**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:**  **March 31, 2008**

 

**or**

 

**o****                                ****TRANSITION REPORTPURSUANT 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 asspecified in its charter)

 

| **Indiana**                                                     | ** ** | **04-3786176**                     |
|-----------------------------------------------------------------|------------|------------------------------------|
| (State or other jurisdiction of

incorporation or organization) |       | (IRS Employer

Identification No.) |

 

**120 Gibraltar Road**

**Suite 107**

**Horsham, PA  19044**

(Address of Principal Executive Offices)

 

**(215) 682-7114**

(Issuer’s Telephone Number,including Area Code)

 

Indicate by check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or 15(d) ofthe Securities 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

 

Indicate bycheck mark whether the registrant is a large accelerated filer, an acceleratedfiler, a non-accelerated filer, or a smaller reporting company. See definitionsof “large accelerated filer,” “accelerated filer,” and “smaller reportingcompany” in Rule 12b-2 of the Exchange Act. (Check one):

 

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

 

Indicate by check mark whether the registrantis a shell 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 registranthas filed all documents and reports required to be filed by Sections 12, 13 or15(d) of the Securities Exchange Act of 1934 subsequent to thedistribution of securities under a plan confirmed by a court.

 

Yes  o    No  o

 

**APPLICABLE ONLY TO CORPORATE ISSUERS**

** **

Indicate the number of shares outstanding of each of the issuer’sclasses of common stock, as of the latest practicable date:  There were 46,635,231 shares of the issuer’scommon stock, $.001 par value per share, issued and outstanding on May 12,2008.

 

 

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**TABLE OF CONTENTS**

** **
| ** **   | ** ** | ** **                                                                                                      | ** ** | **Page**   |
|--------------|------------|-----------------------------------------------------------------------------------------------------------------|------------|------------|
|         | ** ** | ** **                                                                                                      | ** ** | ** ** |
|         | ** ** | **PART I – FINANCIAL INFORMATION**                                                                    | ** ** | ** ** |
|         | ** ** | ** **                                                                                                      | ** ** | ** ** |
| **Item 1.**  | ** ** | **Financial Statements**                                                                                        |       | 1          |
| ** **   |       | **Consolidated  Balance Sheets at March 31, 2008 (Unaudited) and December 31, 2007**                  |       | 1          |
| ** **   |       | **Consolidated Statements  of Operations for the Three Months Ended March 31, 2008 and 2007  (Unaudited)** |       | 2          |
| ** **   |       | **Consolidated  Statements of Cash Flows for the Three Months Ended March 31, 2008 and  2007 (Unaudited)** |       | 3          |
| ** **   |       | **Notes to  Consolidated Financial Statements (Unaudited)**                                                     |       | 4          |
| **Item 2.**  |       | **Management’s Discussion and  Analysis**                                                                  |       | 13         |
| **Item 4T.** |       | **Controls and Procedures**                                                                                     |       | 21         |
| ** **   |       |                                                                                                            |       |       |
| ** **   | ** ** | **PART II – OTHER INFORMATION**                                                                       | ** ** | ** ** |
| ** **   | ** ** | ** **                                                                                                      | ** ** | ** ** |
| **Item 2.**  |       | **Unregistered Sales of Equity  Securities and Use of Proceeds**                                                |       | 22         |
| **Item 6.**  |       | **Exhibits**                                                                                                    |       | 23         |

 

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**PART I – FINANCIAL INFORMATION**

** **

**Item 1.  Financial Statements.**

** **

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

Consolidated Balance Sheets

 
| ** **                                                                                                                                                                               | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                               | ** ** | **2008**           | ** ** | **2007**              | ** ** |
|                                                                                                                                                                                     |       | **(unaudited)**    |       |                  |       |
| **Assets**                                                                                                                                                                               |       |               |       |                  |       |
|                                                                                                                                                                                     |       |               |       |                  |       |
| Current assets:                                                                                                                                                                          |       |               |       |                  |       |
| Cash                                                                                                                                                                                     |       | $                  | 105,081    |                  | $          | 32,206 |   |
| Accounts receivable, net                                                                                                                                                                 |       | —             |       | 21,257                |       |
| Prepaid expense                                                                                                                                                                          |       | 152,102            |       | 182,228               |       |
| Deposits                                                                                                                                                                                 |       | 235,150            |       | 295,389               |       |
| Other current assets                                                                                                                                                                     |       | 3,220              |       | 4,500                 |       |
|                                                                                                                                                                                     |       |               |       |                  |       |
| Total current assets                                                                                                                                                                     |       | 495,553            |       | 535,580               |       |
|                                                                                                                                                                                     |       |               |       |                  |       |
| Property and equipment, net                                                                                                                                                              |       | 57,887             |       | 69,550                |       |
| Prepaid expense                                                                                                                                                                          |       | 87,521             |       | 117,702               |       |
|                                                                                                                                                                                     |       |               |       |                  |       |
| Total assets                                                                                                                                                                             |       | $                  | 640,961    |                  | $          | 722,832 |   |
|                                                                                                                                                                                     |       |               |       |                  |       |
| **Liabilities and stockholders’ equity**                                                                                                                                            |       |               |       |                  |       |
|                                                                                                                                                                                     |       |               |       |                  |       |
| Current liabilities                                                                                                                                                                      |       |               |       |                  |       |
| Accounts payable                                                                                                                                                                         |       | $                  | 236,404    |                  | $          | 262,355 |   |
| Accrued expenses                                                                                                                                                                         |       | 20,610             |       | 39,984                |       |
| Deferred revenue                                                                                                                                                                         |       | 141,347            |       | 17,338                |       |
|                                                                                                                                                                                     |       |               |       |                  |       |
| Total current liabilities                                                                                                                                                                |       | 398,361            |       | 319,677               |       |
|                                                                                                                                                                                     |       |               |       |                  |       |
| Total liabilities                                                                                                                                                                        |       | 398,361            |       | 319,677               |       |
|                                                                                                                                                                                     |       |               |       |                  |       |
| Commitments and contingencies                                                                                                                                                            |       |               |       |                  |       |
|                                                                                                                                                                                     |       |               |       |                  |       |
| Stockholders’ equity:                                                                                                                                                               |       |               |       |                  |       |
| Common stock, $0.001 par value, 100,000,000  shares authorized, 42,478,106 and 39,419,856 shares issued and outstanding at March 31, 2008 and  December 31, 2007, respectively |       | 42,478             |       | 39,420                |       |
| Additional paid-in capital                                                                                                                                                               |       | 22,816,925         |       | 22,174,891            |       |
| Deferred compensation                                                                                                                                                                    |       | (359,457           | )          | (410,524              | )          |
| Accumulated deficit                                                                                                                                                                      |       | (22,257,346        | )          | (21,400,632           | )          |
|                                                                                                                                                                                     |       |               |       |                  |       |
| Total stockholders’ equity                                                                                                                                                          |       | 242,600            |       | 403,155               |       |
|                                                                                                                                                                                     |       |               |       |                  |       |
| Total liabilities and stockholders’ equity                                                                                                                                          |       | $                  | 640,961    |                  | $          | 722,832 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements

 

1

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

Consolidated Statements of Operations (Unaudited)

 
| ** **                                                             | ** ** | **For the Three Months Ended  March 31,** | ** ** |
|------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                             | ** ** | **2008**                                                           | ** ** | **2007** | ** ** |
|                                                                   |       |                                                               |       |   |   |
| Net revenue                                                            |       | $                                                                  | 822,177    |   | $ | 1,044,508 |   |
|                                                                   |       |                                                               |       |   |   |
| Direct costs                                                           |       | 467,875                                                            |       | 568,083 |   |
|                                                                   |       |                                                               |       |   |   |
| Gross profit                                                           |       | 354,302                                                            |       | 476,425 |   |
|                                                                   |       |                                                               |       |   |   |
| Operating expenses:                                                    |       |                                                               |       |   |   |
| Selling and marketing                                                  |       | 78,925                                                             |       | 71,938 |   |
| General and administrative                                             |       | 1,102,100                                                          |       | 1,050,553 |   |
|                                                                   |       |                                                               |       |   |   |
| Total operating expenses                                               |       | 1,181,025                                                          |       | 1,122,491 |   |
|                                                                   |       |                                                               |       |   |   |
| Loss from operations                                                   |       | (826,723                                                           | )          | (646,066 | ) |
|                                                                   |       |                                                               |       |   |   |
| Other income (expense):                                                |       |                                                               |       |   |   |
| Interest income                                                        |       | 9                                                                  |       | 6,330 |   |
| Loss on extinguishment of debt                                         |       | (30,000                                                            | )          | — |   |
|                                                                   |       |                                                               |       |   |   |
| Total other income (expense)                                           |       | (29,991                                                            | )          | 6,330 |   |
|                                                                   |       |                                                               |       |   |   |
| Net loss                                                               |       | $                                                                  | (856,714   | ) | $ | (639,736 | ) |
|                                                                   |       |                                                               |       |   |   |
| Loss per share — basic and diluted                                |       | $                                                                  | (0.02      | ) | $ | (0.02 | ) |
|                                                                   |       |                                                               |       |   |   |
| Weighted average number of shares outstanding — basic and diluted |       | 40,526,153                                                         |       | 30,757,384 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements

 

2

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

Consolidated Statements of Cash Flows (Unaudited)

 
| ** **                                                                   | ** ** | **For the Three Months Ended   March 31,** | ** ** |
|------------------------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|
| ** **                                                                   | ** ** | **2008**                                                            | ** ** | **2007** | ** ** |
|                                                                         |       |                                                                |       |   |   |
| **Cash flows from operating activities**                                     |       |                                                                |       |   |   |
|                                                                         |       |                                                                |       |   |   |
| Net loss                                                                     |       | $                                                                   | (856,714   | ) | $ | (639,736 | ) |
| Adjustments to reconcile net loss to net  cash used by operating activities: |       |                                                                |       |   |   |
| Common stock issued for services and amortization of prepaid services        |       | 219,498                                                             |       | 284,473 |   |
| Options issued for services                                                  |       | 68,313                                                              |       | 5,014 |   |
| Depreciation                                                                 |       | 11,664                                                              |       | 19,878 |   |
| Loss on extinguishment of debt                                               |       | 30,000                                                              |       | — |   |
| Changes in operating assets and liabilities:                                 |       |                                                                |       |   |   |
| Decrease in accounts receivable                                              |       | 21,257                                                              |       | — |   |
| (Increase) decrease in deposits                                              |       | 60,239                                                              |       | (106,405 | ) |
| Decrease in other current assets                                             |       | 1,280                                                               |       | — |   |
| Decrease in accounts payable and accrued  expenses                           |       | (45,326                                                             | )          | (49,723 | ) |
| Increase in deferred revenue                                                 |       | 124,009                                                             |       | 60,120 |   |
|                                                                         |       |                                                                |       |   |   |
| Net cash used by operating activities                                        |       | (365,780                                                            | )          | (426,379 | ) |
|                                                                         |       |                                                                |       |   |   |
| **Cash flows from investing activities**                                     |       |                                                                |       |   |   |
|                                                                         |       |                                                                |       |   |   |
| Net cash provided by investing activities                                    |       | —                                                              |       | — |   |
|                                                                         |       |                                                                |       |   |   |
| **Cash flows from financing activities**                                     |       |                                                                |       |   |   |
|                                                                         |       |                                                                |       |   |   |
| Proceeds from sale of warrants                                               |       | 240                                                                 |       | — |   |
| Proceeds from exercise of warrants                                           |       | 408,415                                                             |       | — |   |
| Proceeds from issuance of note payable                                       |       | 50,000                                                              |       | — |   |
| Payments on note payable                                                     |       | (20,000                                                             | )          | — |   |
|                                                                         |       |                                                                |       |   |   |
| Net cash provided by financing activities                                    |       | 438,655                                                             |       | — |   |
|                                                                         |       |                                                                |       |   |   |
| Net increase (decrease) in cash                                              |       | 72,875                                                              |       | (426,379 | ) |
| Cash at beginning of period                                                  |       | 32,206                                                              |       | 1,596,969 |   |
|                                                                         |       |                                                                |       |   |   |
| Cash at end of period                                                        |       | $                                                                   | 105,081    |   | $ | 1,170,590 |   |
| ** **                                                                   |       |                                                                |       |   |   |
| **Supplemental disclosure of cash flow  information**                        |       |                                                                |       |   |   |
|                                                                         |       |                                                                |       |   |   |
| Cash paid for taxes                                                          |       | $                                                                   | —     |   | $ | — |   |
|                                                                         |       |                                                                |       |   |   |
| **Schedule of non-cash financing activities**                                |       |                                                                |       |   |   |
|                                                                         |       |                                                                |       |   |   |
| Common stock issued for services                                             |       | $                                                                   | 113,300    |   | $ | 190,300 |   |
| Stock options issued for services                                            |       | $                                                                   | 358,960    |   | $ | 95,796 |   |
| Common stock issued for extinguishment of  debt                              |       | $                                                                   | 60,000     |   | $ | — |   |

 

The accompanying notes are an integral partof these consolidated financial statements

 

3

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** **

**NationalHealth Partners, Inc. and Subsidiaries**

Notes to Consolidated Financial Statements

March31, 2008

** **

**Note 1.  Description of Business**

** **

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

 

TheCompany sells membership programs that encompass all aspects of healthcare,including physicians, hospitals, ancillary services, dentists, prescriptiondrugs and vision care through a national healthcare savings network called “CARExpress.”  The Company derives almost all of its revenuefrom the monthly membership fees it receives from its members.  The Company markets its programs through adirect sales force, brokers and agents, unions and associations, chambers ofcommerce, 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, Integrated Health, Three Rivers and HealthFi.  The Company selects and utilizes only thoseprovider networks that it believes can deliver adequate savings to its memberswhile providing adequate support for its membership programs with thehealthcare providers.  The Companytypically pays a per member per month fee for use of the provider networks thatis determined in part based on the number of providers participating in thenetwork, the number of members accessing the network, and the particularproducts or services offered by the providers. The Company’s agreements with the provider networks are generally for aterm of between one and two years, may be terminated by either party on between45 and 180 days’ prior written notice, and renew automatically for additionalterms unless so terminated.  Most ofthese agreements are non-exclusive and contain confidentiality provisions.

 

**Note2.  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.

 

4

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**NationalHealth Partners, Inc. and Subsidiaries**

Notesto Consolidated Financial Statements

March31, 2008

 

**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, 2007 included in the Company’s Annual Report on Form 10-KSB.  The results of operations for the threemonths ended March 31, 2008, respectively, are not necessarily indicativeof the results that the Company will have for any subsequent quarter or fullfiscal year.

 

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 2007 have been reclassified to conform to the 2008 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 March 31, 2008, the Company’s significant accounting policies andestimates, which are detailed in the Company’s Annual Report on Form 10-KSBfor the year ended December 31, 2007, have not changed materially.

 

**Note 3.  Stock CompensationExpense**

** **

TheCompany records employee stock-based compensation using the fair valuerecognition provisions of Financial Statement of Financial Accounting StandardsNo. 123 (revised 2004), *“Share-Based Payment”*(“SFAS 123R”), using the modified prospective transition method, and recordsnon-employee stock-based compensation expense in accordance with Statement ofFinancial Accounting Standards No. 123, *“AccountingFor Stock-Based Compensation”*(“SFAS 123”) and Emerging Issues TaskForce No. 96-18 *“Accounting for EquityInstruments That Are Issued to Other Than Employees for Acquiring or inConjunction with Selling Goods or Services”* (“EITF 96-18”).  In accordance therewith, the Companyrecognized $287,811 and $289,487 of stock compensation expense during the threemonths ended March 31, 2008 and 2007, respectively.

 

5

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** **

**NationalHealth Partners, Inc. and Subsidiaries**

Notesto Consolidated Financial Statements

March 31, 2008

** **

**Note 4.** **Loss Per Share**

 

Basicloss per share is based on the weighted average number of shares of the Company’scommon stock outstanding during the applicable year, and is calculated bydividing the reported net loss for the applicable year by the weighted averagenumber of shares of common stock outstanding during the applicable year.   The Company calculates diluted loss pershare by dividing the reported net loss for the applicable year by the weightedaverage number of shares of common stock outstanding during the applicable yearas adjusted to give effect to the exercise of all potentially dilutive optionsand warrants outstanding at the end of the year.  An aggregate of 20,527,342 and 20,732,686shares of common stock underlying options and warrants that were outstanding onMarch 31, 2008 and 2007, respectively, have been excluded from thecomputation of diluted earnings per share because they are anti-dilutive.  As a result, basic loss per share was equalto diluted loss per share for each year.

 
| ** **                                                              | ** ** | **For the Three Months   Ended March 31,** | ** ** |
|-------------------------------------------------------------------------|------------|--------------------------------------------------------------------------|------------|
| ** **                                                              | ** ** | **2008**                                                                 | ** ** | **2007** | ** ** |
|                                                                    |       |                                                                     |       |   |   |
| Net loss as reported                                                    |       | $                                                                        | (856,714   | ) | $ | (639,736 | ) |
| Weighted average number of shares  outstanding – basic and diluted |       | 40,526,153                                                               |       | 30,757,384 |   |
|                                                                    |       |                                                                     |       |   |   |
| Loss per share – basic and diluted                                 |       | $                                                                        | (0.02      | ) | $ | (0.02 | ) |

** **

**Note 5.  Property and Equipment**

** **

Property and equipment consisted of the following at March 31,2008:

 
| **Asset**                      | ** ** | **Amount** | ** ** |
|--------------------------------|------------|------------|------------|
|                           |       |       |       |
| Computers                      |       | $          | 60,708     |   |
| Software                       |       | 6,109      |       |
| Furniture                      |       | 27,968     |       |
| Telephone                      |       | 80,780     |       |
| Website                        |       | 106,477    |       |
| Less: accumulated depreciation |       | (224,155   | )          |
|                           |       |       |       |
| Net property and equipment     |       | $          | 57,887     |   |

 

Depreciationexpense for the three months ended March 31, 2008 and 2007 was $11,664 and$19,878, respectively.

 

6

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**NationalHealth Partners, Inc. and Subsidiaries**

Notesto Consolidated Financial Statements

March 31, 2008

** **

**Note 6.   Deposits**

** **

Deposits consist of cash reserves held by merchant processors and thesecurity deposit held by the lessor of the Company’s office space.  As of March 31, 2008, the Company had atotal of $235,150 in deposits.  Of thisamount, $185,101 was being held by Optimal Payments, Inc., $30,431 wasbeing held by PowerPay Payment Systems, Inc., and the remainder was beingheld by the lessor of the Company’s office space and other entities.

 

**Note 7.  Commitments andContingencies**

** **

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**

** **

TheCompany is a party to a lease for its office facility located in Horsham,Pennsylvania which was most recently amended on March 13, 2007.  The amendment extended the term of the leasefrom May 31, 2007 to May 31, 2010. The amendment provides for an initial monthly rent payment of $7,803 andan initial monthly operating expense payment of approximately $5,620.

 

Future minimum lease payments under thisfacility lease are as follows:

 
| **Fiscal Year** | ** ** | **Amount** | ** ** |
|----------------------|------------|------------|------------|
| ** **           | ** ** | ** ** | ** ** |
| 2008                 |       | $          | 129,093    |   |
| 2009                 |       | 166,672    |       |
| 2010                 |       | 70,060     |       |
|                 |       |       |       |
|                 |       | $          | 365,825    |   |

 

**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** | ** ** |
|----------------------|------------|------------|------------|
| ** **           | ** ** | ** ** | ** ** |
| 2008                 |       | $          | 832,689    |   |
| 2009                 |       | 748,107    |       |
| 2010                 |       | 56,315     |       |
|                 |       |       |       |
|                 |       | $          | 1,637,111  |   |

 

7

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**NationalHealth Partners, Inc. and Subsidiaries**

Notesto Consolidated Financial Statements

March 31, 2008

 

**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 March 31, 2008, 393,425 shares of common stock were availablefor issuance under the plan.  The planterminates on February 1, 2016.  On February 6,2006, the Company 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.  401(k) Plan**

** **

On January 15, 2007, the Company adopted the National HealthPartners, Inc. 401(k) Plan. Under the plan, eligible employees may elect to contribute up to 100% oftheir compensation to the 401(k) Plan each year, subject to certain IRSlimitations.  The Company contributes100% of the first 3% of the employee’s contribution and 50% of the next 2% ofthe employee’s contribution. The Company contributed $7,620 to the 401(k) Planduring the three months ended March 31, 2008.

 

**Note 10.  Common Stock andWarrants**

** **

The Company’s authorized capital consisted of 100,000,000 shares ofcommon stock, $0.001 par value per share, at March 31, 2008 and 2007,respectively, of which 42,478,106 and 32,949,106 shares of common stock were outstanding at March 31,2008 and 2007, respectively.  Warrantsexercisable into an aggregate of 11,607,342 and 11,437,686 shares of theCompany’s common stock were outstanding on March 31, 2008 and 2007,respectively.

 

TheCompany estimates the fair value of warrants issued for services on the date ofgrant by using the Black-Scholes pricing model. Under this model, the Company used the following weighted-averageassumptions to determine the fair value of the warrants that have been issuedfor services: a dividend yield of zero percent, an expected volatility ofbetween 244% and 282%, a risk-free interest rate of 3.5% and a remainingcontractual term of 2 years.  The Companyfollows Emerging Issues Task Force No. 96-18 to recognize the fair valueof warrants granted.  Under EITF 96-18,the fair value of the warrants should be recognized as the services arerendered.  The Company is recognizing thecost of services evenly over the term of the agreements since the services arebeing rendered on an ongoing basis during the term of the agreements.

 

8

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**NationalHealth Partners, Inc. and Subsidiaries**

Notesto Consolidated Financial Statements

March 31, 2008

** **

**Note 10.  Common Stock and Warrants(Continued)**

** **

**NonCapital-Raising Transactions**

** **

InJanuary and February 2008, the Company issued an aggregate of 330,000shares of common stock to three consultants pursuant to consulting agreements.The shares were issued at the closing price of the Company’s common stock onthe day immediately preceding the date of issuance for total consideration of$113,300, all of which was recognized as expense during the three months ended March 31,2008.

 

In February 2008, the Company issued240,000 shares of common stock to the holder of a promissory note in partialconsideration for the extinguishment of debt. The shares were issued at the closing price of the Company’s commonstock on the day immediately preceding the date of issuance for totalconsideration of $60,000, all of which was recognized as expense during thethree months ended March 31, 2008.

 

**Capital-RaisingTransactions**

## ** **

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

 

In February 2008, wesold one Class A warrant exercisable into 500,000 shares of common stock,one Class B warrant exercisable into 1,000,000 shares of common stock andone Class C warrant exercisable into 1,000,000 shares of common stock toan accredited investor for aggregate gross proceeds of $100.  The Class A warrants had an exerciseprice of $0.20 per share, were exercisable until February 29, 2008, andexpired at the end of the exercise period. The Class B warrants have an exercise price of $0.30 per share, areexercisable until June 30, 2008, are callable by us if certain criteriaare satisfied, and expire at the end of the exercise period.  The Class C warrants have an exerciseprice of $0.40 per share, are exercisable until December 31, 2008, arecallable by us if certain criteria are satisfied, and expire at the end of theexercise period.

 

In February 2008, theCompany completed a private offering of Class A warrants exercisable into 600,000shares of common stock for aggregate cash proceeds of $60.  The Class A warrants were sold in unitscomprised of one Class A warrant at a purchase price of $1.00 perunit.  The Class A warrants had anexercise price of $0.12 per share, were until March 28, 2008, and expiredat the end of the exercise period.

 

Duringthe three months ended March 31, 2008, the Company received aggregategross proceeds of $408,415 from the exercise of warrants held by the Company’ssecurity holders.  The Company issued atotal of 2,538,250 shares of its common stock in connection therewith atexercise prices ranging between $0.12 and $0.22 per share.

 

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**NationalHealth Partners, Inc. and Subsidiaries**

Notesto Consolidated Financial Statements

March 31, 2008

** **

**Note11.  Stock Options**

 

Stock options exercisable into an aggregate of 8,920,000 and 8,235,000shares of the Company’s common stock were outstanding on March 31, 2008and 2007, respectively.  No options wereexercised during the three months ended March 31, 2008 and 2007,respectively.  The Company estimates the fair value of itsstock options on the date of grant by using the Black-Scholes pricing model inaccordance with the provisions of Statement of Financial Accounting Standards No. 148,*“Accounting for Stock-Based Compensation –Transition and Disclosure.”* Under the Black-Scholes pricing model, the Company used the followingweighted-average assumptions to determine the fair value of the stock optionsissued: a dividend yield of zero percent, an expected volatility of between241% and 290%, a risk-free interest rate of between 3.5% and 5% and a remainingcontractual life of between 9.15 and 9.95 years.

 

InJanuary 2008, the Company issued a stock option to a new employee toacquire 100,000 shares of common stock. The option has an exercise price of $0.23 per share, which was the closingsales price of the Company’s common stock on the date of grant, and vests infour equal annual installments beginning on the first anniversary of the dateof grant.  The option has a term of 10years and was valued at $22,997 on the date of grant.  The Company recognized $1,070 of expenseduring the three months ended March 31, 2008 in connection with theissuance of this option.

 

InMarch 2008, the Company issued a stock option to each of David M. Daniels,Alex Soufflas and Patricia S. Bathurst to acquire 400,000 shares of commonstock.  Each option has an exercise priceof $0.28 per share, which was the closing sales price of the Company’s commonstock on the date of grant, and vests in four equal annual installmentsbeginning on the first anniversary of the date of grant.  The options have a term of 10 years and hadan aggregate value of $335,962 on the date of grant.  The Company recognized a total of $20,926 ofexpense during the three months ended March 31, 2008 in connection withthe issuance of these options.

 

**Note 12. Related-Party Transactions**

 

InMarch 2008, the Company issued a stock option to each of David M. Daniels,Alex Soufflas and Patricia S. Bathurst to acquire 400,000 shares of commonstock.  Each option has an exercise priceof $0.28 per share and vests in four equal annual installments beginning on thefirst anniversary of the date of grant. The options have a term of 10 years and had an aggregate value of$335,962 on the date of grant.

 

**Note 13.  Subsequent Events**

** **

In April 2008, theCompany completed a private offering of 500,000 shares of common stock and Class Awarrants exercisable into 500,000 shares of common stock for aggregate grossproceeds of $75,000.  The Class Awarrants had an exercise price of $0.12 per share, were exercisable until April 18,2008, and expired at the end of the exercise period.

 

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**NationalHealth Partners, Inc. and Subsidiaries**

Notesto Consolidated Financial Statements

March 31, 2008

** **

**Note 13.  Subsequent Events(Continued)**

** **

InApril 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.  Theplan terminates on February 1, 2016.  On April 10, 2008, the Company filed aregistration statement on Form S-8, File No. 333-150177, with the SECcovering the public sale of the 3,000,000 shares of common stock available forissuance under the plan.

 

In April 2008,the Company issued a total of 2,700,000 shares of common stock to consultantsfor marketing and advisory services pursuant to individual consultingagreements.

 

As of May 12, 2008, the Company had received $174,000 inconnection with the exercise of warrants held by certain of the Company’swarrant holders.

 

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**CAUTIONARYSTATEMENT REGARDING FORWARD-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-lookingterminology such as “may,” “will,” “expects,” “intends,” “plans,” “projects,” “estimates,”“anticipates,” or “believes” or the negative thereof or any variation thereonor similar terminology or expressions.

 

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 suchexpectations will prove to have been correct. Important factors that could cause actual results to differ materiallyfrom our expectations include, but are not limited to:

 

·                  ourability to fund future growth and implement our business strategy;

 

·                  ourdependence on a limited number of preferred provider organizations (“PPOs”) andother healthcare provider networks;

 

·                  ourdependence on a single insurance company for the insurance benefits offered aspart of our CARExpressTMPlus programs;

 

·                  ourdependence upon a limited number of marketing and distribution partners forsubstantially all of our revenue;

 

·                  ourability to market our membership programs and develop and expand the market forour membership programs;

 

·                  demandfor and acceptance of our membership programs;

 

·                  competitionin the health discount membership market;

 

·                  ourability to attract and retain qualified personnel;

 

·                  legislativeor regulatory changes in the healthcare industry;

 

·                  thecondition of the securities and capital markets;

 

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

 

and statementsof assumption underlying any of the foregoing, as well as any other factors setforth herein and under the caption *“Item 1.  Description of Business – Risks andUncertainties”* of our Annual Report on Form 10-KSB for ourfiscal year ended December 31, 2007. All subsequent written and oral forward-looking statements attributableto us, or persons acting on our behalf, are expressly qualified in theirentirety by the foregoing.  Except asrequired by law, we assume no duty to update or revise our forward-lookingstatements based on changes in internal estimates or expectations or otherwise.

 

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** **

**Item 2. Management’s Discussion and Analysis.**

** **

Unless otherwise indicated or the context otherwise requires, allreferences to the “Company,” “we,” “us” or “our” and similar terms in thisreport refer to National Health Partners, Inc. and its subsidiaries.

 

This Management’s Discussion and Analysis and other parts of thisreport contain forward-looking statements that involve risks anduncertainties.  All forward-lookingstatements included in this report are based on information available to us onthe date hereof and, except as required by law, we assume no obligation toupdate any such forward-looking statements. Our actual results may differ materially from those anticipated in theseforward-looking statements as a result of a number of factors, including thoseset forth herein and under the caption *“Item 1.  Description of Business – Risks andUncertainties”* in our Annual Report on Form 10-KSB for ourfiscal year ended December 31, 2007. The following should be read in conjunction with our consolidatedfinancial statements included above in Item 1 of Part I of this report.

 

**Overview**

** **

We are a national healthcare membership organization that was formed byhealthcare professionals to address the need for affordable healthcarenationwide.  We create, market and sellmembership programs to predominantly underserved markets in the healthcareindustry through a national healthcare savings network called CARExpressTM.  CARExpressTM is a network of hospitals,doctors, dentists, pharmacists and other healthcare providers comprised of over1,000,000 healthcare providers that render their services and products toCARExpressTMmembers at discounted prices.  CARExpressTM enables people toengage in point-of-service transactions directly with these healthcareproviders and pay discounted prices to the providers.

 

Our membership programs offer savings on healthcare services to personswho are uninsured or underinsured by providing them with access to the samePPOs that are utilized by employers that self-fund at least a portion of theiremployees’ healthcare costs.  Ourmembership programs are also used to supplement benefit plans and fill in thegaps created by the need to reduce health benefits to keep the costs of healthinsurance reasonable.  We sell ourmembership programs directly through our sales force and indirectly throughbrokers and agents, unions and associations, small businesses and otherorganizations.

 

We are actively engaged in marketing our membership programs to thepublic.  Our primary objective is togenerate increased sales of our membership programs while expanding ourposition as a provider of unique healthcare membership service programs.  The target market for our membership programsis comprised of individuals who have either limited health benefits or nohealth benefits.  Our market share ofthis market is currently less than one percent and has been less than onepercent since our inception.  Since weare not currently large enough to pursue and support the entire market, weintend to continue to pursue specific opportunities that we identify in thismarket through our various marketing and distribution channels.  Through product design, competitivemembership pricing and a variety of marketing and distribution partners, we arepursuing opportunities in the healthcare market that insurance companies havenot addressed.

 

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**Operational Metrics**

** **

Our revenue consists almost exclusively of recurring monthly membershipfees that we 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 ourCARExpressTMhealth discount programs is approximately $35. Approximately 95% of the CARExpressTM health discount programs that wehave sold to our current members consist of our Comprehensive Care Programwhich is currently sold at a monthly retail price of $39.95.  The remaining CARExpressTM health discount programs that wehave sold to our current members consist of a mix of our less expensiveprograms.  We do not have similar dataavailable for our new CARExpressTMPlus membership programs since we only recently began selling them to thepublic.

 

We receive each member’s initial monthly payment and billinginformation at the beginning 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.

 

A key metric that we use to evaluate our success is our memberretention rates.  Member retention ratesrepresent the percentage of new members that we acquire that we are able toretain for a specified period of time. Since we incur a large portion of our costs up front and receiverecurring membership fees throughout the term of the membership, the longer weare able to retain the members we acquire, the greater the revenue potential ofthe membership programs that we sell.  Webelieve that the key to obtaining a high member retention rate is to target ourmarketing campaigns towards those individuals and organizations that are most inneed of our programs, most capable of paying for our programs, and most loyalto us and our programs.  Member retentionrates can be influenced by a variety of factors, including:

 

·             the type ofmembership programs being sold;

 

·             the marketingcampaign being used to sell our membership programs;

 

·             the financialcondition and loyalty of our members;

 

·             the distributionchannel selling our membership programs; and

 

·             the type and amountof compensation being paid to our marketing and distribution partners to sellour membership programs.

 

We have obtained valuable information regarding member demographicsthrough the marketing and advertising campaigns that we have conducted and arefocusing our marketing and advertising campaigns on members and member groups thatwe have identified 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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** **

**Outlook**

 

Our strategy is to continue to expand our position as a provider ofunique healthcare membership service programs. We have implemented several strategic growth initiatives since 2006through which we achieved new contracts and strategic partnerships with anumber of marketing and distribution companies, the most recent of whichinvolved a shift in our sales strategy from sales through marketing companiesto sales through employers and “affinity groups.”  An “affinity group” is a group of people whoshare interests, issues, and a common bond or background, and offer support foreach other.  Examples of the types ofaffinity groups that we are working with include unions, associations, chambersof commerce and small business networks. These organizations typically have a large number of members and thus,each one provides us with the opportunity to obtain a large number of sales.

 

We expect to generate future revenue and members primarily throughsales of our CARExpressTM health discount programs and ourCARExpressTMPlus membership programs to employees and members of affinity groups throughour direct sales force, our marketing and distribution partners, and ourvarious marketing and advertising campaigns. We intend to finance each of these projects through cash on hand,internally generated cash flows from operating activities and proceeds from theissuance of debt and equity securities. We will use any additional investments that we receive to accelerate theexpansion of each of our advertising campaigns and programs and increase salesof our membership programs.

 

We expect the number of CARExpressTM members generatedeach month to increase for the foreseeable future.  We also expect our retention rates to improveover the next 12 months as we obtain additional information regarding memberdemographics and target our marketing and advertising campaigns towardsprospective members and member groups that are most suitable for our membershipprograms.  As a result, we expect tobegin generating a net profit from operations during 2008 as the recurringmembership fees from our increasing membership base overtake the costsassociated with obtaining the new members we are generating.  We can provide no assurance, however, thatour membership base will increase as projected, that our member retention rateswill improve over the next 12 months or that we will begin generating a netprofit from operations during 2008.

 

**Critical Accounting Policies**

** **

For information regarding our critical accounting policies, pleaserefer to the discussion provided in our Annual Report on Form 10-KSB forthe year ended December 31, 2007 under the caption *“Item6.  Management’s Discussion and Analysis –Critical Accounting Policies”* and our Notes to ConsolidatedFinancial Statements.

 

**Recent Accounting Pronouncements**

** **

For information regarding recent accounting pronouncements applicableto our business, please refer to the discussion provided in our Annual Reporton Form 10-KSB for the year ended December 31, 2007 under the caption*“Item 6. Management’s Discussion and Analysis – Recent Accounting Pronouncements”*and our Notes to Consolidated Financial Statements.

 

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**Comparison of the Three-Month Periods Ended March 31,2008****and 2007**

** **

Revenue

 

Revenue consists almost exclusively of the monthly membership fees thatwe receive from members of our membership programs.  Revenue decreased $222,331 to $822,177 forthe three months ended March 31, 2008 from $1,044,508 for the three monthsended March 31, 2007.  The decreaseof $222,331 resulted primarily from a decrease in sales of our CARExpressTM membership programsthrough marketing companies in connection with the shift in our sales strategyfrom sales through marketing companies to sales through employers and affinitygroups.  Approximately 70% of the revenuethat we generated during the three months ended March 31, 2008 was derivedfrom sales of our membership programs to first-time members, compared toapproximately 95% during the corresponding period in 2007.  The remainder of the revenue that wegenerated 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 CARExpressTM health discount programs and ourCARExpressTMPlus membership programs to employees and members of affinity groups throughour direct sales force, our marketing and distribution partners, and ourvarious marketing and advertising campaigns.

 

Direct Costs

 

Direct costs consist of sales commissionsthat we pay to our marketing and distribution partners and fees that we pay toour PPOs and provider networks for access to their networks.  Direct costs decreased $100,208 to $467,875for the three months ended March 31, 2008, from $568,083 for the threemonths ended March 31, 2007.  Thedecrease of $100,208 was due to a decrease of $176,380 for sales commissions,partially offset by an increase of $76,172 for PPO and network providercosts.  We expect cost of sales toincrease over the next 12 months as increased sales of our membership programsresult in higher overall sales commission expenses and provider networks 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 increased$6,987 to $78,925 for the three months ended March 31, 2008, from $71,938for the three months ended March 31, 2007. The increase of $6,987 was due primarily to an increase of $11,714 forsalaries and other cash compensation paid to employees selling and marketingour membership programs, partially offset by a decrease of $10,128 in equitycompensation paid to employees selling and marketing our membership programsand decreases in other selling and marketing expenses.  We expect selling and marketing expenses toincrease during the next 12 months as we grow our direct sales force and engagein larger and more frequent marketing and advertising campaigns and activities.

 

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General and Administrative Expenses

 

General and administrative expenses consistprimarily of employee compensation expense, professional fees and other generaland 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$35,206 to $518,063 for the three months ended March 31, 2008, from$553,269 for the three months ended March 31, 2007.  The decrease of $35,206 was due primarily toa decrease of $103,948 in restricted stock expense, partially offset by anincrease of $56,292 in stock option expense and increases in other employeecompensation expense. We expect employee compensation expense to increase overthe next 12 months as we continue to retain additional executive managementpersonnel and other employees in connection with 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 increased $65,296 to $249,459 for the three monthsended March 31, 2008 from $184,163 for the three months ended March 31,2007.  The increase of $65,296 was dueprimarily to increases of $49,101 in the amount of expense recognized inconnection with equity-based compensation paid to service providers andconsultants for various services, and $16,195 in fees for legal, accounting,technology and general consulting services. We expect professional fees to increase over the next 12 months as weincur additional legal, accounting and technology fees in connection with thegeneral expansion of our business and operations.

 

*Other General and Administrative Expenses*.  Other general and administrative expensesconsist of costs for supplies, computer hardware and system costs, bank servicecharges, filing fees and dues, non-employee customer service representativeexpense, rent expense, health insurance costs, financial printer costs,transfer agent costs, the costs of investor relations campaigns and activities,postage and delivery expenses, severance expenses, general business expensesand miscellaneous general and administrative expenses that are not associatedwith our selling and marketing activities. Other general and administrative expenses increased $20,128 to $334,578for the three months ended March 31, 2008 from $314,450 for the threemonths ended March 31, 2007.  Theincrease of $20,128 resulted primarily from increases of $33,924 for bankservice charges associated with new and recurring member transaction and$16,571 for printing and reproduction costs, as well as increases in othergeneral and administrative expenses, partially offset by decreases of $23,949for fees associated with state corporate filings and $22,273 for supplies.  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.

 

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Loss on theExtinguishment of Debt

 

Loss on the extinguishment of debt consistsof the loss that we recognized in connection with our issuance of 240,000shares of our common stock to a note holder in February 2008 in partialconsideration for the extinguishment of debt. We recognized a loss on the extinguishment of debt of $30,000 during thethree months ended March 31, 2008 in connection with the issuance of theseshares.  We did not recognize any suchloss during the three months ended March 31, 2007.  We do not expect to recognize any additionalgains or losses on the extinguishment of debt in the foreseeable future.

 

Net Loss

 

Our net loss increased$216,978 to $856,714 for the three months ended March 31, 2008, from$639,736 for the three months ended March 31, 2007.  The increase of $216,978 was primarily theresult of a decrease of $222,331 in revenue and increases of $65,296 forprofessional fees, $30,000 for loss on the extinguishment of debt and $20,128for general and administrative expenses, partially offset by decreases of$100,208 for direct costs incurred in connection with the sale of ourmembership programs and $35,206 for employee compensation expense.  We expect to begin generating a net profitfrom operations during 2008 as the recurring membership fees from ourincreasing membership base overtake the costs associated with obtaining andretaining members.

 

**Liquidity and Capital Resources**

** **

Since our inception, we have funded our operations primarily throughprivate sales of equity securities and the use of short-term debt.  As of May 12, 2008, we had cash and cashequivalents of approximately $210,000.

 

Net cash used by operating activities was $365,780 for the three monthsended March 31, 2008 compared to $426,379 for the three months ended March 31,2007.  The $60,599 decrease in cash usedby operating activities was due primarily to increases of $32,858 forequity-based compensation expense, $30,000 for loss on the extinguishment ofdebt, $166,644 for deposits and $63,889 for deferred revenue, partially offsetby an increase of $242,861 for net loss.

 

We did not have any cash flows from investing activities for the threemonths ended March 31, 2008 or 2007.

 

Net cash provided by financing activities was $438,655 for the threemonths ended March 31, 2008.  We didnot have any cash flows from investing activities for the three months ended March 31,2007.  The $438,655 increase in cashprovided by financing activities was due primarily to an increase of $408,415in proceeds from the exercise of warrants and an increase of $50,000 inproceeds from the issuance of debt, partially offset by an increase of $20,000in payments on debt.

 

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Our primary sources of capital over the past 12 months are set forthbelow.

 

In August 2007, we sold1,200,000 shares of common stock, one Class A warrant exercisable into1,000,000 shares of common stock and one Class B warrant exercisable into1,000,000 shares of common stock to an accredited investor for aggregate grossproceeds of $540,000.  We agreed to use our reasonable best effortsto file a registration statement with the SEC by December 31, 2007 toregister all of the shares of our common stock issued in the offering and allof the shares of our common stock underlying the Class A warrants and Class Bwarrants issued in the offering.  AllClass A warrants had an exercise price of $0.60 per share, wereexercisable for a period of 30 days commencing on the date the registrationstatement was declared effective by the SEC, and expired at the end of theexercise period.  All Class Bwarrants have an exercise price of $.80 per share, are exercisable until December 31,2008, are callable by us if certain criteria are satisfied, and expire at theend of the exercise period.

 

In October 2007,we completed a private offering of 810,000 shares of our common stock, Class Awarrants exercisable into 810,000 shares of our common stock and Class Bwarrants exercisable into 810,000 shares of our common stock for aggregate cashconsideration of $243,000.  Thesesecurities were sold in units comprised of one share of our common stock, one Class Awarrant and one Class B warrant. The units were sold at a purchase price of $0.30 per unit.  We agreed to use our reasonable best effortsto file a registration statement with the SEC by December 15, 2007 toregister all of the shares of our common stock issued in the offering and allof the shares of our common stock underlying the Class A warrants and Class Bwarrants issued in the offering.  The Class Awarrants were initially exercisable into one share of our common stock at anexercise price of $0.30 per share, were exercisable during a period beginningon the date the registration statement covering the public resale of the sharesunderlying the warrants was declared effective by the SEC and ending on January 31,2008, and expired at the end of the exercise period.  The Class B warrants are initiallyexercisable into one share of our common stock at an exercise price of $0.40per share, are exercisable during a period beginning on the date theregistration statement covering the public resale of the shares underlying thewarrants was declared effective by the SEC and ending on December 31, 2008,and expire at the end of the exercise period.

 

In November 2007,we completed a private offering of 500,000 shares of our common stock, Class Awarrants exercisable into 500,000 shares of our common stock and Class Bwarrants exercisable into 500,000 shares of our common stock for aggregate cashconsideration of $150,000.  Thesesecurities were sold in units comprised of one share of our common stock, one Class Awarrant and one Class B warrant. The units were sold at a purchase price of $0.30 per unit.  We agreed to use our reasonable best effortsto file a registration statement with the SEC by December 15, 2007 toregister all of the shares of our common stock issued in the offering and allof the shares of our common stock underlying the Class A warrants and Class Bwarrants issued in the offering.  The Class Awarrants were initially exercisable into one share of our common stock at anexercise price of $0.30 per share, were exercisable during a period beginningon the date a registration statement covering the public resale of the sharesunderlying the warrants was declared effective by the SEC and ending on thelater of January 31, 2008 or the date that is 30 calendar days after theeffective date of the registration statement, and expired at the end of theexercise period.  The Class Bwarrants are initially exercisable into one share of our common stock at anexercise price of $0.40 per share, are exercisable during a period beginning onthe date the registration statement covering the public resale of the shares

 

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underlyingthe warrants was declared effective by the SEC and ending on December 31,2008, and expire at the end of the exercise period.

 

In November 2007,we completed a private offering of 1,240,000 shares of our common stock, Class Awarrants exercisable into 1,240,000 shares of our common stock, and Class Bwarrants exercisable into 1,240,000 shares of our common stock for aggregatecash consideration of $310,000.  Thesesecurities were sold in units comprised of one share of our common stock, one Class Awarrant and one Class B warrant. The units were sold at a purchase price of $0.25 per unit.  We agreed to use our reasonable best effortsto file a registration statement with the SEC by December 15, 2007 toregister all of the shares of our common stock issued in the offering and allof the shares of our common stock underlying the Class A warrants and Class Bwarrants issued in the offering. The Class A warrants wereinitially exercisable into one share of our common stock at an exercise priceof $0.30 per share, were exercisable during a period beginning on the date aregistration statement covering the public resale of the shares underlying thewarrants was declared effective by the SEC and ending on the later of January 31,2008 or the date that is 30 calendar days after the effective date of theregistration statement, and expired at the end of the exercise period.  The Class B warrants are initiallyexercisable into one share of our common stock at an exercise price of $0.40per share, are exercisable during a period beginning on the date a registrationstatement covering the public resale of the shares underlying the warrants wasdeclared effective by the SEC and ending on December 31, 2008, and expireat the end of the exercise period.

 

In December 2007,we completed a private offering of 555,000 shares of our common stock, Class Awarrants exercisable into 555,000 shares of our common stock, Class Bwarrants exercisable into 555,000 shares of our common stock, and Class Cwarrants exercisable into 555,000 shares of our common stock for aggregate cashconsideration of $111,000.  Thesesecurities were sold in units comprised of one share of our common stock, one Class Awarrant, one Class B warrant and one Class C warrant.  The units were sold at a purchase price of$0.20 per unit.  We agreed to use ourreasonable best efforts to file a registration statement with the SEC by December 15,2007 to register all of the shares of our common stock issued in the offeringand all of the shares of our common stock underlying the Class A warrants,Class B warrants and Class C warrants issued in the offering.  The Class A warrants were initiallyexercisable into one share of our common stock at an exercise price of $0.22per share, were exercisable during a period beginning on the date aregistration statement covering the public resale of the shares underlying thewarrants is declared effective by the SEC and ending on the date that is 90calendar days after the effective date of the registration statement,were callable by us if certain criteria are satisfied, and expired at the end of the exercise period.  The Class B warrants are initiallyexercisable into one share of our common stock at an exercise price of $0.30per share, are exercisable during a period beginning on the date a registrationstatement covering the public resale of the shares underlying the warrants isdeclared effective by the SEC and ending on the date that is 180 calendar daysafter the effective date of the registration statement, are callable byus if certain criteria are satisfied,and expire at the end of the exercise period. The Class C warrants are initially exercisable into one share ofour common stock at an exercise price of $0.30 per share, are exercisableduring a period beginning on the date a registration statement covering thepublic resale of the shares underlying the warrants is declared effective bythe SEC and ending on the third anniversary of the effective date of theregistration statement, and expire at the end of the exercise period.

 

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In February 2008, wecompleted a private offering of 500,000 shares of our common stock and Class Awarrants exercisable into 500,000 shares of our common stock for aggregategross proceeds of $75,000.  The Class Awarrants had an exercise price of $0.12 per share, were exercisable until April 18,2008 and expired at the end of the exercise period.

 

During the period beginning January 1, 2007 and ending March 31,2008, we issued 4,488,250 shares of common stock upon the exercise of warrantsat exercise prices ranging between $0.12 and $0.22 per share for aggregate gross proceeds of $707,415.

 

To date, our capital needs have been metprincipally through the sales of our equity and debt securities and proceedsreceived upon the exercise of outstanding warrants by our securityholders.   We do not currently maintain aline of credit or term loan with any commercial bank or other financialinstitution.  We have used the proceedsfrom the exercise of warrants and our private offerings of securities to payvirtually all of the costs and expenses we have incurred.  These costs and expenses were comprised ofoperating expenses, which consisted of the employee compensation expenses,professional fees, rent expenses 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 that our current cash resources will not be sufficient tosustain our current operations for the next 12 months.  We will need to obtain additional cashresources within the next 12 months to enable us to pay our ongoing costs andexpenses as they are incurred and finance the growth of our business.  We intend to obtain these funds throughinternally generated cash flows from operating activities and proceeds from theissuance of debt and equity securities. The sale of equity or convertible debt securities would result inadditional dilution to our shareholders. The issuance of debt would result in increased expenses and couldsubject us to covenants that may have the effect of restricting our operations.  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.

 

**Off-BalanceSheet Arrangements**

** **

As of March 31, 2008, we did not haveany relationships with unconsolidated entities or financial partners, such asentities often referred to as structured finance or special purpose entities,that had been established for the purpose of facilitating off-balance sheetarrangements or other contractually narrow or limited purposes.  As such, we are not materially exposed to anyfinancing, liquidity, market or credit risk that could arise if we had engagedin such relationships.

 

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

** **

As of March 31, 2008, we carried out theevaluation of the effectiveness of our disclosure controls and proceduresrequired by Rule 13a-15(e) under the Exchange Act under thesupervision and with the participation of our management, including our ChiefExecutive Officer and Chief Financial Officer. Based upon that evaluation, our Chief Executive Officer and 

 

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Chief Financial Officerconcluded that, as of March 31, 2008, our disclosure controls and procedureswere effective to provide reasonable assurance that information we are requiredto 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 SEC’srules and forms, and (ii) accumulated and communicated to ourmanagement, 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 internalcontrol over financial reporting identified in connection with this evaluationthat occurred during our fiscal quarter ended March 31, 2008 that hasmaterially affected, or is reasonably likely to materially affect, our internalcontrol over financial reporting.

 

**PART II– OTHER INFORMATION**

** **

**Item 2.  Unregistered Sales of EquitySecurities and Use of Proceeds.**

** **

During the three months ended March 31, 2008, wesold the following securities without registration under the Securities Act of1933, as amended (the “Securities Act”):

 

In January 2008, we issued an option exercisable into 100,000shares of common stock to a new non-executive employee.  The option has an initial exercise price of $0.23per share, vests in four equal annual installments commencing on the date ofissuance, and has a term of 10 years. The securities were issued to an accredited investor in a privateplacement transaction exempt from the registration requirements of theSecurities Act pursuant to Section 4(2) of the Securities Act directlyby us without engaging in any advertising or general solicitation of any kindand without payment of underwriting discounts or commissions to any person.

 

In January and February 2008, we issued a total of 330,000shares of our common stock to accredited investors in exchange for sales andmarketing services.  These securitieswere issued to three accredited investors in private placement transactionsexempt from the registration requirements of the Securities Act pursuant to Section 4(2) ofthe Securities Act directly by us without engaging in any advertising orgeneral solicitation of any kind and without payment of underwriting discountsor commissions to any person.

 

In February 2008, we completed a private offering of Class Awarrants exercisable into 1,000,000 shares of common stock for aggregate grossproceeds of $100.  The Class Awarrants had an exercise price of $0.12 per share, were exercisable until February 29,2008, and expired at the end of the exercise period.  These securities were issued to a limitednumber of accredited investors in private placement transactions exempt fromthe registration requirements of the Securities Act pursuant to Section 4(2) ofthe Securities Act directly by us without engaging in any advertising orgeneral solicitation of any kind and without payment of underwriting discountsor commissions to any person.

 

In February 2008, we soldone Class A warrant exercisable into 500,000 shares of common stock, one Class Bwarrant exercisable into 1,000,000 shares of common stock and one Class Cwarrant exercisable into 1,000,000 shares of common stock to an accreditedinvestor for aggregate gross proceeds of $100. The Class A warrants had an exercise price of $0.20 per share, wereexercisable until February 29, 2008, and expired at the end of theexercise period.  The Class Bwarrants have an exercise price of $0.30 per share, are exercisable until June 30,2008, are callable by us if certain criteria are satisfied, and expire at theend of the exercise

 

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period. The Class C warrants have an exercise price of $0.40 per share, areexercisable until December 31, 2008, are callable by us if certaincriteria are satisfied, and expire at the end of the exercise period.  These securities were issued to an accreditedinvestor in a private placement transaction 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 and without payment of underwriting discounts orcommissions to any person.

 

In February 2008, we issued 240,000 shares of our common stock toan accredited investor in partial consideration for the extinguishment ofdebt.  These securities were issued to anaccredited investor in a private placement transaction exempt from theregistration requirements of the Securities Act pursuant to Section 4(2) ofthe Securities Act directly by us without engaging in any advertising orgeneral solicitation of any kind and without payment of underwriting discountsor commissions to any person.

 

In February 2008, we completed a private offering of Class Awarrants exercisable into 600,000 shares of common stock for aggregate cashproceeds of $60.  The Class Awarrants were sold in units comprised of one Class A warrant at a purchaseprice of $1.00 per unit.  The Class Awarrants had an exercise price of $0.12 per share, were exercisable until March 28,2008, and expired at the end of the exercise period.  These securities were issued to a limitednumber of accredited investors in private placement transactions exempt fromthe registration requirements of the Securities Act pursuant to Section 4(2) ofthe Securities Act directly by us without engaging in any advertising orgeneral solicitation of any kind and without payment of underwriting discountsor commissions to any person.

 

In March 2008, we issued an option exercisable into 400,000 sharesof common stock to each of David M. Daniels, Alex Soufflas and Patricia S.Bathurst.  The options have an initialexercise price of $0.28 per share, vest in four equal annual installmentscommencing on the date of issuance, and have a term of 10 years.  The securities were issued to threeaccredited investors in private placement transactions exempt from theregistration requirements of the Securities Act pursuant to Section 4(2) ofthe Securities Act directly by us without engaging in any advertising orgeneral solicitation of any kind and without payment of underwriting discountsor commissions to any person.

 

**Item 6. Exhibits.**

** **

                The following exhibits areincluded herein:

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

 

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**SIGNATURES**

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 
|                    | NATIONAL HEALTH PARTNERS, INC. |
|-------------------------|--------------------------------|
|                    |                           |
|                    |                           |
| Date: May 15, 2008 | /s/ David M. Daniels           |
|                    | David M. Daniels               |
|                    | Chief Executive Officer        |

 

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**EXHIBIT INDEX**

 

 
| **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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