal Accountant Fees and Services.**

 

The following tablepresents fees for professional audit services performed by HJ &Associates, LLC for the audit of our annual financial statements for our fiscalyears ended December 31, 2009 and 2008, and fees billed for other servicesrendered by HJ & Associates, LLC during such years.

 
| ** **          | ** ** | **2009** | ** ** | **2008** | ** ** |
|---------------------|------------|----------|------------|----------|------------|
|                |       |     |       |     |       |
| Audit  Fees:        |       | $        | 50,400     |     | $          | 45,000 |   |
|                |       |     |       |     |       |
| Audit-Related Fees: |       | $        | 7,290      |     | 3,854      |   |
|                |       |     |       |     |       |
| Tax  Fees:          |       | $        | 1,691      |     | 1,691      |   |
|                |       |     |       |     |       |
| All Other Fees:     |       | $        | —     |     | —     |   |
|                |       |     |       |     |       |
| Total:              |       | $        | 59,381     |     | $          | 50,545 |   |

 

*AuditFees* consist of fees billed for professionalservices rendered by our principal accountant for the audit of our annual consolidatedfinancial statements and review of our interim consolidated financialstatements included in our quarterly reports and services that are normallyprovided by our principalaccountant in connection withstatutory and regulatory filings or engagements.

 

*Audit-Related Fees* consist of fees billed for assurance and related services rendered byour principal accountant that are reasonably related to the performance of theaudit or review of our consolidated financial statements and are not reported under“Audit Fees” and relate to services performed in connection with the review ofour Registration Statements on Form SB-2 and Form S-1.

 

*Tax Fees*consists of fees billed for professional services rendered by our principalaccountant for tax compliance, tax advice and tax planning.  These services include assistance regardingfederal and state tax compliance and filings.

 

*All Other Fees*consist of fees billed for products and services provided by our principalaccountant, other than those services described above.

 

Our board of directorsserves as our audit committee.  Itapproves the engagement of our independent auditors, and meets with ourindependent auditors to approve the annual scope of accounting services to beperformed and the related fee estimates. It also meets with our independent auditors prior to the completion ofour annual audit and reviews the results of their audit and review of ourannual and interim consolidated financial statements, respectively.  During the course of the year, our chairmanhas the authority to pre-approve requests for services that were not approvedin the annual pre-approval process.  Thechairman reports any interim pre-approvals at the following quarterly meeting.  At each of the meetings, management and ourindependent auditors update our board of directors regarding material changesto any service

 

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engagement and related fee estimates as compared toamounts previously approved.  During 2008and 2008, all audit and non-audit services performed by our independentaccountants were pre-approved by our board of directors in accordance with theforegoing procedures.

 

**Item 14.  Exhibits**

 

Thefollowing exhibits are filed as part of this report:

 
| **Exhibit No.** | ** ** | **Exhibit**                                                                                                                                                                                                                                                                              |
|----------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1                  |       | Restated  Articles of Incorporation (incorporated by reference to  Exhibit 3.1 to the registration statement on Form SB-2, File  No. 333-126315, initially filed with the SEC on June 30, 2005, as  amended (“Registration Statement No. 333-126315”) |
|                 |       |                                                                                                                                                                                                                                                                                     |
| 3.2                  |       | Amended and  Restated Bylaws (incorporated by reference to Exhibit 3.2 to  Registration Statement No. 333-126315)                                                                                                                                                              |
|                 |       |                                                                                                                                                                                                                                                                                     |
| 4.1                  |       | Specimen Stock  Certificate (incorporated by reference to Exhibit 4.1 to  Registration Statement No. 333-126315)                                                                                                                                                               |
|                 |       |                                                                                                                                                                                                                                                                                     |
| 10.1                 |       | Employment  Agreement, dated May 13, 2005, by an between the Company and David M.  Daniels (incorporated by reference to Exhibit 10.1 to Registration  Statement No. 333-126315)                                                                                          |
|                 |       |                                                                                                                                                                                                                                                                                     |
| 10.2                 |       | Employment  Agreement, dated May 13, 2005, by an between the Company and Patricia S.  Bathurst (incorporated by reference to Exhibit 10.3 to Registration  Statement No. 333-126315)                                                                                      |
|                 |       |                                                                                                                                                                                                                                                                                     |
| 10.3                 |       | Option to  Acquire Shares of Common Stock, dated May 13, 2005, issued by the  Company to David M. Daniels (incorporated by reference  to Exhibit 10.4 to Registration Statement No. 333-126315)                                                                           |
|                 |       |                                                                                                                                                                                                                                                                                     |
| 10.4                 |       | Option to  Acquire Shares of Common Stock, dated May 13, 2005, issued by the  Company to Patricia S. Bathurst (incorporated by reference  to Exhibit 10.6 to Registration Statement No. 333-126315)                                                                       |
|                 |       |                                                                                                                                                                                                                                                                                     |
| 10.5†           |       | Network Access  Agreement, dated April 30, 2001, between the Company and Careington  International Corporation (incorporated by reference to  Exhibit 10.7 to Registration Statement No. 333-126315)                                                                      |
|                 |       |                                                                                                                                                                                                                                                                                     |
| 10.6†           |       | Optum Services  Agreement, dated October 1, 2001, between the Company and United  HealthCare Services, Inc. (incorporated by reference  to Exhibit 10.8 to Registration Statement No. 333-126315)                                                                    |
|                 |       |                                                                                                                                                                                                                                                                                     |
| 10.7†           |       | Network Access  and Repricing Agreement, dated September 1, 2002, between the Company  and First Access, Inc. (incorporated by reference to  Exhibit 10.9 to Registration Statement No. 333-126315)                                                                  |
|                 |       |                                                                                                                                                                                                                                                                                     |
| 10.8†           |       | Network Leasing  Agreement, dated December 18, 2003, between the Company and National  Benefit Builders, Inc. (incorporated by reference to  Exhibit 10.10 to Registration Statement No. 333-126315)                                                                 |

 

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| 10.9† |   | AdvancePCS, L.P.  Managed Pharmaceutical Benefit Agreement, dated July 1, 2001, between  the Company and AdvancePCS, L.P. (incorporated by  reference to Exhibit 10.11 to Registration Statement  No. 333-126315)                                                  |
|------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |   |                                                                                                                                                                                                                                                                              |
| 10.10      |   | Agreement of  Lease, dated April 22, 2004, between Liberty Property Limited  Partnership and the Company (incorporated by reference  to Exhibit 10.12 to Registration Statement No. 333-126315)                                                                    |
|       |   |                                                                                                                                                                                                                                                                              |
| 10.11      |   | Option to  Acquire Shares of Common Stock, dated August 15, 2005, issued by the  Company to Alex Soufflas (incorporated by reference to  Exhibit 10.18 to Registration Statement No. 333-126315)                                                                   |
|       |   |                                                                                                                                                                                                                                                                              |
| 10.12      |   | Employment  Agreement, dated March 29, 2006, by and between the Company and Alex  Soufflas (incorporated by reference to Exhibit 10.45 to the Annual Report  on Form 10-KSB filed with the SEC on March 31, 2006)                                             |
|       |   |                                                                                                                                                                                                                                                                              |
| 10.13      |   | Restricted Stock  Award Agreement, dated March 28, 2006, by and between the Company and  David M. Daniels (incorporated by reference to Exhibit 10.47  to the Annual Report on Form 10-KSB filed with the SEC on March 31,  2006)                             |
|       |   |                                                                                                                                                                                                                                                                              |
| 10.14      |   | Restricted Stock  Award Agreement, dated March 28, 2006, by and between the Company and  Alex Soufflas (incorporated by reference to Exhibit 10.48  to the Annual Report on Form 10-KSB filed with the SEC on March 31,  2006)                                |
|       |   |                                                                                                                                                                                                                                                                              |
| 10.15      |   | Restricted Stock  Award Agreement, dated March 28, 2006, by and between the Company and  Patricia S. Bathurst (incorporated by reference to Exhibit 10.49  to the Annual Report on Form 10-KSB filed with the SEC on March 31,  2006)                         |
|       |   |                                                                                                                                                                                                                                                                              |
| 10.16      |   | Option to  Acquire Shares of Common Stock, dated December 12, 2006, issued by the  Company to David M. Daniels (incorporated by reference  to Exhibit 10.1 to the Current Report on Form 8-K filed with the  SEC on December 14, 2006)                        |
|       |   |                                                                                                                                                                                                                                                                              |
| 10.17      |   | Option to  Acquire Shares of Common Stock, dated December 12, 2006, issued by the  Company to Alex Soufflas (incorporated by reference to  Exhibit 10.2 to the Current Report on Form 8-K filed with the SEC  on December 14, 2006)                           |
|       |   |                                                                                                                                                                                                                                                                              |
| 10.18      |   | Option to  Acquire Shares of Common Stock, dated December 12, 2006, issued by the  Company to Patricia S. Bathurst (incorporated by reference  to Exhibit 10.3 to the Current Report on Form 8-K filed with the  SEC on December 14, 2006)                    |
|       |   |                                                                                                                                                                                                                                                                              |
| 10.19      |   | Amendment No. 1  to Option to Acquire Shares of Common Stock, dated December 12, 2006,  between the Company and David M. Daniels (incorporated by reference  to Exhibit 10.4 to the Current Report on Form 8-K filed with the  SEC on December 14, 2006) |

 

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| 10.20  |   | Amendment  No. 1 to Option to Acquire Shares of Common Stock, dated  December 12, 2006, between the Company and Alex Soufflas (incorporated  by reference to Exhibit 10.5 to the Current Report on Form 8-K  filed with the SEC on December 14, 2006)        |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                  |
| 10.21  |   | Amendment  No. 1 to Option to Acquire Shares of Common Stock, dated  December 12, 2006, between the Company and Patricia S. Bathurst (incorporated  by reference to Exhibit 10.6 to the Current Report on Form 8-K  filed with the SEC on December 14, 2006) |
|   |   |                                                                                                                                                                                                                                                                                  |
| 10.22  |   | First Amendment  to Lease Agreement dated March 13, 2007 by and between the Company and  Liberty Property Limited Partnership (incorporated by reference  to Exhibit 10.2 to the Current Report on Form 8-K filed with the  SEC on March 19, 2007)                |
|   |   |                                                                                                                                                                                                                                                                                  |
| 10.23  |   | Restricted Stock  Award, dated September 4, 2007, issued by the Company to David M.  Daniels (incorporated by reference to Exhibit 10.1 to the Current Report  on Form 8-K filed with the SEC on September 7, 2007)                                               |
|   |   |                                                                                                                                                                                                                                                                                  |
| 10.24  |   | Option to  Acquire Shares of Common Stock, dated September 4, 2007, issued by the  Company to Alex Soufflas (incorporated by reference to  Exhibit 10.2 to the Current Report on Form 8-K filed with the SEC  on September 7, 2007)                               |
|   |   |                                                                                                                                                                                                                                                                                  |
| 10.25  |   | Option to  Acquire Shares of Common Stock, dated September 4, 2007, issued by the  Company to Patricia S. Bathurst (incorporated by reference  to Exhibit 10.3 to the Current Report on Form 8-K filed with the  SEC on September 7, 2007)                        |
|   |   |                                                                                                                                                                                                                                                                                  |
| 10.26  |   | Option to  Acquire Shares of Common Stock, dated March 25, 2008, issued by the  Company to David M. Daniels (incorporated by reference  to Exhibit 10.33 to the Annual Report on Form 10-KSB filed with the  SEC on March 31, 2008)                               |
|   |   |                                                                                                                                                                                                                                                                                  |
| 10.27  |   | Option to  Acquire Shares of Common Stock, dated March 25, 2008, issued by the  Company to Alex Soufflas (incorporated by reference to  Exhibit 10.34 to the Annual Report on Form 10-KSB filed with the  SEC on March 31, 2008)                                  |
|   |   |                                                                                                                                                                                                                                                                                  |
| 10.28  |   | Option to  Acquire Shares of Common Stock, dated March 25, 2008, issued by the  Company to Patricia S. Bathurst (incorporated by reference  to Exhibit 10.35 to the Annual Report on Form 10-KSB filed with the  SEC on March 31, 2008)                           |
|   |   |                                                                                                                                                                                                                                                                                  |
| 10.29  |   | Option to  Acquire Shares of Common Stock, dated December 30, 2008, issued by the  Company to Patricia S. Bathurst (incorporated by reference  to Exhibit 10.36 to the Annual Report on Form 10-K filed with the  SEC on March 25, 2009)                          |
|   |   |                                                                                                                                                                                                                                                                                  |
| 10.30  |   | Option to Acquire  Shares of Common Stock, dated June 15, 2009, issued by the Company to  Patricia S. Bathurst (incorporated by reference to Exhibit 10.1 to  the Quarterly Report on Form 10-Q filed with the SEC on  November 16, 2009)                         |

 

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| 10.31  |   | Second Amendment  to Lease Agreement dated November 13, 2009 by and between the Company  and Liberty Property Limited Partnership (incorporated by reference  to Exhibit 10.3 to the Current Report on Form 8-K filed with the  SEC on November 17, 2009) |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                          |
| 10.32  |   | Option to  Acquire Shares of Common Stock, dated December 29, 2009, issued by the  Company to Patricia S. Bathurst                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                          |
| 21.1   |   | Subsidiaries of  the Company                                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                          |
| 23.1   |   | Consent of  HJ & Associates, LLC                                                                                                                                                                                                                                     |

 

----

† Certain information in this document has been omitted and filedseparately with the Securities and Exchange Commission.  Confidential treatment has been granted withrespect to the omitted portions.

 

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**SIGNATURES**

 

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.

 

 
|                      | **NATIONAL HEALTH PARTNERS, INC.** |
|---------------------------|------------------------------------|
|                      | ** **                         |
|                      |                               |   |
| Date: March 30, 2010 | By:                                | /s/ David M. Daniels |
|                      |                               | David M. Daniels |
|                      |                               | Chief Executive Officer |

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the registrant and in thecapacities and on the dates indicated.

 
| **Signature**        | ** ** | **Title**                                                   | ** ** | **Date**            |
|----------------------|------------|-------------------------------------------------------------|------------|---------------------|
|                 |       |                                                        |       |                |
|                 |       |                                                        |       |                |
| /s/ David M. Daniels |       | Chief Executive  Officer, President and Chairman of         |       | March 30, 2010 |
| David M. Daniels     |       | the Board (Principal  Executive Officer)                    |       |                |
|                 |       |                                                        |       |                |
| /s/ Alex Soufflas    |       | Chief Financial  Officer, Executive Vice President          |       | March 30, 2010 |
| Alex Soufflas        |       | and Secretary  (Principal Financial and Accounting Officer) |       |                |

 

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**NATIONAL HEALTH PARTNERS, INC.AND SUBSIDIARIES**

**CONSOLIDATED FINANCIAL STATEMENTS**

 

Table of Contents

 
| Report of Independent Registered Public Accounting  Firm                                                            | F-2    |
|---------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                |   |
| Consolidated Balance Sheets at December 31, 2009  and 2008                                                     | F-3    |
|                                                                                                                |   |
| Consolidated Statements of Operations for the Years  Ended December 31, 2009 and 2008                          | F-4    |
|                                                                                                                |   |
| Consolidated Statements of Stockholders’ Equity  (Deficit) for the Years Ended December 31, 2009 and 2008 | F-5    |
|                                                                                                                |   |
| Consolidated Statements of Cash Flows for the Years  Ended December 31, 2009 and 2008                          | F-6    |
|                                                                                                                |   |
| Notes to Consolidated Financial Statements –  December 31, 2009 and 2008                                  | F-7    |

 

F-1

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Table of Contents

 

**Report of Independent Registered Public AccountingFirm**

 

To the Board of Directors of

National Health Partners, Inc.and Subsidiaries

Horsham, Pennsylvania

 

We have audited theaccompanying consolidated balance sheets of National Health Partners, Inc.and Subsidiaries, as of December 31, 2009 and 2008, and the relatedstatements of operations, stockholders’ equity (deficit) and cash flows foreach of the two years ended December 31, 2009. These consolidatedfinancial statements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these consolidated financialstatements based on our audits.

 

We conducted our audit inaccordance with the standards of the Public Company Accounting Oversight Board(United States).  Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whetherthe consolidated financial statements are free of material misstatement.  An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the consolidated financialstatements.  An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.  We believe that our audit provides areasonable basis for our opinion.

 

In our opinion, the consolidatedfinancial statements referred to above present fairly, in all material respects,the financial position of National Health Partners, Inc. and Subsidiaries asof December 31, 2009 and 2008, and the results of its operations and itscash flows for each of the two years in the period ended December 31, 2009,in conformity with U.S. generally accepted accounting principles.

 

We were not engaged toexamine management’s assertion about the effectiveness of National HealthPartners, Inc. and Subsidiaries’ internal control over financial reportingas of December 31, 2009 and accordingly, we do not express an opinionthereon.

 

The accompanying consolidatedfinancial statements have been prepared assuming that the Company will continueas a going concern.  As discussed in Note2 to the consolidated financial statements, the Company has suffered recurringlosses and has experienced negative cash flows from operations, which raisessubstantial doubt about the Company’s ability to continue as a going concern.Management’s plans in regard to those matters are also described in Note 2 tothe consolidated financial statements. The consolidated financial statements do not include any adjustmentsthat might result from the outcome of this uncertainty.

 

/s/  HJ & Associates, LLC

 

HJ & Associates,LLC

Salt Lake City, Utah

March 30, 2010

 

F-2

----

 

 

Table of Contents

 

**National Health Partners, Inc. and Subsidiaries**

Consolidated Balance Sheets

 
| ** **                                                                                                                                                                                   | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------|------------|
| ** **                                                                                                                                                                                   | ** ** | **2009**         | ** ** | **2008** | ** ** |
|                                                                                                                                                                                         |       |             |       |   |   |
| **Assets**                                                                                                                                                                                   |       |             |       |   |   |
|                                                                                                                                                                                         |       |             |       |   |   |
| Current  assets:                                                                                                                                                                             |       |             |       |   |   |
| Cash                                                                                                                                                                                         |       | $                | 31,691     |   | $ | 177,545 |   |
| Prepaid  expense                                                                                                                                                                             |       | 4,699            |       | 205,690 |   |
| Deposits                                                                                                                                                                                     |       | 78,829           |       | 114,378 |   |
| Other  current assets                                                                                                                                                                        |       | 9,300            |       | — |   |
|                                                                                                                                                                                         |       |             |       |   |   |
| Total  current assets                                                                                                                                                                        |       | 124,519          |       | 497,613 |   |
|                                                                                                                                                                                         |       |             |       |   |   |
| Property  and equipment, net                                                                                                                                                                 |       | 15,743           |       | 33,842 |   |
| Prepaid  expense                                                                                                                                                                             |       | 1,357            |       | 201,669 |   |
| Deposits                                                                                                                                                                                     |       | 19,000           |       | 19,000 |   |
|                                                                                                                                                                                         |       |             |       |   |   |
| Total  assets                                                                                                                                                                                |       | $                | 160,619    |   | $ | 752,124 |   |
|                                                                                                                                                                                         |       |             |       |   |   |
| **Liabilities and stockholders’ equity (deficit)**                                                                                                                                      |       |             |       |   |   |
| ** **                                                                                                                                                                                   |       |             |       |   |   |
| Current  liabilities                                                                                                                                                                         |       |             |       |   |   |
| Accounts  payable                                                                                                                                                                            |       | $                | 144,369    |   | $ | 68,475 |   |
| Refunds  payable                                                                                                                                                                             |       | 8,607            |       | 38 |   |
| Accrued  expenses                                                                                                                                                                            |       | 892              |       | 13,014 |   |
| Deferred  revenue                                                                                                                                                                            |       | 92,188           |       | 79,008 |   |
|                                                                                                                                                                                         |       |             |       |   |   |
| Total  current liabilities                                                                                                                                                                   |       | 246,056          |       | 160,535 |   |
|                                                                                                                                                                                         |       |             |       |   |   |
| Total  liabilities                                                                                                                                                                           |       | 246,056          |       | 160,535 |   |
|                                                                                                                                                                                         |       |             |       |   |   |
| Commitments  and contingencies                                                                                                                                                               |       |             |       |   |   |
|                                                                                                                                                                                         |       |             |       |   |   |
| Stockholders’  equity (deficit):                                                                                                                                                        |       |             |       |   |   |
| Common  stock, $0.001 par value, 100,000,000 shares authorized, 73,894,754 and  52,586,281 shares issued and outstanding on December 31, 2009 and  December 31, 2008, respectively |       | 73,895           |       | 52,586 |   |
| Additional  paid-in capital                                                                                                                                                                  |       | 26,554,571       |       | 25,195,670 |   |
| Deferred  compensation                                                                                                                                                                       |       | (106,060         | )          | (205,133 | ) |
| Accumulated  deficit                                                                                                                                                                         |       | (26,607,843      | )          | (24,451,534 | ) |
|                                                                                                                                                                                         |       |             |       |   |   |
| Total  stockholders’ equity (deficit)                                                                                                                                                   |       | (85,437          | )          | 591,589 |   |
|                                                                                                                                                                                         |       |             |       |   |   |
| Total  liabilities and stockholders’ equity (deficit)                                                                                                                                   |       | $                | 160,619    |   | $ | 752,124 |   |

 

The accompanyingnotes are an integral part of these consolidated financial statements

 

F-3

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Table of Contents

 

**National Health Partners, Inc. and Subsidiaries**

Consolidated Statements of Operations

 
| ** **                                                              | ** ** | **For the Twelve Months Ended** | ** ** |
|-------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                              | ** ** | **December 31,**                | ** ** |
| ** **                                                              | ** ** | **2009**                        | ** ** | **2008** | ** ** |
|                                                                    |       |                            |       |   |   |
| Net  revenue                                                            |       | $                               | 1,898,947  |   | $ | 2,671,420 |   |
|                                                                    |       |                            |       |   |   |
| Direct  costs                                                           |       | 960,531                         |       | 1,036,076 |   |
|                                                                    |       |                            |       |   |   |
| Gross  profit                                                           |       | 938,416                         |       | 1,635,344 |   |
|                                                                    |       |                            |       |   |   |
| Operating  expenses:                                                    |       |                            |       |   |   |
| Selling  and marketing                                                  |       | 111,036                         |       | 224,546 |   |
| General  and administrative                                             |       | 2,983,802                       |       | 4,433,930 |   |
|                                                                    |       |                            |       |   |   |
| Total  operating expenses                                               |       | 3,094,838                       |       | 4,658,476 |   |
|                                                                    |       |                            |       |   |   |
| Loss  from operations                                                   |       | (2,156,422                      | )          | (3,023,132 | ) |
|                                                                    |       |                            |       |   |   |
| Other  income (expense):                                                |       |                            |       |   |   |
| Interest  income                                                        |       | 113                             |       | 2,230 |   |
| Loss  on extinguishment of debt                                         |       | —                          |       | (30,000 | ) |
|                                                                    |       |                            |       |   |   |
| Total  other income (expense)                                           |       | 113                             |       | (27,770 | ) |
|                                                                    |       |                            |       |   |   |
| Net  loss                                                               |       | $                               | (2,156,309 | ) | $ | (3,050,902 | ) |
|                                                                    |       |                            |       |   |   |
| Loss  per share — basic and diluted                                |       | $                               | (0.03      | ) | $ | (0.07 | ) |
|                                                                    |       |                            |       |   |   |
| Weighted  average number of shares outstanding — basic and diluted |       | 62,062,407                      |       | 46,796,331 |   |

 

The accompanyingnotes are an integral part of these consolidated financial statements

 

F-4

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Table of Contents

 

**National Health Partners, Inc. and Subsidiaries**

Consolidated Statements of Stockholders’ Equity (Deficit)

 
| ** **                                          | ** ** | ** **        | ** ** | ** **  | ** ** | **Additional** | ** ** | ** **       | ** ** | ** **             | ** ** | **Total**             | ** ** |
|-----------------------------------------------------|------------|-------------------|------------|-------------|------------|----------------|------------|------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                          | ** ** | **Common  Stock** | ** ** | **Paid-in** | ** ** | **Deferred**   | ** ** | **Accumulated**  | ** ** | **Stockholders’** | ** ** |
| ** **                                          | ** ** | **Shares**        | ** ** | **Amount**  | ** ** | **Capital**    | ** ** | **Compensation** | ** ** | **Deficit**            | ** ** | **Equity  (Deficit)** | ** ** |
|                                                |       |              |       |        |       |           |       |             |       |                   |       |                  |       |
| **Balance at December 31, 2007**               |       | 39,419,856        |       | $           | 39,420     |           | $          | 22,174,891       |       | $                      | (410,524   | )                     | $          | (21,400,632 | ) | $ | 403,155 |   |
|                                                |       |              |       |        |       |           |       |             |       |                   |       |                  |       |
|                                                |       |              |       |        |       |           |       |             |       |                   |       |                  |       |
| Common stock issued for services                    |       | 5,629,025         |       | 5,629       |       | 1,509,017      |       | 205,391          |       | —                 |       | 1,720,037             |       |
|                                                |       |              |       |        |       |           |       |             |       |                   |       |                  |       |
|                                                |       |              |       |        |       |           |       |             |       |                   |       |                  |       |
| Common stock returned by service providers          |       | (742,100          | )          | (742        | )          | (285,862       | )          | —           |       | —                 |       | (286,604              | )          |
|                                                |       |              |       |        |       |           |       |             |       |                   |       |                  |       |
|                                                |       |              |       |        |       |           |       |             |       |                   |       |                  |       |
| Common stock issued upon exercise of stock warrants |       | 3,463,250         |       | 3,463       |       | 593,952        |       | —           |       | —                 |       | 597,415               |       |
|                                                |       |              |       |        |       |           |       |             |       |                   |       |                  |       |
| Stock options issued for services                   |       | —            |       | —      |       | 290,847        |       | —           |       | —                 |       | 290,847               |       |
|                                                |       |              |       |        |       |           |       |             |       |                   |       |                  |       |
| Common stock and warrants issued for cash           |       | 4,576,250         |       | 4,576       |       | 853,064        |       | —           |       | —                 |       | 857,640               |       |
|                                                |       |              |       |        |       |           |       |             |       |                   |       |                  |       |
| Common stock issued for extinguishment of debt      |       | 240,000           |       | 240         |       | 59760          |       | —           |       | —                 |       | 60,000                |       |
|                                                |       |              |       |        |       |           |       |             |       |                   |       |                  |       |
| Net loss                                            |       | —            |       | —      |       | —         |       | —           |       | (3,050,902             | )          | (3,050,902            | )          |
|                                                |       |              |       |        |       |           |       |             |       |                   |       |                  |       |
| **Balance at December 31, 2008**               |       | 52,586,281        |       | 52,586      |       | 25,195,670     |       | (205,133         | )          | (24,451,534            | )          | 591,589               |       |
|                                                |       |              |       |        |       |           |       |             |       |                   |       |                  |       |
| Common stock issued for services                    |       | 4,925,429         |       | 4,925       |       | 345,954        |       | 99,073           |       | —                 |       | 449,952               |       |
|                                                |       |              |       |        |       |           |       |             |       |                   |       |                  |       |
| Common stock issued upon exercise of stock warrants |       | 75,000            |       | 75          |       | 3,675          |       | —           |       | —                 |       | 3,750                 |       |
|                                                |       |              |       |        |       |           |       |             |       |                   |       |                  |       |
| Stock options issued for services                   |       | —            |       | —      |       | 351,377        |       | —           |       | —                 |       | 351,377               |       |
|                                                |       |              |       |        |       |           |       |             |       |                   |       |                  |       |
| Common stock and warrants issued for cash           |       | 16,308,044        |       | 16,309      |       | 657,895        |       | —           |       | —                 |       | 674,204               |       |
|                                                |       |              |       |        |       |           |       |             |       |                   |       |                  |       |
| Net loss                                            |       | —            |       | —      |       | —         |       | —           |       | (2,156,309             | )          | (2,156,309            | )          |
|                                                |       |              |       |        |       |           |       |             |       |                   |       |                  |       |
| **Balance at December 31, 2009**               |       | 73,894,754        |       | $           | 73,895     |           | $          | 26,554,571       |       | $                      | (106,060   | )                     | $          | (26,607,843 | ) | $ | (85,437 | ) |

** **

The accompanyingnotes are an integral part of these consolidated financial statements

 

F-5

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Table of Contents

 

**National Health Partners, Inc. and Subsidiaries**

Consolidated Statements of Cash Flows

 
| ** **                                                                   | ** ** | **For the Twelve Months Ended** | ** ** |
|------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                   | ** ** | **December 31,**                | ** ** |
| ** **                                                                   | ** ** | **2009**                        | ** ** | **2008** | ** ** |
| **Cash flows from operating activities**                                     |       |                            |       |   |   |
| Net  loss                                                                    |       | $                               | (2,156,309 | ) | $ | (3,050,902 | ) |
| Adjustments  to reconcile net loss to net cash used by operating activities: |       |                            |       |   |   |
| Common  stock issued for services and amortization of prepaid services       |       | 851,257                         |       | 1,322,507 |   |
| Warrants  issued for services                                                |       | —                          |       | 3,498 |   |
| Options  issued for services                                                 |       | 351,376                         |       | 290,848 |   |
| Depreciation                                                                 |       | 18,099                          |       | 35,708 |   |
| Loss  on extinguishment of debt                                              |       | —                          |       | 30,000 |   |
| Changes  in operating assets and liabilities:                                |       |                            |       |   |   |
| Decrease  (increase) in accounts receivable                                  |       | —                          |       | 21,257 |   |
| Decrease  (increase) in deposits                                             |       | 35,550                          |       | 162,011 |   |
| Decrease  (increase) in other current assets                                 |       | (9,300                          | )          | 4,500 |   |
| (Decrease)  increase in accounts payable and accrued expenses                |       | 72,341                          |       | (220,813 | ) |
| Increase  in deferred revenue                                                |       | 13,179                          |       | 61,670 |   |
|                                                                         |       |                            |       |   |   |
| Net  cash used by operating activities                                       |       | (823,807                        | )          | (1,339,716 | ) |
|                                                                         |       |                            |       |   |   |
| **Cash flows from investing activities**                                     |       |                            |       |   |   |
|                                                                         |       |                            |       |   |   |
| Net  cash provided by investing activities                                   |       | —                          |       | — |   |
|                                                                         |       |                            |       |   |   |
| **Cash flows from financing activities**                                     |       |                            |       |   |   |
|                                                                         |       |                            |       |   |   |
| Net  Proceeds from sale of stocks and warrants                               |       | 674,203                         |       | 857,640 |   |
| Net  Proceeds from exercise of warrants                                      |       | 3,750                           |       | 597,415 |   |
| Net  Proceeds from issuance of note payable                                  |       | —                          |       | 50,000 |   |
| Payments  on note payable                                                    |       | —                          |       | (20,000 | ) |
|                                                                         |       |                            |       |   |   |
| Net  cash provided by financing activities                                   |       | 677,953                         |       | 1,485,055 |   |
|                                                                         |       |                            |       |   |   |
| Net  increase (decrease) in cash                                             |       | (145,854                        | )          | 145,339 |   |
| Cash  at beginning of period                                                 |       | 177,545                         |       | 32,206 |   |
|                                                                         |       |                            |       |   |   |
| Cash  at end of period                                                       |       | $                               | 31,691     |   | $ | 177,545 |   |
|                                                                         |       |                            |       |   |   |
| **Supplemental disclosure of cash flow information**                         |       |                            |       |   |   |
|                                                                         |       |                            |       |   |   |
| Cash  paid for interest                                                      |       | $                               | —     |   | $ | — |   |
| Cash  paid for taxes                                                         |       | $                               | —     |   | $ | — |   |
|                                                                         |       |                            |       |   |   |
| **Schedule of non-cash financing activities**                                |       |                            |       |   |   |
|                                                                         |       |                            |       |   |   |
| Common  stock issued for services                                            |       | $                               | 350,880    |   | $ | 1,514,646 |   |
| Stock  options issued for services                                           |       | $                               | 80,117     |   | $ | 374,714 |   |
| Common  stock issued for extinguishment of debt                              |       | $                               | —     |   | $ | 60,000 |   |
| Common  stock issued for stock offering costs                                |       | $                               | 70,352     |   | $ | 83,700 |   |

 

The accompanyingnotes are an integral part of these consolidated financial statements

 

F-6

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Table ofContents

 

**National Health Partners, Inc. and Subsidiaries**

Notes to Consolidated Financial Statements

December 31, 2009 and 2008

 

**Note 1.  Description of Business.**

 

NationalHealth Partners, Inc. (the “Company”) was organized on March 10, 1989as “Spectrum Vision Systems of Indiana, Inc.” under the laws of the Stateof Indiana.  The Company changed its nameto “National Health Partners, Inc.” on March 13, 2001.

 

TheCompany sells membership programs that encompass all aspects of healthcare,including physicians, hospitals, ancillary services, dentists, prescriptiondrugs and vision care through a national healthcare savings network called “CARExpress.”  The Company derives almost all of its revenuefrom the monthly membership fees it receives from its members.  It markets its programs through a directsales force, brokers and agents, unions and associations, chambers of commerce,and a variety of other organizations. The Company typically pays these organizations commissions on the saleprice of the membership programs.  Theseorganizations typically offer and sell the Company’s membership programs on apart-time basis and may engage in other related or unrelated business activities,including selling the products or services of the Company’s competitors.  The Company’s agreements with theseorganizations are generally for a term of one year and renew automatically foradditional one-year terms unless written notice of termination is delivered byeither party to the other at least 30 days prior to the then-current term.

 

TheCompany contracts with preferred provider organizations and other providernetworks for access to the discounted rates they have negotiated with theirhealthcare providers.  The principalsuppliers of the healthcare providers that comprise CARExpress are CareMark,Aetna, Optum, Outlook Vision, Integrated Health, Three Rivers andHealthFi.  The Company selects andutilizes only those provider networks that it believes can deliver adequatesavings to its members while providing adequate support for its membershipprograms with the healthcare providers. It typically pays a per member per month fee for use of the provider networksthat is determined in part based on the number of providers participating inthe network, the number of members accessing the network, and the particularproducts or services offered by the providers. The Company’s agreements with the provider networks are generally for aterm of between one and two years, may be terminated by either party on between45 and 180 days’ prior written notice, and renew automatically for additionalterms unless so terminated.  Most ofthese agreements are non-exclusive and contain confidentiality provisions.

 

**Note2.  Significant Accounting Policies**

 

Thissummary of significant accounting policies is provided to assist the reader inunderstanding the Company’s financial statements.  The financial statements and notes theretoare representations of the Company’s management.  The Company’s management is responsible fortheir integrity and objectivity.  Theseaccounting policies conform to accounting principles generally accepted in theUnited States of America and have been consistently applied in the preparation ofthe financial statements.

 

F-7

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Table of Contents

 

**National Health Partners, Inc. and Subsidiaries**

Notes to Consolidated Financial Statements

December 31, 2009 and 2008

 

**Note2.  Significant Accounting Policies(Continued)**

 

**Basis of Presentation**

 

The Company’s financial statements have beenprepared using accounting principles generally accepted in the United States ofAmerica applicable to a going concern which contemplates the realization ofassets and liquidation of liabilities in the normal course of business.  The Company has historically incurredsignificant losses, which raises substantial doubt about the Company’s abilityto continue as a going concern.  Theaccompanying financial statements do not include any adjustments relating tothe recoverability and classification of asset carrying amounts or the amountand classification of liabilities that might result from the outcome of thisuncertainty.

 

**Principles of Consolidation**

 

Thefinancial statements include the balances of National Health Partners, Inc.and its wholly-owned subsidiaries.  Allmaterial inter-company balances and transactions have been eliminated inconsolidation.

 

**Reclassifications**

 

Certainamounts in the 2008 financial statements have been reclassified to conform tothe 2009 presentation.  Thesereclassifications did not result in any change to the previously reported totalassets, net loss or stockholders’ equity.

 

**Estimates**

 

Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that affect the amounts reported in the financial statementsand accompanying notes.  Actual resultscould differ from those estimates.

 

**Revenue Recognition**

 

TheCompany’s revenue consists of the monthly membership fees that it receives fromthe sale of its membership programs as well as any shipping and handling feesthat it may receive for the shipment of membership packages to newmembers.  The date a monthly membership begins varies for eachindividual member depending upon when the particular member purchased themembership.  Members have the right to terminate their membership at any time and maydo so at the end of each month before they pay the membership fee for the nextmonth.  The Company recognizes the membership fees and shipping andhandling fees as revenue when persuasive evidence of an arrangement exists,delivery or performance has occurred, the sales price is fixed anddeterminable, and collectibility is reasonably assured in accordance with Financial Accounting Standards Board (“FASB”)Accounting Standards Codification (“ASC”) Topic 605 (“ASC 605”).

 

F-8

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Table of Contents

 

**National Health Partners, Inc. and Subsidiaries**

Notes to Consolidated Financial Statements

December 31, 2009 and 2008

 

**Note2.  Significant Accounting Policies(Continued)**

 

**Revenue Recognition (Continued)**

 

The membership feesare paid by members each month.  Thecontractual term for the membership fees is equal to the monthly membershipperiod.  The expected period during whichthe services will be performed in return for the membership fees will neverextend beyond the one-month membership period since the members will payanother monthly membership fee before the next monthly membership period begins. As a result, the Company recognizes the membership fees on a straight-linebasis over the contract term since the relationship with the member is notexpected to extend beyond the contractual term and the member is not expectedto continue to benefit from the payment of the membership fee after thecontractual term has expired.

 

# **The shipping and handling fees are one-time paymentsreceived by the Company from the applicable members when they first become amember.  These fees are not paid repeatedly each month.  The monthlycontract term is, therefore, not necessarily equal to the expected periodduring which services will be performed since the period during which serviceswill be performed is the average period during which each person is expected tobe a member.  The Company calculates the expected period during which itexpects its members to remain members as of the end of each fiscalquarter.  It does so by determining the total number of members that ithad on such date, then dividing the total number of months for which all ofsuch members had been a member as of that date by the number of suchmembers.  This provides the average number of months each member has beena member.  The expected period during which services will be performed (i.e.,the expected period during which each member will remain a member) has alwaysexceeded the initial monthly membership period.  Therefore, the Companyrecognizes shipping and handling fees on a straight-line basis over theexpected period during which the services will be performed since therelationship with the members is expected to extend beyond the initialcontractual term and the members are expected to continue to benefit from thepayment of the shipping and handling fees after the initial contractual term hasexpired.**

# ** **

At the beginning of each membership period,the monthly membership fee is paid by the member and recorded as deferredrevenue.  The Company then recognizesrevenue as the services are rendered. Shipping and handling fees that the Company receives for the shipment ofmembership packages to new members are included in its membership fees andrecorded as deferred revenue.  TheCompany typically receives cash within five days of the date the membership feeis charged to a member’s credit card.  TheCompany had deferred revenue of $92,188 and $79,008 at December 31, 2009and 2008, respectively.

 

F-9

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Table of Contents

 

**National Health Partners, Inc. and Subsidiaries**

Notes to Consolidated Financial Statements

December 31, 2009 and 2008

 

**Note2.  Significant Accounting Policies(Continued)**

 

**Revenue Recognition (Continued)**

 

The Company offers a free trial to some of its members.  The Company does not recognize any revenueduring the free-trial period.  In theevent the member continues the membership after the free-trial period expires,the member pays the monthly membership fee and the Company recognizes revenueas services are rendered.

 

The Company also offers a 30-day money-back guarantee to itsmembers.  Members can cancel theirmembership during the first 30 days of their initial membership period andreceive a full refund.  After that,members can cancel their membership at the end of any subsequent monthlymembership period.  If a member cancelshis or her membership and the member’s credit card has already been processedfor the next monthly membership period, a refund check will be issued to themember and no revenue will be recognized for that period.

 

The Company recognizes refunds as expense in accordance with ASC 605which permits companies to recognize refundable membership fees, net ofestimated refunds, as earned revenue over the membership term in limitedcircumstances if the following criteria are met: (i) the estimate ofcancellations and refunded revenue are being made for a large pool ofhomogeneous items (membership transactions with the same characteristics, suchas terms, periods, class of customers, nature of services, etc.), (ii) reliableestimates of the expected refunds can be made on a timely basis and it isremote that material adjustments to previously recognized revenue would berequired, (iii) there is a sufficient company-specific historical basisupon which to estimate the refunds and such historical basis is predictive offuture events, and (iv) the amount of the membership fees specified in theagreement at the outset of the arrangement is fixed, other than the customer’sright to request a refund.  The Companyhad sales refunds of $164,552 and $203,870 that were netted against sales forthe years ended December 31, 2009 and 2008, respectively, and had refundspayable of $8,607 and $38 at December 31, 2009 and 2008, respectively.

 

**DirectCosts**

 

The Company’s direct costs consist of sales commissions and fees paidto PPOs and provider networks.  TheCompany incurred sales commission expense of $639,950 and $578,057 and networkprovider costs of $320,581 and $458,019 for the years ended December 31,2009 and 2008, respectively.

 

F-10

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Table of Contents

 

**National Health Partners, Inc. and Subsidiaries**

Notes to Consolidated Financial Statements

December 31, 2009 and 2008

 

**Note2.  Significant Accounting Policies(Continued)**

 

**Selling and Marketing Expenses**

 

TheCompany’s selling and marketing expenses consist of advertising expenses,marketing expenses, compensation paid to employees selling and marketing theCompany’s CARExpress membership programs to potential customers, and rentexpense, depreciation and amortization expense allocated to the Company’sselling and marketing activities, as well as all other selling and marketingexpenses incurred by the Company. Depreciation and amortization expense included in selling and marketingexpense is derived from the Company’s telephones and website and certain of theCompany’s computers, all of which are an integral part of the Company’s sellingand marketing activities.

 

**Stock-BasedCompensation Expense**

 

TheCompany accounts for employee stock-based compensation in accordance with thefair value recognition provisions of ASC Topic 718 (“ASC 718”) using themodified prospective transition method.  Underthis method, compensation expense includes: (a) compensation expense forall stock-based payments granted, but not yet vested, as of January 1,2006 based on the grant-date fair value, and (b) compensation expense forall stock-based payments granted subsequent to January 1, 2006, based onthe grant-date fair value.  Such amountshave been reduced by the Company’s estimate of forfeitures of all unvestedawards.

 

The Company accounts for non-employeestock-based compensation in accordance with ASC 718 and ASC Topic 505 (“ASC 505”).  ASC 718 and ASC 505 require that the Companyrecognizes compensation expense based on the estimated fair value ofstock-based compensation granted to non-employees over the vesting period,which is generally the period during which services are rendered by thenon-employees.

 

TheCompany uses the Black-Scholes pricing model to determine the fair value of thestock-based compensation that it grants to employees and non-employees.  The Company is required to make certainassumptions in connection with this determination, the most important of whichinvolves the calculation of volatility with respect to the price of its commonstock.  The computation of volatility isintended to produce a volatility value that is representative of the Company’sexpectations about the future volatility of the price of its common stock overan expected term.

 

F-11

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Table of Contents

 

**National Health Partners, Inc. and Subsidiaries**

Notes to Consolidated Financial Statements

December 31, 2009 and 2008

 

**Note2.  Significant Accounting Policies(Continued)**

 

**Stock-BasedCompensation Expense (Continued)**

 

TheCompany used its share price history to determine volatility and cannot predicthow the price of its shares of common stock will react on the open market inthe future since its common stock has only been trading on the OTC BulletinBoard since March 30, 2006.  As aresult, the volatility value that the Company calculated may differ from thefuture volatility of the price of its shares of common stock.

 

The Company recognized $1,202,632 and$1,616,853 of stock compensation expense during the years ended December 31,2009 and 2008, respectively.

 

**IncomeTaxes**

 

TheCompany uses the liability method of accounting for income taxes under whichdeferred tax assets and liabilities are recognized for the estimated future taxconsequences attributable to differences between the financial statementcarrying amounts of existing assets and liabilities and their respective taxbases and operating loss and tax credit carryforwards.  Deferred tax assets and liabilities aremeasured using enacted tax rates in effect for the year in which those temporarydifferences are expected to be recovered or settled.  The effect on deferred tax assets andliabilities of a change in tax rates is recognized as part of the provision forincome taxes in the period that includes the enactment date.  Valuation allowances are established whennecessary to reduce deferred tax assets to the amount expected to be realizedin the future.

 

Netdeferred tax assets consisted of the following components at December 31,2009 and 2008, respectively:

 
| ** **                       | ** ** | **December 31,** | ** ** |
|----------------------------------|------------|-----------------------|------------|
| ** **                       | ** ** | **2009**              | ** ** | **2008** | ** ** |
| Deferred tax assets:             |       |                  |       |   |   |
| Net operating loss carryforwards |       | $                     | 5,722,311  |   | $ | 5,250,900 |   |
| Depreciation                     |       | 2,995                 |       | 2,000 |   |
| Deferred revenue                 |       | 35,953                |       | 30,800 |   |
|                             |       |                  |       |   |   |
| Deferred tax liabilities:        |       |                  |       |   |   |
| Depreciation                     |       | -0-                   |       | -0- |   |
|                             |       |                  |       |   |   |
| Valuation allowance              |       | (5,761,259            | )          | (5,283,700 | ) |
|                             |       |                  |       |   |   |
| Net deferred tax asset           |       | $                     | —     |   | $ | — |   |

 

F-12

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Table of Contents

 

**National Health Partners, Inc. and Subsidiaries**

Notes to Consolidated Financial Statements

December 31, 2009 and 2008

 

**Note 2.  Significant Accounting Policies (Continued)**

 

**Income Taxes (Continued)**

 

At December 31,2009, the Company had net operating loss carry-forwards of approximately$14,672,600 that may be offset against future taxable income from the years2010 through 2030. No tax benefit has been reported in the December 31,2009 financial statements since the potential tax benefit is offset by avaluation allowance of the same amount.

 

Utilization of netoperating loss carryforwards may be subject to a substantial annual limitationdue to ownership change limitations provided by the Internal Revenue Code of1986, as well as similar state and foreign provisions.  These ownership changes may limit the amountof net operating loss carryforwards that can be utilized annually to offsetfuture taxable income and tax, respectively. Subsequent ownership changes could further affect the limitation infuture years.  These annual limitationprovisions may result in the expiration of certain net operating losses andcredits before utilization.

 

In calculating theamount of pretax income from continuing operations for the years ended December 31,2009 and 2008, the amount of income tax calculated under accounting principlesgenerally accepted in the United States of America differed from the amount ofincome tax determined under United States federal and state income taxprovisions as follows:

 
| ** **              | ** ** | **December 31,** | ** ** |
|-------------------------|------------|-----------------------|------------|
| ** **              | ** ** | **2009**              | ** ** | **2008** | ** ** |
|                    |       |                  |       |   |   |
| Book income             |       | $                     | (840,961   | ) | $ | (1,189,852 | ) |
| Meals and entertainment |       | 1,512                 |       | 9,971 |   |
| Stock compensation      |       | 331,990               |       | 653,973 |   |
| Valuation allowance     |       | 526,811               |       | 525,908 |   |
|                    |       |                  |       |   |   |
|                    |       | $                     | —     |   | $ | — |   |

 

F-13

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Table of Contents

 

**National Health Partners, Inc. and Subsidiaries**

Notes to Consolidated Financial Statements

December 31, 2009 and 2008

 

**Note2.  Significant Accounting Policies(Continued)**

 

**LossPer Share**

 

Basicloss per share is based on the weighted average number of shares of the Company’scommon stock outstanding during the applicable year, and is calculated bydividing the reported net loss for the applicable year by the weighted averagenumber of shares of common stock outstanding during the applicable year.   The Company calculates diluted loss pershare by dividing the reported net loss for the applicable year by the weightedaverage number of shares of common stock outstanding during the applicable yearas adjusted to give effect to the exercise of all potentially dilutive optionsand warrants outstanding at the end of the year.  A total of 18,200,515 and 16,838,092 sharesof common stock underlying options and warrants that were outstanding on December 31,2009 and 2008, respectively, have been excluded from the computation of dilutedearnings per share because they are anti-dilutive.  As a result, basic loss per share was equalto diluted loss per share for each year.

 
| ** **                                                            | ** ** | **For the Years********Ended December 31,** | ** ** |
|-----------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                            | ** ** | **2009**                                         | ** ** | **2008** | ** ** |
|                                                                  |       |                                             |       |   |   |
| Net loss as reported                                                  |       | $                                                | (2,156,309 | ) | $ | (3,050,902 | ) |
| Weighted average numberof shares  outstanding –basic and diluted |       | 62,062,407                                       |       | 46,796,331 |   |
| Loss per share – basic and diluted                               |       | $                                                | (0.03      | ) | $ | (0.07 | ) |

 

**Cashand Cash Equivalents**

 

TheCompany considers all highly liquid investments with an original maturity ofthree months or less on the date of purchase to be cash equivalents.

 

**FinancialInstruments**

 

Thecarrying amounts of the Company’s cash and cash equivalents, accounts payable,accrued liabilities and other short-term liabilities in the consolidatedbalance sheet approximate their fair value due to the short-tem maturity ofthese instruments and obligations.

 

F-14

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Table of Contents

 

**National Health Partners, Inc. and Subsidiaries**

Notes to Consolidated Financial Statements

December 31, 2009 and 2008

 

**Note2.  Significant Accounting Policies(Continued)**

 

**DerivativeFinancial Instruments**

 

TheCompany has issued common stock and warrants to certain consultants to theCompany and has evaluated the terms and conditions of the common stock andwarrants to determine whether the warrants represented embedded or freestandingderivative instruments under the provisions of ASC Topic 815 (“ASC 815”).  The Company determined that the warrants didnot represent freestanding derivative instruments and that the warrants did notmeet the requirements for liability classification under ASC 815.  As a result, the fair value of the warrantsis reflected in the Company’s additional paid-in capital.  The fair value of the Company’s derivativefinancial instruments are estimated using the Black-Scholes pricing model whichtakes into consideration the estimated term of the warrants, the volatility ofthe price of the Company’s common stock, interest rates and the probabilitythat the warrants will be exercised.

 

**Property and Equipment**

 

Property and equipmentare stated at cost, less accumulated depreciation and amortization.Depreciation and amortization are calculated using the straight-line basis overthe estimated useful lives of the related assets.  The estimated useful lives of the Company’sproperty and equipment are as follows:

 
| Computer  equipment     |   | 3  years |
|-------------------------|--------|----------|
| Computer  software      |   | 3  years |
| Furniture  and fixtures |   | 7  years |
| Telephone  equipment    |   | 5  years |
| Website  equipment      |   | 3  years |

 

Thecost of major improvements to the Company’s property and equipment arecapitalized. The cost of maintenance and repairs that do not improve or extendthe life of the applicable assets are expensed as incurred.  When assets are retired or otherwise disposedof, the cost and accumulated depreciation and amortization are removed from theaccounts and any resulting gain or loss is reported in the period realized.

 

TheCompany reviews property and equipment for impairment whenever events orchanges in circumstances indicate that the carrying amount of assets may not berecoverable.  Recoverability is measuredby comparison of the carrying amount of the assets to the future undiscountednet cash flows that the assets are expected to generate.  If the assets are considered to be impaired,the impairment to be recognized is measured by the amount by which the carryingamount of these assets exceeds the fair value of the assets.

 

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Table of Contents

 

**National Health Partners, Inc. and Subsidiaries**

Notes to Consolidated Financial Statements

December 31, 2009 and 2008

 

**Note 2. Significant Accounting Policies (Continued)**

 

**RecentAccounting Pronouncements**

 

InMay 2009, the Financial Accounting Standards Board (“FASB”) issuedguidance now codified as ASC Topic 855 (“ASC 855”) which establishes generalstandards of accounting for, and disclosures of, events that occur after thebalance sheet date but before financial statements are issued or are availableto be issued.  ASC 855 requires thedisclosure of the date through which an entity has evaluated subsequent eventsand the basis for selecting that date (i.e., whether that date represents thedate the financial statements were issued or were available to be issued).These new provisions are effective for interim or fiscal periods ending after June 15,2009.  The adoption of these provisionsdid not have a material impact on the Company’s financial condition and resultsof operations.

 

InJune 2009, the FASB issued guidance now codified as ASC Topic 105 (“ASC105”) as the single source of authoritative nongovernmental U.S. GAAP.  ASC 105 does not change current U.S. GAAP,but is intended to simplify user access to all authoritative U.S. GAAP byproviding all authoritative literature related to a particular topic in oneplace. All existing accounting standard documents have been superseded and allother accounting literature not included in the FASB ASC is considerednon-authoritative.  These new provisionsare effective for interim and annual periods ending after September 15,2009 and, accordingly, are effective for the Company for the current fiscalreporting period.  The adoption of theseprovisions did not have an impact on the Company’s financial condition andresults of operations.

 

**Note 3. Property and Equipment**

 

Property and equipment consisted of thefollowing at December 31, 2009 and 2008:

 
| ** **                     | ** ** | **Amount** | ** ** |
|--------------------------------|------------|------------|------------|
| ** **                     | ** ** | **2009**   | ** ** | **2008** | ** ** |
| Asset                          |       |       |       |   |   |
| Computers                      |       | $          | 60,708     |   | $ | 60,708 |   |
| Software                       |       | 6,109      |       | 6,109 |   |
| Furniture                      |       | 27,968     |       | 27,968 |   |
| Telephone                      |       | 80,780     |       | 80,780 |   |
| Website                        |       | 106,477    |       | 106,477 |   |
| Less: accumulated depreciation |       | (266,299   | )          | (248,200 | ) |
|                           |       |       |       |   |   |
| Net property and equipment     |       | $          | 15,743     |   | $ | 33,842 |   |

 

Depreciationexpense for the years ended December 31, 2009 and 2008 was $18,099 and$35,708, respectively.

 

F-16

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Table of Contents

 

**National Health Partners, Inc. and Subsidiaries**

Notes to Consolidated Financial Statements

December 31, 2009 and 2008

 

**Note 4.  Deposits**

 

Deposits consist primarilyof cash reserves held by merchant processors that the Company uses to processcredit card transactions and the security deposit held by the lessor of theCompany’s office space.  Each agreement that the Company has enteredinto with merchant processors contains a standard provision that gives themerchant processors the right to withhold funds from the proceeds generated bythe Company through the sale of its membership programs through credit cardtransactions.  The amount of the reserves may be increased or decreased byeach merchant processor at any time based on the perceived risk exposure of themerchant processor.  The merchant processors are required to return theamount of funds that they withhold from the proceeds within no less than six monthsand no more than nine months of the date such funds were originallywithheld.  As a result, the Company expects to receive all such fundswithin six to nine months of the date such funds were originally withheld bythe merchant processors.

 

As of September 30,2009, the Company had a total of $97,828 in deposits.  Of this amount, $75,000 was being held byPowerPay Payment Systems, Inc., $19,000 was being held by the lessor ofthe Company’s office space and the rest was being held by other businesspartners of the company.  As of December 31, 2008, the Company had a total of$106,828 in deposits.  Of this amount,$75,000 was being held by PowerPay Payment Systems, Inc., $12,828 wasbeing held by PayTran Payment Systems and $19,000 was being held by the lessorof the Company’s office space.

 

**Note 5.  Commitments and Contingencies**

 

The Company’s material commitments and contingencies consist of anoperating lease for its office space in Pennsylvania and employment agreementswith its executive officers.

 

**Operating Leases**

 

The Company is a party to alease for its office facility located in Horsham, Pennsylvania which was mostrecently amended in November 2009. The amendment extended the term of the lease from May 31, 2010 to May 31,2013.  The amendment provides for aninitial monthly rent payment of $7,214 and an initial monthly operating expensepayment of approximately $6,160.  TheCompany will be required to make minimum annual rent payments of approximately$86,500, $90,000 and $93,500, respectively, and estimated annual operatingexpense payments of approximately $74,000 (subject to periodic increases)during the three-year term of the amendment.

 

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Table of Contents

 

**National Health Partners, Inc. and Subsidiaries**

Notes to Consolidated Financial Statements

December 31, 2009 and 2008

 

**Note 5.  Commitments and Contingencies (Continued)**

 

**Employment Agreements**

 

The Company is a party toemployment agreements with each of its current executive officers.  Future minimum payments under theseemployment agreements are as follows:

 
| **Fiscal Year** | ** ** | **Amount** | ** ** |
|-----------------|------------|------------|------------|
|            |       |       |       |
| 2010            |       | $          | 965,749    |   |
| 2011            |       | 88,527     |       |
|            |       | $          | 1,054,276  |   |

 

**Note 6.  2006 Stock Incentive Plan**

 

On February 2, 2006,the Company adopted the National Health Partners, Inc. 2006 StockIncentive Plan.  Under the plan,4,500,000 shares of common stock may be granted to employees, officers anddirectors of, and consultants and advisors to, the Company under awards thatmay be made in the form of stock options, warrants, stock appreciation rights,restricted stock, restricted units, unrestricted stock and other equity-basedor equity-related awards.  As of December 31,2008, all shares of common stock had been issued under the plan.  The plan terminates on February 1,2016.  On February 6, 2006, theCompany filed a registration statement on Form S-8, File No. 333-131589,with the Securities and Exchange Commission (“SEC”) covering the public sale ofthe 4,500,000 shares of common stock available for issuance under the plan.

 

**Note 7.  2008 Stock Incentive Plan**

 

On April 7, 2008, theCompany adopted the National Health Partners, Inc. 2008 Stock IncentivePlan.  Under the plan, 3,000,000 sharesof common stock may be granted to employees, officers and directors of, andconsultants and advisors to, the Company under awards that may be made in theform of stock options, warrants, stock appreciation rights, restricted stock,restricted units, unrestricted stock and other equity-based or equity-relatedawards.  As of December 31, 2008,all shares of common stock had been issued under the plan.  The plan terminates on April 6,2018.  On April 10, 2008, theCompany filed a registration statement on Form S-8, File No. 333-150177,with the SEC covering the public sale of the 3,000,000 shares of common stockavailable for issuance under the plan.

 

F-18

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Table of Contents

 

**National Health Partners, Inc. and Subsidiaries**

Notes to Consolidated Financial Statements

December 31, 2009 and 2008

 

**Note 8.  401(k) Plan**

 

OnJanuary 15, 2007, the Company adopted the National Health Partners, Inc.401(k) Plan. Under the plan, eligible employees may elect to contribute upto 100% of their compensation to the plan each year, subject to certainlimitations imposed by the Internal Revenue Service.  The Company contributes 100% of the first 3%of the employee’s contribution and 50% of the next 2% of the employee’scontribution.  The Company contributed$7,206 and $35,707 to the plan during the years ended December 31, 2009and 2008, respectively.

 

**Note 9.  Common Stock and Warrants**

 

The Company’s authorizedcapital consisted of 100,000,000 shares of common stock, $0.001 par value pershare, at December 31, 2009 and 2008, respectively, of which 73,894,754and 52,586,281 shares of common stock were outstanding at December 31,2009 and 2008, respectively.  Warrantsexercisable into a total of 8,143,372 and 7,661,592 shares of the Company’scommon stock were outstanding on December 31, 2009 and 2008, respectively.

 

The Company estimates thefair value of warrants issued for services on the date of grant by using theBlack-Scholes pricing model.  Under thismodel, the Company used the following weighted-average assumptions to determinethe fair value of the warrants that have been issued for services: a dividendyield of zero percent, an expected volatility of****282%,a risk-free interest rate of 3.5% and a remaining contractual term of twoyears.  The Company follows ASC Topic 505(“ASC 505”) to recognize the fair value of warrants granted.  Under ASC 505, the fair value of the warrantsshould be recognized as the services are rendered.  The Company is recognizing the cost ofservices evenly over the term of the agreements since the services are beingrendered on an ongoing basis during the term of the agreements.

 

**Non Capital-Raising Transactions**

 

InJanuary 2008, the Company terminated its agreement with Trident MarketingInternational, Inc.  As a result,the remaining 50,000 shares underlying the restricted stock award granted to itin March 2007 failed to vest and were canceled by the Company inaccordance with the terms of the restricted stock award.

 

In January and February 2008,the Company issued a total of 330,000 shares of common stock to threeconsultants pursuant to individual consulting agreements. The shares werevalued at the closing price of the Company’s common stock on the date theagreements were executed for total consideration of $113,300, all of which wasrecognized as expense during the year ended December 31, 2008.

 

F-19

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Table of Contents

 

**National Health Partners, Inc. and Subsidiaries**

Notes to Consolidated Financial Statements

December 31, 2009 and 2008

 

**Note 9.  Common Stock and Warrants (Continued)**

 

**Non Capital-Raising Transactions (Continued)**

 

InFebruary 2008, the Company issued 240,000 shares of common stock to theholder of a promissory note in partial consideration for the extinguishment ofdebt.  The shares were issued at theclosing price of the Company’s common stock on the date the agreement wasexecuted for total consideration of $60,000, all of which was recognized asexpense during the year ended December 31, 2008.

 

In April 2008, theCompany issued a total of 2,700,000 shares of common stock to consultants formarketing and advisory services pursuant to individual consultingagreements.  The shares were valued atthe closing price of the Company’s common stock on the date the agreements wereexecuted for total consideration of $1,246,900. The Company recognized $554,874 and $692,026 of expense during the yearsended December 31, 2009 and 2008 in connection with the issuance of theseshares.

 

In December 2008, theCompany issued a total of 1,385,525 shares of common stock to five consultantspursuant to individual consulting agreements. The shares were valued at theclosing price of the Company’s common stock on the date the agreements wereexecuted for total consideration of $87,704. The Company recognized $64,902 and$16,746 of expense during the years ended December 31, 2009 and 2008,respectively, in connection with the issuance of these shares.

 

InDecember 2008, the Company issued 690,000 and 523,500 shares of commonstock to David M. Daniels, its President and Chief Executive Officer, and AlexSoufflas, its Vice President and Chief Financial Officer, respectively, in fullpayment of deferred salary compensation that was earned by each of them during2008 and payable to each of them as of December 31, 2008.  The shares were valued at $0.055 per sharefor total consideration of $66,743, all of which was recognized as expenseduring the year ended December 31, 2008.

 

In January 2009, theCompany issued 600,000 shares of common stock to a consultant pursuant to aconsulting agreement. The shares were valued at the closing price of theCompany’s common stock on the date the agreement was executed for totalconsideration of $30,000, all of which was recognized as expense during theyear ended December 31, 2009.

 

F-20

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Table of Contents

 

**National Health Partners, Inc. and Subsidiaries**

Notes to Consolidated Financial Statements

December 31, 2009 and 2008

 

**Note 9.  Common Stock and Warrants (Continued)**

 

**Non Capital-Raising Transactions (Continued)**

 

InJune 2009, the Company issued 500,000 and 405,000 shares of common stockto David M. Daniels, its President and Chief Executive Officer, and AlexSoufflas, its Vice President and Chief Financial Officer, respectively, in fullpayment of deferred salary compensation that was earned by each of them duringthe three months ended March 31, 2009 and payable to each of them as of March 31,2009.  The shares were valued at $0.09per share for total consideration of $81,450, all of which was recognized asexpense during the year ended December 31, 2009.

 

InDecember 2009, the Company issued 1,864,286 and 1,556,143 shares of commonstock to David M. Daniels, its President and Chief Executive Officer, and AlexSoufflas, its Vice President and Chief Financial Officer, respectively, in fullpayment of deferred salary compensation that was earned by each of them duringthe nine months ended December 31, 2009 and payable to each of them as of December 31,2009.  The shares were valued at $0.07per share for total consideration of $239,430, all of which was recognized asexpense during the year ended December 31, 2009.

 

## **Capital-Raising Transactions**

##  

In February 2008, theCompany completed a private offering of Class A warrants exercisable into1,000,000 shares of common stock for aggregate gross proceeds of $100.  The Class A warrants had an exerciseprice of $0.12 per share, were exercisable until February 29, 2008, andexpired at the end of the exercise period.

 

In February 2008, theCompany sold one Class A warrant exercisable into 500,000 shares of commonstock, one Class B warrant exercisable into 1,000,000 shares of commonstock and one Class C warrant exercisable into 1,000,000 shares of commonstock to an accredited investor for aggregate gross proceeds of $100.  The Class A warrant had an exerciseprice of $0.20 per share, was exercisable until February 29, 2008, andexpired at the end of the exercise period. The Class B warrant had an exercise price of $0.30 per share, wasexercisable until June 30, 2008, was callable by the Company if certaincriteria are satisfied, and expired at the end of the exercise period.  The Class C warrant had an exerciseprice of $0.40 per share, was exercisable until December 31, 2008, wascallable by the Company if certain criteria are satisfied, and expired at theend of the exercise period.

 

F-21

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Table of Contents

 

**National Health Partners, Inc. and Subsidiaries**

Notes to Consolidated Financial Statements

December 31, 2009 and 2008

 

**Note 9.  Common Stock and Warrants (Continued)**

 

**Capital-Raising Transactions (Continued)**

 

In February 2008, theCompany completed a private offering of Class A warrants exercisable into600,000 shares of common stock for aggregate cash proceeds of $60.  The Class A warrants were sold in unitscomprised of one Class A warrant at a purchase price of $1.00 perunit.  The Class A warrants had anexercise price of $0.12 per share, were exercisable until March 28, 2008,and expired at the end of the exercise period.

 

In April 2008, theCompany completed a private offering of 500,000 shares of common stock and Class Awarrants exercisable into 500,000 shares of common stock for aggregate grossproceeds of $75,000.  The Company paidfinder fees consisting of 75,000 shares of common stock and a Class Awarrant exercisable into 75,000 shares of common stock in connection with thisoffering.  The Class A warrants had anexercise price of $0.12 per share, were exercisable until April 18, 2008,and expired at the end of the exercise period.

 

In June 2008, theCompany completed a private offering of 675,000 shares of common stock, Class Awarrants exercisable into 675,000 shares of common stock and Class Bwarrants exercisable into 675,000 shares of common stock for aggregate cashconsideration of $108,000.  Thesesecurities were sold in units comprised of one share of common stock, one Class Awarrant and one Class B warrant at a purchase price of $0.16 perunit.  The Company paid finder feesconsisting of 101,250 units identical to the units sold in the offering.  The Company agreed to provide each investorwith an opportunity to include all shares of common stock and all shares ofcommon stock issued upon the exercise of the warrants in any registrationstatement that the Company files with the SEC for the purposes of a publicoffering of the Company’s securities (excluding registration statements onForms S-4 or S-8).  The Class Awarrants were initially exercisable into one share of common stock at anexercise price of $0.20 per share, were exercisable during a period of 90 daysbeginning on the date of grant, and expired at the end of the exercise period.  The Class B warrants were initiallyexercisable into one share of common stock at an exercise price of $0.30 pershare, were exercisable during a period beginning on the date of grant andending on December 31, 2008, and expired at the end of the exerciseperiod.

 

F-22

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Table of Contents

 

**National Health Partners, Inc. and Subsidiaries**

Notes to Consolidated Financial Statements

December 31, 2009 and 2008

 

**Note 9.  Common Stock and Warrants (Continued)**

 

**Capital-Raising Transactions (Continued)**

 

In July 2008, theCompany sold 3,000,000 shares of common stock and one Class A warrantexercisable into 3,000,000 shares of common stock to an accredited investor foraggregate gross proceeds of $750,000. The Company paid finder fees consisting of 225,000 shares of commonstock and a Class A warrant exercisable into 225,000 shares of commonstock and cash consideration of $56,250 in connection with this offering.  The Class A warrants had an exerciseprice of $0.30 per share, were exercisable for a period commencing on the dateof grant and ending on December 31, 2009, and expired at the end of theexercise period.

 

In July 2008, theCompany completed a private offering of Class A warrants exercisable into1,000,000 shares of common stock for aggregate gross proceeds of $100.  The Class A warrants had an exerciseprice of $0.20 per share, were exercisable until December 31, 2008, andexpired at the end of the exercise period.

 

During the year ended December 31,2008, the Company received aggregate gross proceeds of $597,415 from theexercise of warrants held by the Company’s security holders.  The Company issued a total of 3,463,250shares of its common stock in connection therewith at exercise prices rangingbetween $0.12 and $0.40 per share.

 

In April 2009, theCompany completed a private offering of 5,346,000 shares of its common stockand Class A warrants exercisable into 2,673,000 shares of common stockfor aggregate cash consideration of $200,475.  The shares were sold in units consisting oftwo shares of common stock and one Class A warrant at a purchase price of$0.075 per unit.   The Company paidfinder fees consisting of 400,900 units identical to the units sold in theoffering.  The Class A warrants hadan exercise price of $0.075 per share, were exercisable during the periodcommencing on the date of grant and ending September 30, 2009, and expiredat the end of the exercise period.

 

In May 2009, the Companysold 2,000,000 shares of common stock and Class A warrants exercisableinto 1,000,000 shares of common stock to an accredited investor for aggregategross proceeds of $100,000.  The Companypaid finder fees consisting of 200,000 shares of common stock and 100,000 Class Awarrants.  The Class A warrants hadan exercise price of $0.075 per share, were exercisable during the periodcommencing on the date of grant and ending December 31, 2009, and expiredat the end of the exercise period.

 

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Table of Contents

 

**National Health Partners, Inc. and Subsidiaries**

Notes to Consolidated Financial Statements

December 31, 2009 and 2008

 

**Note 9.  Common Stock and Warrants (Continued)**

 

**Capital-Raising Transactions (Continued)**

 

In July 2009, theCompany completed a private offering of 500,000 shares of its common stock and Class Awarrants exercisable into 250,000 shares of common stock for aggregatecash consideration of $30,000.  Theshares were sold in units consisting of two shares of common stock, one Class Awarrant and one Class B warrant at a purchase price of $0.12 perunit.   The Class A warrants hadan exercise price of $0.06 per share, were exercisable during the periodcommencing on the date of grant and ending December 31, 2009, and expiredat the end of the exercise period.

 

In July 2009, theCompany sold 2,000,000 shares of common stock and Class A warrantsexercisable into 2,000,000 shares of common stock to an accredited investor foraggregate gross proceeds of $100,000. The Company paid finder fees consisting of 200,000 shares of commonstock.  The Class A warrants have anexercise price of $0.05 per share, are exercisable during the period commencingon the date of grant and ending December 31, 2010, and expire at the endof the exercise period.

 

In August 2009, theCompany completed a private offering of 2,150,000 shares of its common stock, Class Awarrants exercisable into 1,075,000 shares of common stock and Class Bwarrants exercisable into 1,075,000 shares of common stock for aggregatecash consideration of $107,500.  Theshares were sold in units consisting of two shares of common stock, one Class Awarrant and one Class B warrant at a purchase price of $0.10 perunit.   The Class A warrants had anexercise price of $0.05 per share, were exercisable during the periodcommencing on the date of grant and ending December 31, 2009, and expiredat the end of the exercise period.   The Class B warrants have an exerciseprice of $0.10 per share, are exercisable during the period commencing on thedate of grant and ending December 31, 2010, and expire at the end of theexercise period.

 

In October 2009, theCompany completed a private offering of 1,004,560 shares of its common stockand Class A warrants exercisable into 502,280 shares of common stock for aggregatecash consideration of $50,228.  Theshares were sold in units consisting of two shares of common stock and one Class Awarrant at a purchase price of $0.10 per unit.  The Company paid finder fees consisting of 150,684 shares of commonstock and Class A warrants exercisable into 75,342 shares of common stock.  The Class A warrants have an exerciseprice of $0.05 per share, are exercisable during the period commencing on thedate of grant and ending May 31, 2010, and expire at the end of theexercise period.

 

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Table of Contents

 

**National Health Partners, Inc. and Subsidiaries**

Notes to Consolidated Financial Statements

December 31, 2009 and 2008

 

**Note 9.  Common Stock and Warrants (Continued)**

 

**Capital-Raising Transactions(Continued)**

** **

In November 2009, theCompany completed a private offering of 700,000 shares of its common stock and Class Awarrants exercisable into 350,000 shares of common stock for aggregatecash consideration of $35,000.  Theshares were sold in units consisting of two shares of common stock and one Class Awarrant at a purchase price of $0.10 per unit.  The Company paid finder fees consisting of 105,000 shares of commonstock and Class A warrants exercisable into 52,500 shares of commonstock.  The Class A warrantshave an exercise price of $0.05 per share, are exercisable during the periodcommencing on the date of grant and ending May 31, 2010, and expire at theend of the exercise period.

 

In November 2009, theCompany completed a private offering of Class A warrantsexercisable into 2,000,000 shares of common stock for aggregate cashconsideration of $1,000.  The Companypaid finder fees consisting of Class A warrants exercisable into 300,000shares of common stock.  The Class Awarrants had an exercise price of $0.04 per share, were exercisable during theperiod commencing on the date of grant and ending December 31, 2009, andexpired at the end of the exercise period.

 

In November 2009, theCompany sold 1,000,000 shares of common stock and Class A warrantsexercisable into 1,000,000 shares of common stock to an accredited investor foraggregate gross proceeds of $50,000.  TheCompany paid finder fees consisting of 150,000 shares of common stock and Class Awarrants exercisable into 150,000 shares of common stock.  The Class A warrants have an exerciseprice of $0.05 per share, are exercisable during the period commencing on thedate of grant and ending December 31, 2010, and expire at the end of theexercise period.

 

During the year ended December 31,2009, the Company received aggregate gross proceeds of $3,750 from the exerciseof warrants held by one of the Company’s security holders.  The Company issued a total of 75,000 sharesof its common stock in connection therewith at an exercise price of $0.05 pershare.

 

**Note 10.  Stock Options**

 

Stock options exercisableinto a total of 10,057,143 and 9,176,500 shares of the Company’s common stockwere outstanding on December 31, 2009 and 2008, respectively.  The weighted average exercise price of thestock options outstanding on December 31, 2009 and 2008 was $0.37 and$0.41, respectively.  The Companyestimates the fair value of its stock options on the date of grant by using theBlack-Scholes pricing model in accordance with the provisions of ASC 718.  Under the Black-Scholes pricing model, theCompany used the following weighted-average assumptions to determine the fairvalue of the stock options issued: a dividend yield of zero percent, anexpected volatility of between 221% and 290%, a risk-free interest rate ofbetween 2.25% and 4.76% and a remaining contractual life of between 9.15 and9.95 years.

 

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Table of Contents

 

**National Health Partners, Inc. and Subsidiaries**

Notes to Consolidated Financial Statements

December 31, 2009 and 2008

 

**Note 10.  Stock Options (Continued)**

 

In January 2008, theCompany issued a stock option to a new employee to acquire 100,000 shares ofcommon stock.  The option has an exerciseprice of $0.23 per share, which was the closing sales price of the Company’scommon stock on the date of grant, and vests in four equal annual installmentsbeginning on the first anniversary of the date of grant.  The option has a term of 10 years and wasvalued at $22,997 on the date of grant. The Company recognized $5,745 and$5,383 of expense during the years ended December 31, 2009 and 2008,respectively, in connection with the issuance of this option.

 

In March 2008, theCompany issued a stock option to each of David M. Daniels, Alex Soufflas andPatricia S. Bathurst to acquire 400,000 shares of common stock.  Each option has an exercise price of $0.28per share, which was the closing sales price of the Company’s common stock onthe date of grant, and vests in four equal annual installments beginning on thefirst anniversary of the date of grant. The options have a term of 10 years and had a total value of $335,962 onthe date of grant. The Company recognized $84,163 and $83,933 of expense duringthe years ended December 31, 2009 and 2008, respectively, in connectionwith the issuance of these options.

 

In December 2008, theCompany issued a stock option to Patricia S. Bathurst to acquire 286,500 sharesof common stock in full payment of deferred salary compensation that was earnedby her during 2008 and payable to her as of December 31, 2008.  The option has an exercise price of $0.055per share and was vested in full on the date of grant.  The option has a term of 10 years and wasvalued at $15,754 on the date of grant, all of which was recognized as expenseduring the year ended December 31, 2008.

 

In June 2009, theCompany issued a stock option to Patricia S. Bathurst to acquire 225,000 sharesof common stock in full payment of deferred salary compensation that was earnedby her during the three months ended March 31, 2009 and payable to her asof March 31, 2009.  The option hasan exercise price of $0.09 per share and was vested in full on the date ofgrant.  The option has a term of 10 yearsand was valued at $20,245 on the date of grant, all of which was recognized asexpense during the year ended December 31, 2009.

 

In December 2009, theCompany issued a stock option to Patricia S. Bathurst to acquire 855,643 sharesof common stock in full payment of deferred salary compensation that was earnedby her during the nine months ended December 31, 2009 and payable to heras of December 31, 2009.  The optionhas an exercise price of $0.07 per share and was vested in full on the date ofgrant.  The option has a term of 10 yearsand was valued at $59,872 on the date of grant, all of which was recognized asexpense during the year ended December 31, 2009.

 

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Table ofContents

 

**National Health Partners, Inc. and Subsidiaries**

Notes to Consolidated Financial Statements

December 31, 2009 and 2008

 

**Note10.  Stock Options (Continued)**

 

Asummary of the stock options issued during the years ended December 31,2009 and 2008 is set forth below.  Nostock options were exercised during the years ended December 31, 2009 and2008.

 
| ** **                          | ** ** | ** ** | ** ** | **Weighted-** | ** ** |
|-------------------------------------|------------|------------|------------|---------------|------------|
| ** **                          | ** ** | ** ** | ** ** | **Average**   | ** ** |
| ** **                          | ** ** | ** ** | ** ** | **Exercise**  | ** ** |
| ** **                          | ** ** | **Shares** | ** ** | **Price**     | ** ** |
| ** **                          | ** ** | ** ** | ** ** | ** **    | ** ** |
| Outstanding, December 31, 2007 |       | 7,660,000  |       | $             | 0.45       |   |
|                                |       |       |       |          |       |
| Granted                             |       | 1,586,500  |       | 0.24          |       |
| Expired                             |       | (70,000    | )          | 0.55          |       |
|                                |       |       |       |          |       |
| Outstanding, December 31, 2008 |       | 9,176,500  |       | $             | 0.41       |   |
|                                |       |       |       |          |       |
| Granted                             |       | 1,080,643  |       | 0.07          |       |
| Expired                             |       | (200,000   | )          | 0.60          |       |
|                                |       |       |       |          |       |
| Outstanding, December 31, 2009 |       | 10,057,143 |       | $             | 0.37       |   |
|                                |       |       |       |          |       |
| Exercisable, December 31, 2008 |       | 6,834,000  |       | $             | 0.42       |   |
| Exercisable, December 31, 2009 |       | 8,479,643  |       | $             | 0.37       |   |

 
| **Year Ended********December 31,** | ** ** | **Range of   Exercise Prices** | ** ** | **Number   Outstanding** | ** ** | **Weighted-   Average   Remaining   Contractual   Life** | ** ** | **Weighted-  Average********Exercise********Price** | ** ** |
|-----------------------------------------|------------|--------------------------------|------------|--------------------------|------------|----------------------------------------------------------|------------|-----------------------------------------------------|------------|
|                                    |       |                           |       |                     |       |                                                     |       |                                                |       |
| 2008                                    |       | $0.055 – $0.88            |       | 9,176,500                |       | 9.32                                                     |       | $                                                   | 0.41       |   |
| 2009                                    |       | $0.055 – $0.88            |       | 10,057,143               |       | 9.39                                                     |       | $                                                   | 0.37       |   |

 

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Table of Contents

 

**National Health Partners, Inc. and Subsidiaries**

Notes to Consolidated Financial Statements

December 31, 2009 and 2008

 

**Note 11.  Related-PartyTransactions**

 

InMarch 2008, the Company issued a stock option to each of David M. Daniels,Alex Soufflas and Patricia S. Bathurst to acquire 400,000 shares of commonstock.  Each option has an exercise priceof $0.28 per share and vests in four equal annual installments beginning on thefirst anniversary of the date of grant. The options have a term of 10 years.

 

InDecember 2008, the Company issued 690,000 and 523,500 shares of commonstock to David M. Daniels, its President and Chief Executive Officer, and AlexSoufflas, its Vice President and Chief Financial Officer, respectively, in fullpayment of deferred salary compensation that was earned by each of them during2008 and payable to each of them as of December 31, 2008.

 

InDecember 2008, the Company issued a stock option to Patricia S. Bathurstto acquire 286,500 shares of common stock in full payment of deferred salarycompensation that was earned by Ms. Bathurst during 2008 and payable toher as of December 31, 2008.  Theoption has an exercise price of $0.055 per share, was vested in full on thedate of grant, and has a term of 10 years.

 

In June 2009, the Company issued500,000 and 405,000 shares of common stock to David M. Daniels, its Presidentand Chief Executive Officer, and Alex Soufflas, its Vice President and ChiefFinancial Officer, respectively, in full payment of deferred salarycompensation that was earned by each of them during the three months ended March 31,2009 and payable to each of them as of March 31, 2009.

 

In June 2009, the Company issued a stock option to Patricia S.Bathurst to acquire 225,000 shares of common stock in full payment of deferredsalary compensation that was earned by her during the three months ended March 31,2009 and payable to her as of March 31, 2009.  The option has an exercise price of $0.09 pershare and was vested in full on the date of grant.

 

In December 2009, the Companyissued 1,864,286 and 1,556,143 shares of common stock to David M. Daniels, itsPresident and Chief Executive Officer, and Alex Soufflas, its Vice Presidentand Chief Financial Officer, respectively, in full payment of deferred salarycompensation that was earned by each of them during the nine months ended December 31,2009 and payable to each of them as of December 31, 2009.

 

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Table of Contents

 

**National Health Partners, Inc. and Subsidiaries**

Notes to Consolidated Financial Statements

December 31, 2009 and 2008

 

**Note11.  Related-Party Transactions(Continued)**

 

InDecember 2009, the Company issued a stock option to Patricia S. Bathurstto acquire 855,643 shares of common stock in full payment of deferred salarycompensation that was earned by her during the nine months ended December 31,2009 and payable to her as of December 31, 2009.  The option has an exercise price of $0.07 pershare and was vested in full on the date of grant.

 

**Note 12.  Subsequent Events**

 

## The Company has performed an evaluation of subsequent events as of thedate the financial statements were issued.  Other than the events notedbelow, the Company is not aware of any subsequent events that would requirerecognition or disclosure in the financial statements.

##  

In January 2010, the Company sold1,000,000 shares of common stock and Class A warrants exercisable into1,000,000 shares of common stock to an accredited investor for aggregate grossproceeds of $40,000.  The Class Awarrants have an exercise price of $0.04 per share, are exercisable during theperiod commencing on the date of grant and ending December 31, 2010, andexpire at the end of the exercise period.

 

In February 2010, the Company sold2,000,000 shares of common stock to an accredited investor for aggregate grossproceeds of $40,000.

 

In February 2010, the Company sold2,000,000 shares of common stock and Class A warrants exercisable into4,000,000 shares of common stock to an accredited investor for aggregate grossproceeds of $40,000.  The Class Awarrants have an exercise price of $0.02 per share, are exercisable during theperiod commencing on the date of grant and ending December 31, 2010, andexpire at the end of the exercise period.

 

InMarch 2010, Alex Soufflas resigned as the Company’s Chief FinancialOfficer, Executive Vice President and Secretary effective March 31, 2010.

 

InMarch 2010, we completed a private offering of 450,000 shares of ourcommon stock for aggregate cash consideration of $10,125.  The Company agreed to file a registrationstatement with the SEC by March 31, 2010 to register the resale of allshares of common stock sold in the offering.

 

InMarch 2010, the Company completed a private offering of 3,200,000 sharesof its common stock for aggregate cash consideration of 64,000.  The Company agreed to file a registrationstatement with the SEC by March 31, 2010 to register the resale of allshares of common stock sold in the offering.

 

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**EXHIBIT INDEX**

 
| **Exhibit** | ** ** | **Exhibit Description**                                                                                                                                      |
|-------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |       |                                                                                                                                                              |
| 10.32       |       | Option to  Acquire Shares of Common Stock, dated December 29, 2009, issued by the  Company to Patricia S. Bathurst                                           |
|        |       |                                                                                                                                                              |
| 21.1        |       | Subsidiaries of  the Company                                                                                                                                      |
|        |       |                                                                                                                                                              |
| 23.1        |       | Consent of H  J & Associates, LLC                                                                                                                        |
|        |       |                                                                                                                                                              |
| 31.1        |       | Certification of Chief  Executive Officer required by Rule 13a-14(a) under the Securities  Exchange Act of 1934, as amended                             |
|        |       |                                                                                                                                                              |
| 31.2        |       | Certification of Chief  Financial Officer required by Rule 13a-14(a) under the Securities  Exchange Act of 1934, as amended                             |
|        |       |                                                                                                                                                              |
| 32.1        |       | Certification of Chief  Executive Officer and Chief Financial Officer required by  Rule 13a-14(b) under the Securities Exchange Act of 1934, as amended |

 

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