Table of Contents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, DC 20549**

 

**FORM 10-Q**

 

**(Mark One)**

 
| x                                                      | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
|--------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------|
|                                                   |
| **For the quarterly period ended: June 30, 2009** |
|                                                   |
| **or**                                                 |
|                                                   |
| **o**                                                  | ** ** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(D) OF THE EXCHANGE ACT OF 1934**            |

 

**For****the transition period from                        to                       **

 

**Commission****File No. ****000-51731**

 

**NATIONALHEALTH PARTNERS, INC.**

(Exact name of registrant as specified in itscharter)

 

| **Indiana**                                                     | ** ** | **04-3786176**                     |
|-----------------------------------------------------------------|------------|------------------------------------|
| (State or other jurisdiction of  incorporation or organization) |       | (IRS Employer  Identification No.) |

 

**120 Gibraltar Road**

**Suite 107**

**Horsham, PA 19044**

(Addressof Principal Executive Offices)

 

**(215) 682-7114**

(Issuer’s Telephone Number, including Area Code)

 

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 1394 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 No o

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Website, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 ofthis chapter) during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post such files). Yes o No o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-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 mark whether the registrant is ashell company (as defined in rule 12b-2 of the Exchange Act). Yes o No x

 

**APPLICABLE ONLY TO ISSUERS INVOLVED IN**

**BANKRUPTCY PROCEEDINGS DURING THE**

**PRECEDING FIVE YEARS**

 

Indicate by check mark whether the registrant hasfiled all documents and reports required to be filed by Sections 12, 13 or 15(d) ofthe Securities Exchange Act of 1934 subsequent to the distribution ofsecurities under a plan confirmed by a court. Yes o No o

 

**APPLICABLE ONLY TO CORPORATE ISSUERS**

 

Indicate the number of shares outstanding ofeach of the issuer’s classes of common stock, as of the latest practicabledate:  There were 67,289,081 shares ofthe issuer’s common stock, $.001 par value per share, issued and outstanding onAugust 10, 2009.

 

 

 

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Table ofContents

 

**TABLE OF CONTENTS**

 
| ** ** | ** **                                                                                                         | **Page** |
|------------|--------------------------------------------------------------------------------------------------------------------|----------|
|       |                                                                                                               |     |
|       | **PART I – FINANCIAL INFORMATION**                                                                       |     |
|       |                                                                                                               |     |
| Item 1.    | Financial Statements                                                                                               | 1        |
|       |                                                                                                               |     |
|       | Consolidated Balance Sheets at  June 30, 2009 (Unaudited) and December 31, 2008                          | 1        |
|       |                                                                                                               |     |
|       | Consolidated Statements of  Operations for the Three and Six Months Ended June 30, 2009 and 2008  (Unaudited) | 2        |
|       |                                                                                                               |     |
|       | Consolidated Statements of  Cash Flows for the Six Months Ended June 30, 2009 and 2008 (Unaudited)            | 3        |
|       |                                                                                                               |     |
|       | Notes to  Consolidated Financial Statements (Unaudited)                                                            | 4        |
|       |                                                                                                               |     |
| Item 2.    | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                        | 14       |
|       |                                                                                                               |     |
| Item 4T.   | Controls and  Procedures                                                                                           | 23       |
|       |                                                                                                               |     |
|       | **PART II – OTHER  INFORMATION**                                                                         |     |
|       |                                                                                                               |     |
| Item 2.    | Unregistered  Sales of Equity Securities and Use of Proceeds                                                       | 24       |
|       |                                                                                                               |     |
| Item 6.    | Exhibits                                                                                                           | 25       |

 

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Table ofContents

 

**PART I– FINANCIAL INFORMATION**

 

**Item 1.  Financial Statements.**

 

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

Consolidated Balance Sheets

 
| ** **                                                                                                                                                                    | ** ** | **June 30,**    | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------|------------|------------------|------------|
| ** **                                                                                                                                                                    | ** ** | **2009**        | ** ** | **2008**         | ** ** |
| ** **                                                                                                                                                                    | ** ** | **(Unaudited)** | ** ** | ** **       | ** ** |
|                                                                                                                                                                          |       |            |       |             |       |
| **Assets**                                                                                                                                                                    |       |            |       |             |       |
|                                                                                                                                                                          |       |            |       |             |       |
| Current assets:                                                                                                                                                               |       |            |       |             |       |
| Cash                                                                                                                                                                          |       | $               | 53,906     |             | $          | 177,545 |   |
| Prepaid expense                                                                                                                                                               |       | 162,307         |       | 205,690          |       |
| Deposits                                                                                                                                                                      |       | 103,651         |       | 114,378          |       |
| Other current assets                                                                                                                                                          |       | 800             |       | —           |       |
|                                                                                                                                                                          |       |            |       |             |       |
| Total current assets                                                                                                                                                          |       | 320,664         |       | 497,613          |       |
|                                                                                                                                                                          |       |            |       |             |       |
| Property and equipment, net                                                                                                                                                   |       | 21,910          |       | 33,842           |       |
| Prepaid expense                                                                                                                                                               |       | 164,708         |       | 201,669          |       |
| Deposits                                                                                                                                                                      |       | 19,000          |       | 19,000           |       |
|                                                                                                                                                                          |       |            |       |             |       |
| Total assets                                                                                                                                                                  |       | $               | 526,282    |             | $          | 752,124 |   |
|                                                                                                                                                                          |       |            |       |             |       |
| **Liabilities and stockholders' equity**                                                                                                                                      |       |            |       |             |       |
|                                                                                                                                                                          |       |            |       |             |       |
| Current liabilities                                                                                                                                                           |       |            |       |             |       |
| Accounts payable                                                                                                                                                              |       | $               | 126,234    |             | $          | 68,513 |   |
| Refunds payable                                                                                                                                                               |       | 8,807           |       | —           |       |
| Accrued expenses                                                                                                                                                              |       | 103,191         |       | 13,014           |       |
| Deferred revenue                                                                                                                                                              |       | 94,541          |       | 79,008           |       |
|                                                                                                                                                                          |       |            |       |             |       |
| Total current liabilities                                                                                                                                                     |       | 332,773         |       | 160,535          |       |
|                                                                                                                                                                          |       |            |       |             |       |
| Total liabilities                                                                                                                                                             |       | 332,773         |       | 160,535          |       |
|                                                                                                                                                                          |       |            |       |             |       |
| Commitments and contingencies                                                                                                                                                 |       |            |       |             |       |
|                                                                                                                                                                          |       |            |       |             |       |
| Stockholders' equity:                                                                                                                                                         |       |            |       |             |       |
| Common stock, $0.001 par value, 100,000,000 shares authorized, 62,439,081  and 52,586,281 shares issued and outstanding on June 30, 2009 and December  31, 2008, respectively |       | 62,439          |       | 52,586           |       |
| Additional paid-in capital                                                                                                                                                    |       | 25,754,812      |       | 25,195,670       |       |
| Deferred compensation                                                                                                                                                         |       | (143,842        | )          | (205,133         | )          |
| Accumulated deficit                                                                                                                                                           |       | (25,479,900     | )          | (24,451,534      | )          |
|                                                                                                                                                                          |       |            |       |             |       |
| Total stockholders' equity                                                                                                                                                    |       | 193,509         |       | 591,589          |       |
|                                                                                                                                                                          |       |            |       |             |       |
| Total liabilities and stockholders' equity                                                                                                                                    |       | $               | 526,282    |             | $          | 752,124 |   |

 

Theaccompanying notes are an integral part of these consolidated financialstatements

 

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

Consolidated Statements of Operations(Unaudited)

 
| ** **                                                              | ** ** | **For the Three Months Ended** | ** ** | **For the Six Months Ended** | ** ** |
|-------------------------------------------------------------------------|------------|--------------------------------|------------|------------------------------|------------|
| ** **                                                              | ** ** | **June 30,**                   | ** ** | **June 30,**                 | ** ** |
| ** **                                                              | ** ** | **2009**                       | ** ** | **2008**                     | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                                                    |       |                           |       |                         |       |   |   |   |   |
| Net revenue                                                             |       | $                              | 375,228    |                         | $          | 882,016 |   | $ | 793,071 |   | $ | 1,704,193 |   |
|                                                                    |       |                           |       |                         |       |   |   |   |   |
| Direct costs                                                            |       | 226,033                        |       | 233,535                      |       | 357,977 |   | 701,410 |   |
|                                                                    |       |                           |       |                         |       |   |   |   |   |
| Gross profit                                                            |       | 149,195                        |       | 648,481                      |       | 435,094 |   | 1,002,783 |   |
|                                                                    |       |                           |       |                         |       |   |   |   |   |
| Operating expenses:                                                     |       |                           |       |                         |       |   |   |   |   |
| Selling and marketing                                                   |       | 31,050                         |       | 56,050                       |       | 67,091 |   | 134,975 |   |
| General and administrative                                              |       | 681,237                        |       | 973,468                      |       | 1,396,455 |   | 2,075,568 |   |
|                                                                    |       |                           |       |                         |       |   |   |   |   |
| Total operating expenses                                                |       | 712,287                        |       | 1,029,518                    |       | 1,463,546 |   | 2,210,543 |   |
|                                                                    |       |                           |       |                         |       |   |   |   |   |
| Loss from operations                                                    |       | (563,092                       | )          | (381,037                     | )          | (1,028,452 | ) | (1,207,760 | ) |
|                                                                    |       |                           |       |                         |       |   |   |   |   |
| Other income (expense):                                                 |       |                           |       |                         |       |   |   |   |   |
| Interest income                                                         |       | 4                              |       | 35                           |       | 87 |   | 44 |   |
| Loss on extinguishment of debt                                          |       | —                         |       | —                       |       | — |   | (30,000 | ) |
|                                                                    |       |                           |       |                         |       |   |   |   |   |
| Total other income (expense)                                            |       | 4                              |       | 35                           |       | 87 |   | (29,956 | ) |
|                                                                    |       |                           |       |                         |       |   |   |   |   |
| Net loss                                                                |       | $                              | (563,088   | )                            | $          | (381,002 | ) | $ | (1,028,365 | ) | $ | (1,237,716 | ) |
|                                                                    |       |                           |       |                         |       |   |   |   |   |
| Loss per share — basic and diluted                                 |       | $                              | (0.01      | )                            | $          | (0.01 | ) | $ | (0.02 | ) | $ | (0.03 | ) |
|                                                                    |       |                           |       |                         |       |   |   |   |   |
| Weighted average number of shares outstanding  — basic and diluted |       | 59,344,518                     |       | 46,033,765                   |       | 56,263,627 |   | 42,930,508 |   |

 

The accompanying notes are an integral part of theseconsolidated financial statements

 

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

ConsolidatedStatements of Cash Flows (Unaudited)

 
| ** **                                                                   | ** ** | **For the Six Months Ended** | ** ** |
|------------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                   | ** ** | **June 30,**                 | ** ** |
| ** **                                                                   | ** ** | **2009**                     | ** ** | **2008** | ** ** |
|                                                                         |       |                         |       |   |   |
| **Cash flows from  operating activities**                                    |       |                         |       |   |   |
|                                                                         |       |                         |       |   |   |
| Net loss                                                                     |       | $                            | (1,028,365 | ) | $ | (1,237,716 | ) |
| Adjustments to reconcile net loss to net  cash used by operating activities: |       |                         |       |   |   |
| Common stock issued for services and amortization  of prepaid services       |       | 253,084                      |       | 364,047 |   |
| Options issued for services                                                  |       | 157,071                      |       | 136,988 |   |
| Depreciation                                                                 |       | 11,932                       |       | 20,233 |   |
| Loss on extinguishment of debt                                               |       | —                       |       | 30,000 |   |
| Changes in operating assets and  liabilities:                                |       |                         |       |   |   |
| Decrease in accounts receivable                                              |       | —                       |       | 21,257 |   |
| Decrease (increase) in deposits                                              |       | 10,727                       |       | (123,189 | ) |
| Increase in other current assets                                             |       | (800                         | )          | (7,275 | ) |
| Increase (decrease) in accounts payable  and accrued expenses                |       | 147,897                      |       | (62,514 | ) |
| Increase in refunds payable                                                  |       | 8,807                        |       | 4,740 |   |
| Increase in deferred revenue                                                 |       | 15,533                       |       | 65,219 |   |
|                                                                         |       |                         |       |   |   |
| Net cash used by operating activities                                        |       | (424,114                     | )          | (788,210 | ) |
|                                                                         |       |                         |       |   |   |
| **Cash flows from  investing activities**                                    |       |                         |       |   |   |
| ** **                                                                   |       |                         |       |   |   |
| Net cash provided by investing  activities                                   |       | —                       |       | — |   |
|                                                                         |       |                         |       |   |   |
| **Cash flows from  financing activities**                                    |       |                         |       |   |   |
|                                                                         |       |                         |       |   |   |
| Proceeds from sale of stocks and  warrants                                   |       | 300,475                      |       | 183,240 |   |
| Proceeds from exercise of warrants                                           |       | —                       |       | 597,415 |   |
| Proceeds from issuance of note payable                                       |       | —                       |       | 50,000 |   |
| Payments on note payable                                                     |       | —                       |       | (20,000 | ) |
|                                                                         |       |                         |       |   |   |
| Net cash provided by financing  activities                                   |       | 300,475                      |       | 810,655 |   |
|                                                                         |       |                         |       |   |   |
| Net increase (decrease) in cash                                              |       | (123,639                     | )          | 22,445 |   |
| Cash at beginning of period                                                  |       | 177,545                      |       | 32,206 |   |
|                                                                         |       |                         |       |   |   |
| Cash at end of period                                                        |       | $                            | 53,906     |   | $ | 54,651 |   |
|                                                                         |       |                         |       |   |   |
| **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                                             |       | $                            | 111,450    |   | $ | 1,360,200 |   |
| Stock options issued for services                                            |       | $                            | 20,245     |   | $ | 358,960 |   |
| Common stock issued for extinguishment  of debt                              |       | $                            | —     |   | $ | 60,000 |   |
| Common stock issued for stock offering  costs                                |       | $                            | 40,068     |   | $ | 27,450 |   |

 

Theaccompanying notes are an integral part of these consolidated financialstatements

 

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

Notes to Consolidated Financial Statements

June 30, 2009

 

**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 businessactivities, including selling the products or services of the Company’scompetitors.  The Company’s agreementswith these organizations are generally for a term of one year and renewautomatically for additional one-year terms unless written notice oftermination is delivered by either party to the other at least 30 days prior tothe 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 providernetworks that is determined in part based on the number of providersparticipating in the network, the number of members accessing the network, andthe particular products or services offered by the providers.  The Company’s agreements with the providernetworks are generally for a term of between one and two years, may beterminated by either party on between 45 and 180 days’ prior written notice,and renew automatically for additional terms unless so terminated.  Most of these agreements are non-exclusiveand contain confidentiality provisions.

 

**Note2.  Basis of Presentation**

 

Theaccompanying unaudited consolidated financial statements have been prepared inaccordance with accounting principles generally accepted in the United Statesof America and in conformity with the instructions to Form 10-Q and Article 8-03of Regulation S-X and the related rules and regulations of the Securitiesand Exchange Commission (the “SEC”). Accordingly, they do not include all of the information and footnotesrequired by accounting principles generally accepted in the United States ofAmerica for complete financial statements. In the opinion of management, thedisclosures included in these financial statements are adequate to make theinformation presented not misleading.

 

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

Notes to Consolidated Financial Statements

June 30, 2009

 

**Note2.  Basis of Presentation (Continued)**

 

Theunaudited consolidated financial statements included in this document have beenprepared on the same basis as the annual consolidated financial statements andin management’s opinion, reflect all adjustments, including normal recurringadjustments, necessary to present fairly the Company’s financial position,results of operations and cash flows for the interim periods presented. Theunaudited consolidated financial statements should be read in conjunction withthe audited consolidated financial statements and the notes thereto for theyear ended December 31, 2008 included in the Company’s Annual Report on Form 10-K.  The results of operations for the three andsix months ended June 30, 2009 are not necessarily indicative of theresults that the Company will have for any subsequent quarter or full fiscalyear.

 

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 financialstatements and accompanying notes. Actual results could differ from those estimates.  The financial statements include the balancesof National Health Partners, Inc. and its wholly-owned subsidiaries.  All material inter-company balances andtransactions have been eliminated in consolidation.  Certain amounts in the financial statementsfor 2008 have been reclassified to conform to the 2009 presentation.  These reclassifications did not result in anychange to the previously reported total assets, net loss or stockholders’equity.

 

TheCompany’s financial statements have been prepared using accounting principlesgenerally accepted in the United States of America applicable to a goingconcern which contemplates the realization of assets and liquidation ofliabilities in the normal course of business. The Company has historically incurred significant losses, which raisessubstantial doubt about the Company’s ability to continue as a goingconcern.  The accompanying financialstatements do not include any adjustments relating to the recoverability andclassification of asset carrying amounts or the amount and classification ofliabilities that might result from the outcome of this uncertainty.

 

Asof June 30, 2009, the Company’s significant accounting policies andestimates, which are detailed in the Company’s Annual Report on Form 10-Kfor the year ended December 31, 2008, have not changed materially.

 

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

Notes to Consolidated Financial Statements

June 30, 2009

 

**Note 3.  Stock CompensationExpense**

 

TheCompany records employee stock-based compensation using the fair valuerecognition provisions of Statement of Financial Accounting Standards No. 123(revised 2004), *“Share-Based Payment,”* using themodified prospective transition method, and records non-employee stock-basedcompensation expense in accordance with Statement of Financial AccountingStandards No. 123, *“Accounting ForStock-Based Compensation”*and Emerging Issues Task Force No. 96-18*“Accounting for Equity Instruments That Are Issuedto Other Than Employees for Acquiring or in Conjunction with Selling Goods orServices”* (“EITF 96-18”).  Inaccordance therewith, the Company recognized stock compensation expense of$243,621 and $213,225 for the three months ended June 30, 2009 and 2008,respectively, and $410,155 and $501,036 for the six months ended June 30,2009 and 2008, respectively.

 

**Note 4.** **Loss PerShare**

 

Basicloss per share is based on the weighted average number of shares of the Company’scommon stock outstanding during the applicable period, and is calculated bydividing the reported net loss for the applicable period by the weightedaverage number of shares of common stock outstanding during the applicableperiod.  The Company calculates dilutedloss per share by dividing the reported net loss for the applicable period bythe weighted average number of shares of common stock outstanding during theapplicable period as adjusted to give effect to the exercise of all potentiallydilutive options and warrants outstanding at the end of the period.  A total of 17,438,650 and 18,739,092 shares ofcommon stock underlying options and warrants that were outstanding on June 30,2009 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 period.

 
| ** **                                                            | ** ** | **For the Three Months********Ended June 30,** | ** ** | **For the Six Months********Ended June 30,** | ** ** |
|-----------------------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                            | ** ** | **2009**                                            | ** ** | **2008**                                          | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                                                  |       |                                                |       |                                              |       |   |   |   |   |
| Net loss as reported                                                  |       | $                                                   | (563,088   | )                                                 | $          | (381,002 | ) | $ | (1,028,365 | ) | $ | (1,237,716 | ) |
|                                                                  |       |                                                |       |                                              |       |   |   |   |   |
| Weighted average numberof shares  outstanding –basic and diluted |       | 59,344,518                                          |       | 46,033,765                                        |       | 56,263,627 |   | 42,930,508 |   |
|                                                                  |       |                                                |       |                                              |       |   |   |   |   |
| Loss per share – basic and diluted                               |       | $                                                   | (0.01      | )                                                 | $          | (0.01 | ) | $ | (0.02 | ) | $ | (0.03 | ) |

 

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

Notes to Consolidated Financial Statements

June 30, 2009

 

**Note5.  Property and Equipment**

 

Propertyand equipment consisted of the following at June 30, 2009:

 
| **Asset**                      | ** ** | **Amount** | ** ** |
|--------------------------------|------------|------------|------------|
|                           |       |       |       |
| Computers                      |       | $          | 60,708     |   |
| Software                       |       | 6,109      |       |
| Furniture                      |       | 27,968     |       |
| Telephone                      |       | 80,780     |       |
| Website                        |       | 106,477    |       |
| Less: accumulated depreciation |       | (260,132   | )          |
|                           |       |       |       |
| Net property and equipment     |       | $          | 21,910     |   |

 

Depreciation expense was$4,685 and $8,570 for the three months ended June 30, 2009 and 2008,respectively, and $11,932 and $20,233 for the six months ended June 30,2009 and 2008, respectively.

 

**Note6.   Deposits**

 

# **Deposits consist of cashreserves held by merchant processors that the Company uses to process creditcard transactions and the security deposit held by the lessor of the Company’soffice space. **Each agreement that the Company has entered into with merchant processorscontains a standard provision that gives the merchant processors the right towithhold funds from the proceeds generated by the Company through the sale ofits membership programs through credit card transactions.  The amount ofthe reserves may be increased or decreased by each merchant processor at anytime based on the perceived risk exposure of the merchant processor.  Themerchant processors are required to return the amount of funds that theywithhold from the proceeds within no less than six months and no more than ninemonths of the date such funds were originally withheld.  As a result, theCompany expects to receive all such funds within six to nine months of the datesuch funds were originally withheld by the merchant processors.

# ** **

Asof June 30, 2009, the Company had a total of $122,651 in deposits.  Of this amount, $75,000 was being held byPowerPay Payment Systems, Inc., $28,651 was being held by PayTran PaymentSystems, and $19,000 was being held by the lessor of the Company’s officespace.

 

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

Notes to Consolidated Financial Statements

June 30, 2009

 

**Note7.  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 a lease for its office facility located inHorsham, Pennsylvania which was most recently amended on March 13,2007.  The amendment extended the term ofthe lease from May 31, 2007 to May 31, 2010.  The amendment provides for an initial monthlyrent payment of $7,803 and an initial monthly operating expense payment ofapproximately $5,620.

 

Future minimum lease payments under this facility lease are as follows:

 
| **Fiscal Year** | ** ** | **Amount** | ** ** |
|----------------------|------------|------------|------------|
|                 |       |       |       |
| 2009                 |       | $          | 88,205     |   |
| 2010                 |       | 73,504     |       |
|                 |       |       |       |
|                 |       | $          | 161,709    |   |

 

**EmploymentAgreements**

 

TheCompany is a party to employment agreements with each of its current executiveofficers.  Future minimum payments underthese employment agreements are as follows:

 
| **Fiscal Year** | ** ** | **Amount** | ** ** |
|-----------------|------------|------------|------------|
|            |       |       |       |
| 2009            |       | $          | 533,773    |   |
| 2010            |       | 144,161    |       |
|            |       |       |       |
|            |       | $          | 677,934    |   |

 

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

Notes to Consolidated Financial Statements

June 30, 2009

 

**Note8.  2006 Stock Incentive Plan**

 

OnFebruary 2, 2006, the Company adopted the National Health Partners, Inc.2006 Stock Incentive Plan.  Under theplan, 4,500,000 shares of common stock may be granted to employees, officersand directors of, and consultants and advisors to, the Company under awardsthat may be made in the form of stock options, warrants, stock appreciationrights, restricted stock, restricted units, unrestricted stock and otherequity-based or equity-related awards. As of June 30, 2009, all shares of common stock had been issued underthe 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 SEC covering the public sale of the 4,500,000 shares of common stockavailable for issuance under the plan.

 

**Note9.  2008 Stock Incentive Plan**

 

OnApril 7, 2008, the Company adopted the National Health Partners, Inc.2008 Stock Incentive Plan.  Under theplan, 3,000,000 shares of common stock may be granted to employees, officersand directors of, and consultants and advisors to, the Company under awardsthat may be made in the form of stock options, warrants, stock appreciationrights, restricted stock, restricted units, unrestricted stock and otherequity-based or equity-related awards. As of June 30, 2009, all shares of common stock had been issuedunder 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.

 

**Note10.  401(k) Plan**

 

On January 15, 2007, the Company adopted the National HealthPartners, Inc. 401(k) Plan. Under the plan, eligible employees mayelect to contribute up to 100% of their compensation to the plan each year,subject to certain limitations 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 $2,177 and $8,025 to the plan during thethree months ended June 30, 2009 and 2008, respectively, and $4,888 and$15,645 to the plan during the six months ended June 30, 2009 and 2008,respectively.

 

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

Notes to Consolidated Financial Statements

June 30, 2009

 

**Note11.  Common Stock and Warrants**

 

TheCompany’s authorized capital consisted of 100,000,000 shares of common stock,$0.001 par value per share, at June 30, 2009 and 2008, respectively, ofwhich 62,439,081 and 47,454,356 shares of commonstock were outstanding at June 30, 2009 and 2008, respectively.  Warrants exercisable into an aggregate of8,037,150 and 9,819,092 shares of the Company’s common stock were outstandingon June 30, 2009 and 2008, respectively.

 

**Non Capital-Raising Transactions**

 

InJanuary 2009, the Company issued a total of 600,000 shares of common stockto a consultant pursuant to a consulting agreement. The shares were valued atthe closing price of the Company’s common stock on the date the agreement wasexecuted for total consideration of $30,000. The Company recognized $2,493 and $4,767of expense during the three and six months ended June 30, 2009 inconnection with the issuance of these shares.

 

In June 2009, the Company issued 500,000 and405,000 shares of common stock to David M. Daniels, its President and ChiefExecutive Officer, and Alex Soufflas, its Vice President and Chief FinancialOfficer, respectively, in full payment of deferred salary compensation that wasearned by each of them during the three months ended March 31, 2009 andpayable to each of them as of March 31, 2009.  The shares were valued at $0.09 per share fortotal consideration of $81,450, all of which was recognized as expense duringthe three and six months ended June 30, 2009.

 

## **Capital-RaisingTransactions**

## ** **

## **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 ofcommon stock for 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.  Each warrant gives the holder theright to purchase one share of common stock. The Class A warrants have an exercise price of $0.075 per share,are exercisable during the period commencing on the date of grant and ending September 30,2009, and expire at the end of the exercise period.

 

In May 2009, the Company sold 2,000,000 sharesof common stock and Class A warrants exercisable into 1,000,000 shares ofcommon stock to an accredited investor for aggregate gross proceeds of$100,000.  The Company paid finder feesconsisting of 200,000 shares of common stock and 100,000 Class Awarrants.  The Class A warrants havean exercise price of $0.075 per share, are exercisable during the periodcommencing on the date of grant and ending December 31, 2009, and expireat the end of the exercise period.

 

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

Notesto Consolidated Financial Statements

June 30, 2009

 

**Note12.  Stock Options**

 

Stockoptions exercisable into an aggregate of 9,401,500 and 8,920,000 shares of theCompany’s common stock were outstanding on June 30, 2009 and 2008,respectively, of which 7,384,000 and 6,237,500 shares were vested,respectively.  No options were exercisedduring the three and six months ended June 30, 2009 and 2008,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 Statement ofFinancial Accounting Standards No. 148, *“Accountingfor Stock-Based Compensation — Transition and Disclosure.”*  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 227% and 282%, a risk-free interest rate ofbetween 2.25% and 5% and a remaining contractual life of between 9.15 and 9.95years.

 

InJune 2009, the Company issued a stock option to Patricia S. Bathurst toacquire 225,000 shares of common stock in full payment of deferred salarycompensation 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.  The option has a term of 10 years and wasvalued at $20,245 on the date of grant, all of which was recognized as expenseduring the three and six months ended June 30, 2009.

 

**Note13.  Subsequent Events**

## ** **

## **The Company has performed anevaluation of subsequent events through August 10, 2009, which is the datethe financial statements were issued.  Other than the events noted below,the Company is not aware of any subsequent events which would requirerecognition or disclosure in the financial statements.**

## ** **

## **In July 2009, theCompany completed a private offering of 500,000 shares of its common stock and**Class A warrantsexercisable into 250,000 shares of common stock for aggregate cashconsideration of $30,000.  The shareswere sold in units consisting of two shares of common stock and one Class Awarrant at a purchase price of $0.12 per unit.  Each warrant gives the holder the right to purchase one share of commonstock.  The Class A warrants have anexercise price of $0.06 per share, are exercisable during the period commencingon the date of grant and ending December 31, 2009, and expire at the endof the exercise period.

## ** **

In July 2009, the Company sold 2,000,000 sharesof common stock and Class A warrants exercisable into 2,000,000 shares ofcommon stock to an accredited investor for aggregate gross proceeds of$100,000.  The Company paid finder feesconsisting of 200,000 shares of common stock and 200,000 Class Awarrants.  The Class A warrants havean exercise price of $0.05 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.

 

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

Notesto Consolidated Financial Statements

June 30, 2009

 

**Note13.  Subsequent Events (Continued)**

## ** **

## **In August 2009, theCompany completed a private offering of 2,150,000 shares of its common stock,**Class A warrantsexercisable into 1,075,000 shares of common stock and Class B warrantsexercisable into 1,075,000 shares of common stock for aggregate cashconsideration of $107,500.  The shareswere 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.   Each warrant gives the holder theright to purchase one share of common stock. The Class A warrants have an exercise price of $0.05 per share, areexercisable during the period commencing on the date of grant and ending 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 during the period commencing on thedate of grant and ending December 31, 2010, and expire at the end of theexercise period.

 

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**DISCLOSURE REGARDINGFORWARD-LOOKING STATEMENTS**

 

This reportcontains “forward-looking statements” within the meaning of Section 27A ofthe 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-looking terminologysuch as “may,” “will,” “expects,” “intends,” “plans,” “projects,” “estimates,” “anticipates,”or “believes” or the negative thereof or any variation thereon or similarterminology or expressions.

 

These forward-looking statements are subject to risksand uncertainties that could cause actual results to differ materially fromresults proposed in such statements. Although we believe that the expectations reflected in suchforward-looking statements are reasonable, we can give no assurance that such expectationswill prove to have been correct. Important factors that could cause actual results to differ materiallyfrom our expectations include, but are not limited to:

 

·                  our ability to fund futuregrowth and implement our business strategy;

 

·                  our dependence on a limitednumber of preferred provider organizations (“PPOs”) and other healthcareprovider networks;

 

·                  our dependence on a singleinsurance company for the insurance benefits offered as part of our CARExpressPlusTM programs;

 

·                  our dependence upon alimited number of marketing and distribution partners for substantially all ofour revenue;

 

·                  our ability to market ourmembership programs and develop and expand the market for our membershipprograms;

 

·                  demand for and acceptance ofour membership programs;

 

·                  competition in the healthdiscount membership market;

 

·                  our ability to attract andretain qualified personnel;

 

·                  legislative or regulatorychanges in the healthcare industry;

 

·                  the condition of thesecurities and capital markets;

 

·                  general economic andbusiness conditions, either nationally or internationally or in thejurisdictions in which we are doing business;

 

and statements of assumptionunderlying any of the foregoing, as well as any other factors set forth hereinunder *“Item 2. Management’s Discussion and Analysis of Financial Condition and Resultsof Operations”* below and *“Item 1A.  Risk Factors”* of our Annual Reporton Form 10-K for our fiscal year ended December 31, 2008.  All subsequent written and oralforward-looking statements attributable to us, or persons acting on our behalf,are expressly qualified in their entirety by the foregoing.  Except as required by law, we assume no dutyto update or revise our forward-looking statements.

 

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**Item 2.  Management’s Discussionand Analysis of Financial Condition and Results of Operations.**

 

Unless otherwiseindicated or the context otherwise requires, all references to the “Company,”the “registrant” “we,” “us” or “our” and similar terms in this report refer toNational Health Partners, Inc. and its subsidiaries.

 

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 herein and under the caption *“Item 1A.  Risk Factors”*in our Annual Report on Form 10-K for our fiscal year ended December 31,2008.  The following should be read inconjunction with our consolidated financial statements included above in Item 1of Part I of this report.

 

**Overview**

 

Weare a national healthcare membership organization that was formed to addressthe need for affordable healthcare nationwide. We create, market and sell membership programs to predominantlyunderserved markets in the healthcare industry through a national healthcaresavings network called CARExpressTM.  CARExpressTM is a network of hospitals, doctors, dentists,pharmacists and other healthcare providers comprised of over 1,000,000healthcare providers that render their services and products to CARExpressTM members at discounted prices.  CARExpressTM enablespeople to engage in point-of-service transactions directly with thesehealthcare providers and pay discounted prices to the providers.

 

Ourmembership programs offer savings on healthcare services to persons who areuninsured or underinsured by providing them with access to the same PPOs thatare utilized by employers that self-fund at least a portion of their employees’healthcare costs.  Our membershipprograms are also used to supplement benefit plans and fill in the gaps createdby the need to reduce health benefits to keep the costs of health insurancereasonable.  We sell our membershipprograms directly through our sales force and indirectly through brokers andagents, unions and associations, small businesses and other organizations.

 

Weare actively engaged in marketing our membership programs to the public.  Our primary objective is to generate increasedsales of our membership programs while expanding our position as a provider ofunique healthcare membership service programs. The target market for our membership programs is comprised ofindividuals who have either limited health benefits or no health benefits.  Our share of this market is currently lessthan one percent and has been less than one percent since our inception.  Since we are not currently large enough topursue and support the entire market, we intend to continue to pursue specificopportunities that we identify in this market through our various marketing anddistribution channels.  Through productdesign, competitive membership pricing, and a variety of marketing anddistribution partners, we are pursuing opportunities in the healthcare marketthat insurance companies have not addressed.

 

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**Operational Metrics**

 

Ourrevenue consists almost exclusively of recurring monthly membership fees thatwe receive from members of our membership programs.  Our members pay us membership fees each monthfor the duration of their membership. The average membership fee per member per month that we receive for ourCARExpressTM health discount programs is approximately$35.  Approximately 95% of the CARExpressTM health discount programs that we have sold toour current members consist of our Comprehensive Care Program which iscurrently sold at a monthly retail price of $39.95.  The remaining CARExpressTM health discount programs that we have sold toour current members consist of a mix of our less expensive programs.  Approximately 90% of the CARExpress PlusTM membership programs that we have sold to ourcurrent members consist of our CARExpress PlusTM Gold Programwhich is currently sold at a monthly retail price of $137.  The remaining CARExpress PlusTM membership programs that we have sold to ourcurrent members consist of a mix of our other programs.

 

Wereceive each member’s initial monthly payment and billing information at thebeginning of the first monthly membership period.  Monthly payments for subsequent periods arereceived at the beginning of the applicable period.  The monthly membership fees that we receiveare 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.

 

Akey metric that we use to evaluate our success is our member retentionrates.  Member retention rates representthe percentage 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 ourmembership programs;

 

·                  the financial condition and loyalty of ourmembers;

 

·                  the distribution channel selling our membershipprograms; and

 

·                  the type and amount of compensation beingpaid to our marketing and distribution partners to sell our membershipprograms.

 

Wehave obtained valuable information regarding member demographics through themarketing and advertising campaigns that we have conducted and are focusing ourmarketing and advertising campaigns on members and member groups that we haveidentified as being most suitable for our membership programs.  As a result, we expect our retention rates tocontinue to improve over the next 12 months as we pursue these opportunitiesthrough our various marketing and distribution channels.

 

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**FinancialResults and Outlook**

 

Ourstrategy is to continue to expand our position as a provider of unique discounthealthcare membership programs.  We haveimplemented several strategic growth initiatives during the past 12 monthsthrough which we achieved new contracts and strategic partnerships with anumber of organizations.  One of theseinitiatives involved a shift in our sales strategy from sales through marketingcompanies to sales through employers and affinity groups, such as unions,associations, chambers of commerce, small business networks and web marketinggroups.  These organizations typicallyhave a large number of members and customers and thus, each one provides uswith the opportunity to obtain a large number of sales.

 

Weexperienced a decrease in revenue for the three and six months ended June 30,2009 compared to the three and six months ended June 30, 2008 as a resultof the aforementioned shift in our sales strategy.  However, the shift in our sales strategy,coupled with cost-cutting initiatives that we implemented over the past fewquarters in response to deteriorating economic conditions, have resulted inlower direct costs and also resulted in a substantial decrease in net cash usedby operating activities during the six months ended June 30, 2009 comparedto the six months ended June 30, 2008.

 

Wegenerated revenue of $375,228 and $793,071 for the three and six months ended June 30,2009, respectively, compared to revenue of $882,016 and $1,704,193 for thethree and six months ended June 30, 2008, respectively.  We achieved a gross profit of $149,195 and$435,094 for the three and six months ended June 30, 2009, respectively,compared to a gross profit of $648,481 and 1,002,783 for the three and sixmonths ended June 30, 2008, respectively. We recognized a net loss of $(563,088) and $(1,028,365) for the threeand six months ended June 30, 2009, respectively, and a net loss per shareof $(0.01) and $(0.02) for the three and six months ended June 30, 2009,respectively.  By comparison, werecognized a net loss of $(381,002) and $(1,237,716) for the three and sixmonths ended June 30, 2008, respectively, and a net loss per share of$(0.01) and $(0.03) for the three and six months ended June 30, 2008,respectively.  Net cash used by operatingactivities was $(424,114) for the six months ended June 30, 2009 comparedto $(788,210) for the six months ended June 30, 2008, representing adecrease of 46%.

 

Wewill generate future revenue and members primarily through sales of ourCARExpressTM health discount programs and our CARExpressPlusTM membership programs to employees and membersof affinity groups through our direct sales force, our marketing anddistribution partners, and various marketing and advertising campaigns.  During the month of July 2009, weexperienced rapid growth in the number of new members that we are generatingthrough our business partners.  We haveentered into agreements with several affinity groups through which we aregenerating sales of our CARExpressTM membershipprograms and are currently in discussions with several other organizationsregarding the sale of our CARExpressTM membershipprograms.  We are also in discussionswith several organizations regarding the development of customized CARExpressTM programs that combine specific CARExpressTM benefits, like vision, dental, pharmacy and24-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, proceeds from theissuance of equity securities.  We willuse any additional investments that we

 

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receiveto accelerate the expansion of each of our advertising campaigns and programsand increase sales of our membership programs.

 

We expect the number ofCARExpressTM members generated each month to increase as anumber of deals that we have either recently closed or that we expect to closebegin to generate members for us.  Wealso expect the number of CARExpressTM membersgenerated each month to continue to increase throughout the year and expect ourretention rates to improve over the next 12 months since members generatedthrough affinity groups have historically remained members of CARExpressTM for a much longer period of time than membersgenerated through marketing companies. As a result, we expect to generate an increasing amount of revenue andcash flows from operating activities during the year ending December 31,2009.  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, that we will generateincreased revenue and cash flows from operating activities during the yearended December 31, 2009.

 

**Critical Accounting Policies**

 

For information regardingour critical accounting policies, please refer to the discussion provided inour Annual Report on Form 10-K for our fiscal year ended December 31,2008 under the caption *“Item 7.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations — Critical Accounting Policies”*and our Notes to Consolidated Financial Statements included therein.

 

**RecentAccounting Pronouncements**

 

For information regarding recent accountingpronouncements applicable to our business, please refer to the discussionprovided in our Annual Report on Form 10-K for our fiscal year ended December 31,2008 under the caption *“Item 7.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations — Recent AccountingPronouncements”* and our Notes to Consolidated Financial Statementsincluded therein.

 

**Comparison of the Three-Month Periods Ended June 30, 2009 and 2008**

 

Revenue

 

Revenue consists almost exclusively of the monthlymembership fees that we receive from members of our membership programs.  Revenue decreased $506,788 to $375,228 forthe three months ended June 30, 2009 from $882,016 for the three monthsended June 30, 2008.  The decreaseof $506,788 resulted primarily from a decrease in sales of our membershipprograms through marketing companies in connection with the shift in our salesstrategy from sales through marketing companies to sales through employers andaffinity groups.  Approximately 75% ofthe revenue that we generated during the three months ended June 30, 2009was derived from sales of our membership programs to first-time members,compared to approximately 30% during the three months ended June 30,2008.  The remainder of the revenue thatwe generated during these periods was derived from existing members.  We expect revenue to increase over the next12 months as a result of increased sales of our membership programs toemployees and

 

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members of affinity groups through our direct sales force, ourmarketing and distribution partners and our various marketing and advertisingcampaigns.

 

Direct Costs

 

Direct costs consist ofsales commissions that we pay to our marketing and distribution partners andfees that we pay to our PPOs and provider networks for access to theirnetworks.  Direct costs decreased $7,502to $226,033 for the three months ended June 30, 2009, from $233,535 forthe three months ended June 30, 2008. The decrease of $7,502 was due to a decrease of $31,872 for PPO andprovider network costs, partially offset by an increase of $24,370 for salescommissions paid in connection with the acquisition of new members.  We expect our direct costs to increase overthe next 12 months as increased sales of our membership programs result inhigher overall sales commission expenses and provider network costs.

 

Selling and Marketing Expenses

 

Selling and marketing expenses consist ofadvertising expenses, marketing expenses, salaries and other compensation paidto employees selling and marketing our membership programs, rent expenseallocated to our selling and marketing activities, depreciation andamortization expense allocated to our selling and marketing activities, and allother selling and marketing expenses incurred by us.  Selling and marketing expenses decreased$25,000 to $31,050 for the three months ended June 30, 2009, from $56,050for the three months ended June 30, 2008. The decrease of $25,000 was due primarily to a decrease of $20,953 forsalaries and other compensation paid to employees selling and marketing ourmembership programs.  We expect sellingand marketing expenses to increase during the next 12 months as we grow ourdirect sales force and engage in larger and more frequent marketing andadvertising campaigns and activities.

 

General and Administrative Expenses

 

General and administrativeexpenses consist primarily of employee compensation expense, professional feesand other general and administrative expenses.

 

*Employee Compensation 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$104,106 to $452,984 for the three months ended June 30, 2009, from$557,090 for the three months ended June 30, 2008.  The decrease of $104,106 was due primarily todecreases of $57,276 for salary expense and $32,381 for restricted stock awardexpense.  We expect employee compensationexpense to increase over the next 12 months as we begin to hire additionalemployees to support the growth of our business.

 

*Professional Fees*.  Professional fees consist of fees paid to ourindependent accountants, lawyers, technology consultants and otherprofessionals and consultants. Professional fees decreased $58,033 to $69,340 for the three monthsended June 30, 2009 from $127,373 for the

 

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three months ended June 30,2008.  The decrease of $58,033 was dueprimarily to decreases of $38,916 for the amount of expense recognized inconnection with equity-based compensation paid to service providers andconsultants for various services, and $16,773 for legal fees.  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 AdministrativeExpenses*.  Othergeneral and administrative expenses consist of office supplies expense,computer hardware and system costs, bank service charges, filing fees and dues,non-employee customer service representative expense, rent expense, healthinsurance 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 associated withour selling and marketing activities. Other general and administrative expenses decreased $130,092 to $158,913for the three months ended June 30, 2009 from $289,005 for the threemonths ended June 30, 2008.  Thedecrease of $130,092 resulted primarily from decreases of $74,813 for bankservice charges associated with new and recurring member transactions, $19,147for insurance and $21,976 for repairs, 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.

 

Net Loss

 

Our net loss increased $182,086 to $563,088 for thethree months ended June 30, 2009, from $381,002 for the three months endedJune 30, 2008.  The increase of$182,086 was primarily due to a decrease of $506,788 for revenue, partiallyoffset by decreases of $130,092 for other general and administrative expenses,$104,106 for employee compensation expenses, $58,033 for professional fees and$25,000 for selling and marketing expenses. We expect to begin generating a net profit from operations as therecurring membership fees from our increasing membership base overtake thecosts associated with obtaining and retaining members.

 

**Comparison of the Six-Month Periods Ended June 30, 2009 and 2008**

 

Revenue

 

Revenue decreased $911,122 to $793,071 for the sixmonths ended June 30, 2009 from $1,704,193 for the six months ended June 30,2008.  The decrease of $911,122 resultedprimarily from a decrease in sales of our membership programs through marketingcompanies in connection with the shift in our sales strategy from sales throughmarketing companies to sales through employers and affinity groups.  Approximately 60% of the revenue that we generatedduring the six months ended June 30, 2009 was derived from sales of ourmembership programs to first-time members, compared to approximately 50% duringthe six months ended June 30,

 

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2008.  The remainder of therevenue that we generated during these periods was derived from existingmembers.

 

Direct Costs

 

Direct costs decreased$343,433 to $357,977 for the six months ended June 30, 2009, from $701,410for the six months ended June 30, 2008. The decrease of $343,433 was due to decreases of $202,598 for salescommissions and $140,835 for PPO and provider network costs resulting from thedecrease in sales of our membership programs.

 

Selling and Marketing Expenses

 

Selling and marketing expenses decreased $67,884 to$67,091 for the six months ended June 30, 2009, from $134,975 for the sixmonths ended June 30, 2008.  Thedecrease of $67,884 was due primarily to a decrease of $54,779 for salaries andother compensation paid to employees selling and marketing our membershipprograms.

 

General and Administrative Expenses

 

*Employee Compensation Expense*.  Employee compensation expense decreased$143,048 to $932,007 for the six months ended June 30, 2009, from$1,075,055 for the six months ended June 30, 2008.  The decrease of $143,048 was due primarily todecreases of $83,285 for salary expense and $40,844 for restricted stock awardexpense.

 

*Professional Fees*.  Professional fees decreased $203,727 to $173,105for the six months ended June 30, 2009 from $376,832 for the six monthsended June 30, 2008.  The decreaseof $203,727 was due primarily to decreases of $151,569 for the amount ofexpense recognized in connection with equity-based compensation paid to serviceproviders and consultants for various services, and $50,126 for legal fees.

 

*Other General and AdministrativeExpenses*.  Othergeneral and administrative expenses decreased $332,338 to $291,343 for the sixmonths ended June 30, 2009 from $623,681 for the six months ended June 30,2008.  The decrease of $332,338 resultedprimarily from decreases of $186,876 for bank service charges associated withnew and recurring member transactions, $28,974 for repairs, $20,425 forinsurance, $18,879 for printing and reproduction costs, $17,437 for dues,subscriptions and corporate filing fees, $12,868 for postage and delivery costsand $11,747 for office supplies, as well as decreases in other miscellaneousgeneral and administrative expenses.

 

Loss on the Extinguishmentof Debt

 

Loss on the extinguishmentof debt consists of the loss that we recognized in 2008 in connection with thepayment of $20,000 and the issuance of 240,000 shares of common stock to a debtholder in full payment of all principal and interest that was due and payableunder a $50,000 promissory note and a mutual release from any and all claimsarising out of the promissory note.  Werecognized a loss on the extinguishment of debt of $30,000 during the six

 

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months ended June 30,2008 in connection with the issuance of these shares.  We did not recognize any such loss during thesix months ended June 30, 2009.  Wedo not expect to recognize any additional gains or losses on the extinguishmentof debt in the foreseeable future.

 

Net Loss

 

Our net loss decreased $209,351 to $1,028,365 for thesix months ended June 30, 2009, from $1,237,716 for the six months ended June 30,2008.  The decrease of $209,351 was dueprimarily to decreases of $343,433 for direct costs incurred in connection withthe sale of our membership programs, $332,338 for other general andadministrative expenses, $203,727 for professional fees, $143,048 for employeecompensation expenses and $67,884 for selling and marketing expenses, partiallyoffset by a decrease of $911,122 for revenue.

 

**Liquidity and Capital Resources**

 

Sinceour inception, we have funded our operations primarily through private sales ofequity securities.  As of August 1,2009, we had cash and cash equivalents of approximately $160,000.

 

Netcash used by operating activities was $424,114 for the six months ended June 30,2009, compared to $788,210 for the six months ended June 30, 2008.  The $364,096 decrease in cash used byoperating activities was due primarily to a decrease of $209,351 for net lossand increases of $210,411 for accounts payable and accrued expenses and$133,916 for deposits.  These amountswere partially offset by decreases of $90,880 for equity-based compensationexpense, $30,000 for loss on the extinguishment of debt and $49,686 fordeferred revenue.

 

Wedid not have any cash flows from investing activities for the six months ended June 30,2009 and 2008.

 

Net cash provided byfinancing activities was $300,475 for the six months ended June 30, 2009,compared to $810,655 for the six months ended June 30, 2008.  The $510,180 decrease in cash provided byfinancing activities was due to decreases of $480,180 for proceeds from thesale of stock and exercise of warrants and $50,000 for proceeds from theissuance of debt. These amounts were partially offset by a decrease of $20,000for payments on debt.

 

Ourprimary sources of capital over the past 12 months are set forth below.

 

In April 2009, we completed aprivate offering of 5,346,000 shares of our common stock and Class Awarrants exercisable into 2,673,000 shares of our common stock for aggregategross proceeds of $200,475.  The Class Awarrants have an exercise price of $0.075 per share, are exercisable until September 30,2009 and expire at the end of the exercise period.

 

In May 2009, we sold 2,000,000 shares of ourcommon stock and Class A warrants exercisable into 1,000,000 shares of ourcommon stock for aggregate gross proceeds of $100,000.  The Class A warrants have an exerciseprice of $0.075 per share, are exercisable until December 31, 2009 andexpire at the end of the exercise period.

 

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## **In July 2009, wecompleted a private offering of 500,000 shares of our common stock and Class Awarrants exercisable into 250,000 shares of our common stock for aggregate cashconsideration of $30,000.  The Class Awarrants have an 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 ourcommon stock and Class A warrants exercisable into 2,000,000 shares of ourcommon stock for aggregate gross proceeds of $100,000.  The Class A warrants have an exerciseprice of $0.05 per share, are exercisable until December 31, 2010 andexpire at the end of the exercise period.

 

## **In August 2009, wecompleted 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.**

## ** **

Duringthe period beginning January 1, 2008 and ending August 1, 2009, weissued 3,463,250 shares of common stock upon the exercise of warrants atexercise prices ranging between $0.12 and $0.40 per share for aggregate grossproceeds of $597,415.

 

To date, our capital needs have been met primarily through sales ofequity securities and proceeds received upon the exercise of warrants held byour security holders.  We do notcurrently maintain a line of credit or term loan with any commercial bank orother financial institution.  We haveused the proceeds from the exercise of warrants and our private offerings ofsecurities to pay virtually all of the costs and expenses we haveincurred.  These costs and expenses werecomprised of operating expenses, which consisted of the employee compensationexpenses, professional fees and other general and administrative expensesdiscussed above, and the costs of sales discussed above to the extent suchcosts of sales exceeded 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 additional equity wouldresult in dilution to our existing shareholders.  We have not made arrangements to obtainadditional financing and we can provide no assurance that additional financingwill be available in an amount or on terms acceptable to us, if at all.  If we are unable to obtain additional fundswhen they are needed or if such funds cannot be obtained on terms favorable tous, we may be unable to execute upon our business plan or pay our costs andexpenses as they are incurred, which could have a material, adverse effect onour business, financial condition and results of operations.

 

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**Off-BalanceSheet Arrangements**

 

As of June 30, 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.

 

**Item 4T.  Controls and Procedures.**

 

As of June 30, 2009, we carried out the evaluation of the effectiveness of our disclosure controls and procedures required by Rule 13a-15(e) under the Exchange Act under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer.  Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2009, our disclosure controls and procedures were effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is: (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

 

There has been no change in our internal control over financial reporting identified in connection with this evaluation that occurred during our fiscal quarter ended June 30, 2009that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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**PART II — OTHER INFORMATION**

 

**Item  2.  Unregistered Sales of Equity Securities andUse of Proceeds.**

 

During the three months ended June 30, 2009, wesold the following securities without registration under the SecuritiesAct of 1933, as amended (the “Securities Act”):

 

## **In April 2009, wecompleted a private offering of 5,346,000 shares of our common stock and Class Awarrants exercisable into 2,673,000 shares of our common stock for aggregatecash consideration of $200,475.  Theshares were sold in units consisting of two shares of our common stock and one Class Awarrant at a purchase price of $0.075 per unit.   We paid finder fees consisting of 801,800shares of our common stock and Class A warrants exercisable into 400,900shares of our common stock.  Each warrantgives the holder the right to purchase one share of our common stock.  The Class A warrants have an exerciseprice of $0.075 per share, are exercisable during the period commencing on thedate of grant and ending September 30, 2009, and expire at the end of theexercise period.   These securities wereissued to a limited number of accredited investors in private placementtransactions exempt from the registration requirements of the Securities Actpursuant to Section 4(2) of the Securities Act directly by us withoutengaging in any advertising or general solicitation of any kind.**

## ** **

## **In May 2009, we sold2,000,000 shares of common stock and Class A warrants exercisable into1,000,000 shares of common stock to an accredited investor for aggregate grossproceeds of $100,000.  We paid finderfees consisting of 200,000 shares of common stock and 100,000 Class Awarrants.  Each warrant gives the holderthe right to purchase one share of our common stock.  The Class A warrants have an exerciseprice of $0.075 per share, are exercisable during the period commencing on thedate of grant and ending December 31, 2009, and expire at the end of theexercise period. These securities were issued to a limited number of accreditedinvestors in private placement transactions exempt from the registrationrequirements of the Securities Act pursuant to Section 4(2) of theSecurities Act directly by us without engaging in any advertising or generalsolicitation of any kind.**

## ** **

InJune 2009, we issued 500,000 and 405,000 shares of our common stock toDavid M. Daniels and Alex Soufflas, respectively, and a stock option toPatricia S. Bathurst to acquire 225,000 shares of our common stock 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 option that we granted to Ms. Bathursthas a term of 10 years, an exercise price of $0.09 per share and was vested infull on the date of grant.  Thesecurities were issued to a limited number of accredited investors in privateplacement transactions exempt from the registration requirements of theSecurities Act pursuant to Section 4(2) of the Securities Actdirectly by us without engaging in any advertising or general solicitation ofany kind and without payment of underwriting discounts or commissions to anyperson.

 

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**Item 6.  Exhibits.**

 

The following exhibits are included herein:

 
| **Exhibit No.** | ** ** | **Exhibit**                                                                                                                                                               |
|----------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                                      |
| 31.1                 |       | Certification of Chief Executive Officer of the registrant required  by Rule 13a-14(a) under the Securities Exchange Act of 1934, as  amended                   |
|                 |       |                                                                                                                                                                      |
| 31.2                 |       | Certification of Chief Financial Officer of the registrant 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 of the registrant required by Rule 13a-14(b)  under the Securities Exchange Act of 1934, as amended |

 

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**SIGNATURES**

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, the registrant has duly caused thisreport to be signed on its behalf by the undersigned thereunto duly authorized.

 
|                       | NATIONAL HEALTH PARTNERS, INC. |
|----------------------------|--------------------------------|
|                       |                           |
|                       |                           |
| Date: August 14, 2009 | /s/ David M. Daniels           |
|                       | David M. Daniels               |
|                       | Chief Executive Officer        |

 

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**EXHIBITINDEX**

 
| **Exhibit** | ** ** | **Exhibit Description**                                                                                                                            |
|-------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |       |                                                                                                                                                    |
| 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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