UNITED STATES
 SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 
 FORM 10-Q
 
 (Mark one)
 x
QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period endedJune 30, 2012o
TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from ______________ to _____________
 
 Commission File No. 000-51731
 
 
 NATIONAL HEALTH PARTNERS, INC.(Exact name of registrant as specified 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) of the Securities Exchange Act of 1394 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x  No  o
 
 Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  x   No  o
 
 Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 Large accelerated filer o

Accelerated filer oNon-accelerated filer o(Do not check if a smaller reporting company)

Smaller reporting company x
 Indicate by check mark whether the registrant is 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 registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution 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's classes of common stock, as of the latest practicable date:  There were 232,803,252shares of the issuer’s common stock, $.001 par value per share, issued and outstanding on September 24, 2012.








TABLE OF CONTENTS





PagePART I – FINANCIAL INFORMATIONItem 1. Financial Statements
3Consolidated Balance Sheets at June 30, 2012 (Unaudited) and December 31, 2011
3Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2012 and 2011 (Unaudited)
4Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2012 and 2011 (Unaudited)
5Notes to Consolidated Financial Statements (Unaudited)
6Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
15Item 4. Controls and Procedures
21PART II – OTHER INFORMATIONItem 1A. Risk Factors
23Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
23Item 6. Exhibits
23








2





PART I – FINANCIAL INFORMATION





Item 1.  Financial Statements.


National Health Partners, Inc. and Subsidiaries
 Consolidated Balance Sheets





June 30,


December 31,2012


2011(Unaudited)AssetsCurrent assets:Cash

$
2,090


$
3,340Accounts receivable, net


--



5,843Prepaid expense


173,657



305,843Deposits


17,400



--Total current assets


193,147



315,026Property and equipment, net


--



--Prepaid expense


--



8,684Deposits


19,000



19,000Total assets

$
212,147


$
342,710Liabilities and stockholders' equity (deficit)Current liabilitiesAccounts payable

$
258,701


$
161,504Refunds payable


8,960



5,545Accrued expenses


17,900



1,305Deferred revenue


97,592



69,660Notes payable, net of discount


154,873



47,000Total current liabilities


538,026



285,014Total liabilities


538,026



285,014Commitments and contingenciesStockholders' equity (deficit):Common stock, $0.001 par value, 250,000,000 shares authorized,218,803,252 and 202,803,252 shares issued and outstandingon June 30, 2012 and December 31, 2011, respectively


218,803



202,803Additional paid-in capital


28,197,376



28,162,599Accumulated deficit


(28,742,058
)


(28,307,706
)Total stockholders' equity (deficit)


(325,879
)


57,696Total liabilities and stockholders' equity (deficit)

$
212,147


$
342,710
  The accompanying notes are an integral part of these consolidated financial statements
  3
  National Health Partners, Inc. and Subsidiaries
 Consolidated Statements of Operations
 (Unaudited)
   For the Three Months Ended

June 30,


For the Six Months Ended

June 30,2012


2011


2012


2011Net revenue

$
319,557


$
415,935


$
627,819


$
875,478Direct costs


248,804



263,095



398,894



527,337Gross profit


70,753



152,840



228,925



348,141Operating expenses:General and administrative


314,685



441,954



631,318



796,038Total operating expenses


314,685



441,954



631,318



796,038Loss from operations


(243,932
)


(289,114
)


(402,393
)


(447,897
)Interest Expense


(21,416
)


--



(31,959
)


--Net loss

$
(265,348
)

$
(289,114
)

$
(434,352
)

$
(447,897
)Loss per share -- basic and diluted

$
(0.00
)

$
(0.00
)

$
(0.00
)

$
(0.00
)Weighted average number of shares outstanding --basic and diluted


210,671,384



138,751,329



206,737,318



125,112,217
  The accompanying notes are an integral part of these consolidated financial statements
  4
  National Health Partners, Inc. and Subsidiaries
 Consolidated Statements of Cash Flows
 (Unaudited)
  For the Six Months EndedJune 30,2012


2011Cash flows from operating activitiesNet loss

$
(434,352
)

$
(447,897
)Adjustments to reconcile net loss to net cashused by operating activities:Common stock issued for services and amortization of prepaid services


152,978



249,599Options issued for services


377



2,849Amortization of debt discount


15,273



--Depreciation


--



4,393Changes in operating assets and liabilities:(Increase) decrease in deposits


(17,400
)


25,000Decrease in accounts receivable


5,843



--(Increase) decrease in other current assets


(108
)


213Increase (decrease) in accounts payable and accrued expenses


113,793



(37,189
)Increase in refunds payable


3,414



465Increase in deferred revenue


27,932



20,221Net cash used by operating activities


(132,250
)


(182,346
)Cash flows from investing activitiesNet cash provided by investing activities


--



--Cash flows from financing activitiesNet proceeds from sale of stock and warrants


16,000



143,300Net proceeds from investor deposits


--



16,950Net proceeds from sale of notes and warrants


115,000



--Net cash provided by financing activities


131,000



160,250Net decrease in cash


(1,250
)


(22,096
)Cash at beginning of period


3,340



28,548Cash at end of period

$
2,090


$
6,452Supplemental disclosure of cash flow informationCash paid for interest

$
--


$
--Cash paid for taxes

$
--


$
--
  The accompanying notes are an integral part of these consolidated financial statements
 5


National Health Partners, Inc. and Subsidiaries


Notes to Consolidated Financial Statements


June 30, 2012


(Unaudited)





Note 1. Description of Business





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





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





The Company contracts with preferred provider organizations and other provider networks for access to the discounted rates they have negotiated with their healthcare providers.  The principal suppliers of the healthcare providers that comprise CARExpress are CareMark, Aetna, Optum, Outlook Vision, Integrated Health and Three Rivers.  Aetna (Aetna Dental Access) is the actual network name and it is administered through National Benefit Builders. Aetna does not contract directly for this network and instead requires users to contract with their administrator for access to their network. Likewise, Integrated Health and Three Rivers are also networks and are contracted through First Access, Inc., who is the administrator for these networks. The Company selects and utilizes only those provider networks that it believes can deliver adequate savings to its members while providing adequate support for its membership programs with the healthcare providers.  It typically pays a per member per month fee for use of the provider networks that is determined in part based on the number of providers participating in the network, the number of members accessing the network, and the particular products or services offered by the providers.  The Company’s agreements with the provider networks are generally for a term of between one and two years, may be terminated by either party on between 45 and 180 days’ prior written notice, and renew automatically for additional terms unless so terminated.  Most of these agreements are non-exclusive and contain confidentiality provisions.





Note 2. Basis of Presentation





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





The unaudited consolidated financial statements included in this document have been prepared on the same basis as the annual consolidated financial statements and in management’s opinion, reflect all adjustments, including normal recurring adjustments, necessary to present fairly the Company’s financial position, results of operations and cash flows for the interim periods presented. The unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto for the year ended December 31, 2011 included in the Company’s Annual Report on Form 10-K.  The results of operations for the three and six months ended June 30, 2012 are not necessarily indicative of the results that the Company will have for any subsequent quarter or full fiscal year.





The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.  Actual results could differ from those estimates.  The financial statements include the balances of National Health Partners, Inc. and its wholly-owned subsidiaries.  All material inter-company balances and transactions have been eliminated in consolidation.


6


National Health Partners, Inc. and Subsidiaries


Notes to Consolidated Financial Statements


June 30, 2012


(Unaudited)





Note 2. Basis of Presentation (Continued)





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





Certain amounts in the 2011 financial statements have been reclassified to conform to the 2012 presentation. These reclassifications did not result in any change to the previously reported total assets, net loss or stockholder’s equity.





As of June 30, 2012, the Company’s significant accounting policies and estimates, which are detailed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, have not changed materially.





Note 3. Stock Compensation Expense





The Company records employee stock-based compensation using the fair value recognition provisions of Accounting Standards Codification (“ASC”) Topic 718 (“ASC 718”) using the modified prospective transition method, and records non-employee stock-based compensation expense in accordance with ASC Topic 505.  In accordance therewith, the Company recognized stock compensation expense of zero and $12,630 for the three months ended June 30, 2012 and 2011, respectively, and zero and $31,111 for the six months ended June 30, 2012 and 2011, respectively.





Note 4. Loss Per Share





Basic loss per share is based on the weighted average number of shares of the Company’s common stock outstanding during the applicable period, and is calculated by dividing the reported net loss for the applicable period by the weighted average number of shares of common stock outstanding during the applicable period.  The Company calculates diluted loss per share by dividing the reported net loss for the applicable period by the weighted average number of shares of common stock outstanding during the applicable period as adjusted to give effect to the exercise of all potentially dilutive options and warrants outstanding at the end of the period.  A total of 13,325,000 and 12,125,000 shares of common stock underlying options and warrants that were outstanding on June 30, 2012 and 2011, respectively, have been excluded from the computation of diluted earnings per share because they are anti-dilutive.  As a result, basic loss per share was equal to diluted loss per share for each period.








For the Three Months Ended

June 30,


For the Six Months Ended

June 30,2012


2011


2012


2011Net loss as reported

$
(265,348
)

$
(289,114
)

$
(434,352
)

$
(447,897
)Weighted average number of shares outstanding – basic and diluted


210,671,384



138,751,329



206,737,318



125,112,217Loss per share – basic and diluted

$
(0.00
)

$
(0.00
)

$
(0.00
)

$
(0.00
)






7


National Health Partners, Inc. and Subsidiaries


Notes to Consolidated Financial Statements


June 30, 2012


(Unaudited)





Note 5. Property and Equipment





Property and equipment consisted of the following at June 30, 2012:





Asset


AmountComputers

$
60,708Software

6,109Furniture

27,968Telephone

80,780Website

106,477Less: accumulated depreciation

(282,042
)Net property and equipment

$
--





Depreciation expense was zero and $2,166 for the three months ended June 30, 2012 and 2011, respectively, and zero and $4,393 for the six months ended June 30, 2012 and 2011, respectively.





Note 6. Deposits





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





As of June 30, 2012, the Company had a total of $36,400 in deposits.  Of this amount, $17,400 was being held by PowerPay Payment Systems, Inc., and $19,000 was being held by the lessor of the Company’s office space.





Note 7. Notes Payable





Eight promissory notes are outstanding as of June 30, 2012 totaling $152,000. Two promissory notes were executed during the three months ended June 30, 2012 for $60,000 and $5,000 respectively. Principal plus interest of 15% of the amount loaned is due on or before the 180thday following the date of each promissory note.Attached to each promissory note are Class A warrants. For each $1,000 in principal amount, 100,000 shares of Class A warrants are attached. All warrants have an exercise price of $.002 per share, and are exercisable during the period commencing on the date of the grant and ending December 31, 2012, and expire at the end of the exercise period.  The total value of the warrants (debt discount) issued is $22,400, which will be recognized as an expense during 2012. The Company recognized an expense of $10,803 and $10,613 for the three months ended June 30, 2012 and $16,686 and $15,273 for the six months ended June 30, 2012 in connection with the issuance of these promissory notes and warrants respectively.





One promissory note, dated May 16, 2012 is outstanding as of June 30, 2012 totaling $10,000. Provided the lender does not convert the note into stock, the Company shall pay to the lender the principal and all accrued interest of 15% on March 31, 2013.





The total promissory notes outstanding as of June 30, 2012 are $162,000.




8


National Health Partners, Inc. and Subsidiaries


Notes to Consolidated Financial Statements


June 30, 2012


(Unaudited)




Note 8. Commitments and Contingencies





The Company’s material commitments and contingencies consist of an operating lease for its office space in Pennsylvania.





Operating Leases





The Company is a party to a lease for its office facility located in Horsham, Pennsylvania which was most recently amended on November 13, 2009.  The amendment extended the term of the lease from May 31, 2010 to May 31, 2013.  The amendment provides for an initial monthly rent payment of $7,214 and an initial monthly operating expense payment of approximately $6,160.  The agreement requires the Company to make minimum annual rent payments of approximately $86,500, $90,000 and $93,500, respectively, and estimated annual operating expense payments of approximately $74,000 (subject to periodic increases) during the three-year term of the amendment.





The Company has been delinquent with rent payments since the 2nd quarter and as a result the Company received notice on September 17, 2012 from Liberty Property Management of their intent to take legal action within 30 days from the date of notification if the Company doesn’t provide an acceptable payment schedule. The Company’s CEO has been in talks with the management of Liberty and the Company has agreed to a work out schedule for paying the delinquent amount that is currently owed to Liberty. Liberty will suspend any further legal action while the Company makes the subsequent payments in the negotiated schedule. The Company has agreed to make monthly payments over the next 4 months that include a payment for past rent as well as a payment for that current month. The payout schedule would allow the Company to completely payoff the outstanding liability by January, 2013. Upon completion of this payout plan Liberty will provide the Company with a different location to move its operations which will ultimately save the company approximately 50% on future rent. The Company anticipates moving into a new location during the 1st quarter of 2013.





Future minimum lease payments, including estimated annual operating expenses under this facility lease are as follows:




Fiscal Year


Amount2012

$
163,8052013


68,865$
232,670


Note 9. 2006 Stock Incentive Plan





On February 2, 2006, the Company adopted the National Health Partners, Inc. 2006 Stock Incentive Plan.  Under the plan, 4,500,000 shares of common stock may be granted to employees, officers and directors of, and consultants and advisors to, the Company under awards that may be made in the form of stock options, warrants, stock appreciation rights, restricted stock, restricted units, unrestricted stock and other equity-based or equity-related awards.  As of June 30, 2012, all shares of common stock had been issued under the plan.  The plan terminates 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 stock available for issuance under the plan.





9


National Health Partners, Inc. and Subsidiaries


Notes to Consolidated Financial Statements


June 30, 2012


(Unaudited)





Note 10. 2008 Stock Incentive Plan





On April 7, 2008, the Company adopted the National Health Partners, Inc. 2008 Stock Incentive Plan.  Under the plan, 3,000,000 shares of common stock may be granted to employees, officers and directors of, and consultants and advisors to, the Company under awards that may be made in the form of stock options, warrants, stock appreciation rights, restricted stock, restricted units, unrestricted stock and other equity-based or equity-related awards.  As of June 30, 2012, all shares of common stock had been issued under the plan.  The plan terminates on April 6, 2018.  On April 10, 2008, the Company filed a registration statement on Form S-8, File No. 333-150177, with the SEC covering the public sale of the 3,000,000 shares of common stock available for issuance under the plan.





Note 11. 2011 Stock Incentive Plan





On January 28, 2011, the Company adopted the National Health Partners, Inc. 2011 Stock Incentive Plan.  Under the plan, 12,000,000 shares of common stock may be granted to employees, officers and directors of, and consultants and advisors to, the Company under awards that may be made in the form of stock options, warrants, stock appreciation rights, restricted stock, restricted units, unrestricted stock and other equity-based or equity-related awards.   The plan terminates on January 27, 2021.  On January 31, 2011, the Company filed a registration statement on Form S-8, File No. 333-171956, with the Securities and Exchange Commission (“SEC”) covering the public sale of the 12,000,000 shares of common stock available for issuance under the plan.




On May 27, 2011, the Company amended the 2011 Stock Incentive Plan. As amended, the aggregate number of shares that may be issued under the Plan is 20,000,000 shares. On June 27, 2011, the Company filed a registration statement on Form S-8, File No. 333-175156, with the Securities and Exchange Commission (“SEC”) covering the additional 8,000,000 shares.




As of June 30, 2012, 19,800,000 shares of common stock had been issued under the plan.




Note 12. 2011 Stock Incentive Plan No. 2





On April 26, 2011, the Company adopted the National Health Partners, Inc. 2011 Stock Incentive Plan No. 2.  Under the plan, 12,000,000 shares of common stock may be granted to employees, officers and directors of, and consultants and advisors to, the Company under awards that may be made in the form of stock options, warrants, stock appreciation rights, restricted stock, restricted units, unrestricted stock and other equity-based or equity-related awards.  As of June 30, 2012, 12,000,000 shares of common stock had been issued under the plan.  The plan terminates on April 25, 2021.  On April 29, 2011, the Company filed a registration statement on Form S-8, File No. 333-173792, with the Securities and Exchange Commission (“SEC”) covering the public sale of the 12,000,000 shares of common stock available for issuance under the plan.




Note 13. 2011 Stock Incentive Plan No. 3




On September 23, 2011, the Company adopted the National Health Partners, Inc. 2011 Stock Incentive Plan No. 3.  Under the plan, 10,000,000 shares of common stock may be granted to employees, officers and directors of, and consultants and advisors to, the Company under awards that may be made in the form of stock options, warrants, stock appreciation rights, restricted stock, restricted units, unrestricted stock and other equity-based or equity-related awards.  As of June 30, 2012, 2,000,000 shares of common stock had been issued under the plan.  The plan terminates on September 22, 2021.  On September 28, 2011, the Company filed a registration statement on Form S-8, File No. 333-177047, with the Securities and Exchange Commission (“SEC”) covering the public sale of the 10,000,000 shares of common stock available for issuance under the plan.




Note 14. 401(k) Plan





On January 15, 2007, the Company adopted the National Health Partners, Inc. 401(k) Plan. Under the plan, eligible employees may elect to contribute up to 100% of their compensation to the plan each year, subject to certain limitations imposed by the Internal Revenue Service.  The Company contributes 100% of the first 3% of the employee’s contribution and 50% of the next 2% of the employee’s contribution. The Company did not contribute to the plan during the three months ended June 30, 2012 and 2011, respectively, and did not contribute to the plan during the six months ended June 30, 2012 and 2011, respectively.


10


National Health Partners, Inc. and Subsidiaries


Notes to Consolidated Financial Statements


June 30, 2012


(Unaudited)





Note 15. Common Stock and Warrants





The Company’s authorized capital consisted of 250,000,000 shares of common stock, $0.001 par value per share, of which 218,803,252 and 149,328,252 shares of common stock were outstanding at June 30, 2012 and 2011, respectively.  Warrants exercisable into an aggregate of 13,200,000 and 12,000,000 shares of the Company’s common stock were outstanding on June 30, 2012 and 2011, respectively.





Effective January 7, 2011 the Articles of Incorporation were amended as follows: The total number of shares of stock which this corporation shall have authority to issue is two hundred fifty million (250,000,000) with a par value of $.001 per share, all of which shall be shares of common stock.





Non Capital-Raising Transactions




In April 2012, the Company issued 6,000,000 shares of common stock to one consultant, pursuant to an individual agreement with one individual.   The agreement relates to management consulting services to be provided to the Company.  The shares were valued at the closing price of the Company’s common stock on the date the agreement was executed for total consideration of $12,000, which will be recognized as expense during the year ended December 31, 2012.





Capital-Raising Transactions




In January 2012, the Company completed a private placement of promissory notes of $30,000 and Class A warrants exercisable into 3,000,000 shares of our common stock to an accredited investor. The principal and interest of 15% of the amount loaned is due on or before the 180th day following the date of the promissory note The Class A warrants have an exercise price of $.002 per share, are exercisable during the period commencing on the date of the grant and ending December 31, 2012, and expire at the end of the exercise period.




In March 2012, the Company completed a private placement of promissory notes of $10,000 and Class A warrants exercisable into 1,000,000 shares of our common stock to an accredited investor.  The principal and interest of 15% of the amount loaned is due on or before the 180th day following the date of the promissory note The Class A warrants have an exercise price of $.002 per share, are exercisable during the period commencing on the date of the grant and ending December 31, 2012, and expire at the end of the exercise period.




In April 2012, the Company completed a private placement of promissory notes of $65,000 and Class A warrants of our common stock exercisable into 6,500,000 shares of our common stock to an accredited investor.  The principal and interest of 15% of the amount loaned is due on or before the 180th day following the date of the promissory note. The Class A warrants have an exercise price of $0.002 per share, are exercisable during the period commencing on the date of grant and ending December 31, 2012, and expire at the end of the exercise period.




In May 2012, the Company executed a Promissory Note of $10,000. Provided the lender does not convert the note into stock, the Company shall pay to the lender the principal and all accrued interest of 15% on March 31, 2013.





In June 2012, the Company completed a private offering of 10,000,000 shares of our common stock to an accredited investor for aggregate gross proceeds of $16,000.


11


National Health Partners, Inc. and Subsidiaries


Notes to Consolidated Financial Statements


June 30, 2012


(Unaudited)





Note 16. Stock Options





Stock options exercisable into an aggregate of 125,000 shares of the Company’s common stock were outstanding on June 30, 2012 and 2011, respectively, of which 125,000 and 100,000 shares were vested, respectively.  No options were exercised during the three months ended June 30, 2012 and 2011, respectively.  The Company estimates the fair value of its stock options on the date of grant by using the Black-Scholes pricing model in accordance 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 following weighted-average assumptions to determine the fair value of the stock options issued: a dividend yield of zero percent, an expected volatility of between 214% and 282%, a risk-free interest rate of between 2.25% and 4.76% and a remaining contractual life of between 9.15 and 9.95 years.





Note 17. Related Party Transactions





None





Note 18. Subsequent Events





The Company has performed an evaluation of subsequent events in accordance with ASC Topic 855.  Other than the events noted below, the Company is not aware of any subsequent events which would require recognition or disclosure in the financial statements.





In July 2012, the Lender of a Promissory Note dated January 3, 2012 authorized the Company to convert the Promissory Note in the amount of $30,000 plus accrued interest in the amount of $2,250 into a new Promissory Note in the amount of $32,250. Provided the Lender does not convert the note into stock, the principal and interest of 15% are due on March 31, 2013. The Lender also authorized the Company to cancel the 3,000,000 warrants received from the original Promissory Note.





In July 2012, the lender of a Promissory Note dated December 15, 2011 authorized the Company to convert the Promissory Note in the amount of $40,000 plus accrued interest in the amount of $3,353 into a new Promissory Note in the amount of $43,353. Provided the Lender does not convert the note into stock, the principal and interest of 15% are due on March 31, 2013. The lender also authorized the Company to cancel the 4,000,000 warrants received from the original Promissory Note.





In July 2012, the lender of a Promissory Note dated December 23, 2011 authorized the Company to convert the Promissory Note in the amount of $2,000 plus accrued interest in the amount of $161 into a new Promissory Note in the amount of $2,161. Provided the Lender does not convert the note into stock, the principal and interest of 15% are due on March 31, 2013. The lender also authorized the Company to cancel the 200,000 warrants received from the original Promissory Note.





In July 2012, the lender of a Promissory Note dated December 27, 2011 authorized the Company to convert the Promissory Note in the amount of $2,000 plus accrued interest in the amount of $158 into a new Promissory Note in the amount of $2,158. Provided the Lender does not convert the note into stock, the principal and interest of 15% are due on March 31, 2013. The lender also authorized the Company to cancel the 200,000 warrants received from the original Promissory Note.





12


National Health Partners, Inc. and Subsidiaries


Notes to Consolidated Financial Statements


June 30, 2012


(Unaudited)




In July 2012, the lender of a Promissory Note dated December 27, 2011 authorized the Company to convert the Promissory Note in the amount of $3,000 plus accrued interest in the amount of $236 into a new Promissory Note in the amount of $3,236. Provided the Lender does not convert the note into stock, the principal and interest of 15% are due on March 31, 2013. The lender also authorized the Company to cancel the 300,000 warrants received from the original Promissory Note.





In July 2012, the Company executed a Promissory Note of $10,000 of which $5,000 was paid in July and $5,000 was paid in August. Provided the lender does not convert the note into stock, the principal together with interest of 12% are due on March 31, 2013.





In July 2012, the Company executed a Promissory Note of $15,000 of which $7,500 was paid in August and the balance of $7,500 is due on or before November 30, 2012. Provided the lender does not convert the note into stock, the principal together with interest of 12% are due on March 31, 2013.





In July 2012, the Company issued 14,000,000 shares of common stock to two consultants, pursuant to individual agreements.  These agreements relate to management consulting services to be provided to the Company.  The shares were valued at the closing price of the Company’s common stock on the date the agreement was executed for total consideration of $33,600, which will be recognized as expense during the year ended December 31, 2012.





In August 2012, the Company executed a Promissory Note of $72,000, in which the lender agrees to make monthly advances of $6,000 commencing in September for a total of twelve monthly advances totaling $72,000. Provided the lender does not convert the note into stock, the principal together with interest of 12.5%, compounded quarterly are due on January 18, 2014.





In August 2012, the Company executed a Promissory Note of $6,000. Provided the lender does not convert the note into stock, the principal together with interest of 15%, compounded quarterly are due on August 31, 2013.





In September 2012, the Company executed a Promissory Note of $7,500. Provided the lender does not convert the note into stock, the principal together with interest of 15%, are due on December 6, 2012.




The Company has been delinquent with rent payments since the 2nd quarter and as a result the Company received notice on September 17, 2012 from Liberty Property Management of their intent to take legal action within 30 days from the date of notification if the Company doesn’t provide an acceptable payment schedule. The Company’s CEO has been in talks with the management of Liberty and the Company has agreed to a work out schedule for paying the delinquent amount that is currently owed to Liberty. Liberty will suspend any further legal action while the Company makes the subsequent payments in the negotiated schedule. The Company has agreed to make monthly payments over the next 4 months that include a payment for past rent as well as a payment for that current month. The payout schedule would allow the Company to completely payoff the outstanding liability by January, 2013. Upon completion of this payout plan Liberty will provide the Company with a different location to move its operations which will ultimately save the company approximately 50% on future rent. The Company anticipates moving into a new location during the 1st quarter of 2013.




13




DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS





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





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




·
our ability to fund future growth and implement our business strategy;
 
 ·
our dependence on a limited number of preferred provider organizations (“PPOs”) and other healthcare provider networks;
 
 ·
our dependence on a single insurance company for the insurance benefits offered as part of our CARExpress PlusTM programs;
 
 ·
our dependence upon a limited number of marketing and distribution partners for substantially all of our revenue;
 
 ·
our ability to market our membership programs and develop and expand the market for our membership programs;
 
 ·
demand for and acceptance of our membership programs;
 
 ·
competition in the health discount membership market;
 
 ·
our ability to attract and retain qualified personnel;
 
 ·
legislative or regulatory changes in the healthcare industry;
 
 ·
the condition of the securities and capital markets;
 
 ·
general economic and business conditions, either nationally or internationally or in the jurisdictions in which we are doing business;


and statements of assumption underlying any of the foregoing, as well as any other factors set forth herein under “Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations” below. All subsequent written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the foregoing.  Except as required by law, we assume no duty to update or revise our forward-looking statements.


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





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





This Management’s Discussion and Analysis of Financial Condition and Results of Operations and other parts of this report contain forward-looking statements that involve risks and uncertainties.  All forward-looking statements included in this report are based on information available to us on the date hereof, and, except as required by law, we assume no obligation to update any such forward-looking statements.  Our actual results may differ materially from those anticipated in these forward-looking statements as a result of a number of factors.  The following should be read in conjunction with our consolidated financial statements included above in Item 1 of Part I of this report.





Overview





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





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





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





Operational Metrics





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





We receive each member’s initial monthly payment and billing information at the beginning of the first monthly membership period.  Monthly payments for subsequent periods are received at the beginning of the applicable period.  The monthly membership fees that we receive are recognized as revenue evenly over the applicable monthly membership period.  As a result, there is a delay of four weeks between the date we receive a monthly membership fee and the date we recognize the entire fee as revenue.





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A key metric that we use to evaluate our success is our member retention rates.  Member retention rates represent the percentage of new members that we acquire that we are able to retain for a specified period of time.  Since we incur a large portion of our costs up front and receive recurring membership fees throughout the term of the membership, the longer we are able to retain the members we acquire, the greater the revenue potential of the membership programs that we sell.  We believe that the key to obtaining a high member retention rate is to target our marketing campaigns towards those individuals and organizations that are most in need of our programs, most capable of paying for our programs, and most loyal to us and our programs.  Member retention rates can be influenced by a variety of factors, including:


·
the type of membership programs being sold;
 
 ·
the marketing campaign being used to sell our membership programs;
 
 ·
the financial condition and loyalty of our members;
 
 ·
the distribution channel selling our membership programs; and
 
 ·
the type and amount of compensation being paid to our marketing and distribution partners to sell our membership programs.
 We have obtained valuable information regarding member demographics through the marketing and advertising campaigns that we have conducted and are focusing our marketing and advertising campaigns on members and member groups that we have identified as being most suitable for our membership programs.  As a result, we expect our retention rates to continue to improve over the next 12 months as we pursue these opportunities through our various marketing and distribution channels.





Financial Results and Outlook





Our strategy is to continue to expand our position as a provider of unique discount healthcare membership programs.  We have implemented several strategic growth initiatives during the past 12 months through which we achieved new contracts and strategic partnerships with a number of organizations, the most profound of which involved a shift in our sales strategy from sales through marketing companies to sales through employers and “affinity groups.”  An “affinity group” is a group of people who share interests, issues, and a common bond or background, and offer support for each other.  Examples of the types of affinity groups that we are working with include unions, associations, chambers of 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.  In addition, it is far less costly for us to sell our CARExpressTM programs through these organizations than it is for us to engage in expensive, nation-wide marketing and advertising campaigns through marketing companies, and the members that we obtain through these sources tend to remain members for a much longer period of time.





We experienced a decrease in revenue for the three and six months ended June 30, 2012 compared to the three and six months ended June 30, 2012. Our gross profit margin for the three months and six months ended June 30, 2012 was lower than our gross profit margin for the three and six months ended June 30, 2011.  However, our net loss for the three and six months ended June 30, 2012 was lower than our net loss for the three and six months ended June 30, 2011 as a result of the implementation of cost-cutting initiatives. Our net cash used by operating activities decreased during the six months ended June 30, 2012 compared to the six months ended June 30, 2011.





We generated revenue of $319,557 and $627,819 for the three and six months ended June 30, 2012 compared to revenue of $415,935 and $875,478 for the three and six months ended June 30, 2011.  We achieved a gross profit of $70,753 and $228,925 for the three and six months ended June 30, 2012, compared to a gross profit of $152,840 and $348,141 for the three and six months ended June 30, 2011.  We recognized a net loss of $265,348 and $434,352 ($0.00 and $0.00 per share) for the three and six months ended June 30, 2012, respectively, compared to a net loss of $289,114 and $447,897 ($0.00 and $0.00 per share) for the three and six months ended June 30, 2011, respectively.  Net cash used by operating activities was $132,250 for the six months ended June 30, 2012 compared to $182,346 for the six months ended June 30, 2011, representing a decrease of 27%.


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We will generate future revenue and members primarily through sales of our CARExpressTM health discount programs and our CARExpress PlusTM membership programs to employees and members of affinity groups through our marketing and distribution partners, and various marketing and advertising campaigns.  We have entered into agreements with several affinity groups through which we are generating sales of our CARExpressTM membership programs and are currently in discussions with several other organizations regarding the sale of our CARExpressTM membership programs.  We intend to finance each of these projects through cash on hand, internally generated cash flows from operating activities and, if necessary, proceeds from the issuance of equity securities and promissory notes.  We will use any additional investments that we receive to accelerate the expansion of each of our advertising campaigns and programs and increase sales of our membership programs.





We expect the number of CARExpressTM members generated each month to increase during the quarter ended September, 2012 as a number of deals that we have either recently closed or that we expect to close begin to generate members for us.  We also expect the number of CARExpressTM members generated each month to increase throughout the year and expect our retention rates to improve over the next 12 months since members generated through affinity groups have historically remained members of CARExpressTM for a much longer period of time than members generated through marketing companies.  As a result, we expect to generate an increasing amount of revenue during the year ended December 31, 2012.  We believe that this increase in revenue combined with the various cost-cutting initiatives that we implemented over the past several quarters will enable us to generate positive cash flows from operating activities during the year ended December 31, 2012 as the recurring membership fees from our increasing membership base overtake the costs associated with retaining existing members and obtaining new members.  We can provide no assurance, however, that our membership base will increase as projected, that our member retention rates will improve over the next 12 months, that we will generate the aforementioned projected revenue, or that we will generate positive cash flows from operating activities during the year ended December 31, 2012.





Critical Accounting Policies





For information regarding our critical accounting policies, please refer to the discussion provided in our Annual Report on Form 10-K for our fiscal year ended December 31, 2011 under the caption “Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies” and our Notes to Consolidated Financial Statements included therein.





Recent Accounting Pronouncements





For information regarding recent accounting pronouncements applicable to our business, please refer to the discussion provided in our Annual Report on Form 10-K for our fiscal year ended December 31, 2011 under the caption “Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations – Recent Accounting Pronouncements” and our Notes to Consolidated Financial Statements included therein.





Comparison of the Three-Month Periods Ended June 30, 2012 and 2011





Revenue





Revenue consists almost exclusively of the monthly membership fees that we receive from members of our membership programs.  Revenue decreased $96,378 to $319,557 for the three months ended June 30, 2012 from $415,935 for the three months ended June 30, 2011.





The decrease of $96,378 resulted primarily from a decrease in sales through employers and affinity groups in connection with the shift in our sales strategy from sales through marketing companies to sales through employers and affinity groups. The remainder of the revenue that we generated during these periods was derived from existing members.  We expect revenue to increase over the next 12 months as a result of increased sales to employees and members of affinity groups through our marketing and distribution partners and our various marketing and advertising campaigns.


17


Direct Costs





Direct costs consist of sales commissions that we pay to our marketing and distribution partners and fees that we pay to our PPOs and provider networks for access to their networks.  Direct costs decreased $14,291 to $248,804 for the three months ended June 30, 2012, from $263,095 for the three months ended June 30, 2011.  The decrease of $14,291 was due to an increase of $12,037 for sales commissions and a decrease of $26,328 for PPO and provider network costs.  We expect cost of sales to increase over the next 12 months as increased sales of our membership programs result in higher overall sales commission expenses and provider network costs.





General and Administrative Expenses





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





Employee Compensation Expense.  Employee compensation expense consists of all salaries and other cash compensation, equity-based compensation, 401(k) contributions and other compensation that we pay to our employees and the related payroll taxes.  Employee compensation expense decreased $41,193 to $95,677 for the three months ended June 30, 2012, from $136,870 for the three months ended June 30, 2011.  The decrease of $41,193 was due primarily to decreases of $24,814 for salary expense, $14,062 for stock option and restricted stock award expense and $2,317 for related payroll taxes.  We expect employee compensation expense to increase over the next 12 months as we begin to hire additional employees to support the growth of our business.





Professional Fees.  Professional fees consist of fees paid to our independent accountants, lawyers, technology consultants and other professionals and consultants.  Professional fees decreased $70,575 to $108,530 for the three months ended June 30, 2012 from $179,105 for the three months ended June 30, 2011.  The decrease of $70,575was due primarily to a decrease of $91,197 for the amount of expense recognized in connection with equity-based compensation paid to service providers and consultants for various services, offset by an increase of $21,143for accounting fees.  We expect professional fees to increase over the next 12 months as we incur additional legal, accounting and technology fees in connection with the general expansion of our business and operations.





Other General and Administrative Expenses.  Other general and administrative expenses consist of office supplies expense, computer hardware and system costs, bank service charges, filing fees and dues, non-employee customer service representative expense, rent expense, health insurance and other related benefit costs, financial printer costs, transfer agent costs, the costs of investor relations campaigns and activities, postage and delivery expenses, marketing, general business expenses and miscellaneous general and administrative expenses that are not associated with our employee compensation and professional fees.  Other general and administrative expenses decreased $15,501 to $110,478 for the three months ended June 30, 2012 from $125,979 for the three months ended June 30, 2011.  The decrease of $15,501 resulted primarily from decreases of $5,719 for postage, $$5,425 for rent, $1,005 for supplies, $1,508 for financial printing, as well as decrease in other miscellaneous general and administrative expenses.  We expect other general and administrative expenses to increase over the next 12 months as we continue to incur expenses for bank service charges, financial printer services, investor relations campaigns and activities, transfer agent fees, health insurance, rent, non-employee customer service representatives, supplies, computer hardware and systems, and other miscellaneous items associated with the general operation and growth of our business.





Net Loss





Our net loss decreased $23,766 to $265,348 for the three months ended June 30, 2012, from $289,114 for the three months ended June 30, 2011.  The decrease of $23,766 was due to decreases of $41,193 for employee compensation expenses, $70,575 for professional fees, $15,501 for other general and administrative expenses, and $14,291 for direct costs incurred in connection with the sale of our membership programs, offset by a decrease of $96,378 for revenue, and an increase of $21,416 for interest expense.   We expect to begin generating a net profit from operations during 2012 as the recurring membership fees from our increasing membership base overtake the costs associated with obtaining and retaining members.


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Comparison of the Six-Month Periods Ended June 30, 2012 and 2011





Revenue





Revenue consists almost exclusively of the monthly membership fees that we receive from members of our membership programs.  Revenue decreased $247,659 to $627,819 for the six months ended June 30, 2012 from $875,478 for the six months ended June 30, 2011.





The decrease of $247,659 resulted primarily from a decrease in sales through employers and affinity groups in connection with the shift in our sales strategy from sales through marketing companies to sales through employers and affinity groups. The remainder of the revenue that we generated during these periods was derived from existing members.  We expect revenue to increase over the next 12 months as a result of increased sales to employees and members of affinity groups through our marketing and distribution partners and our various marketing and advertising campaigns.





Direct Costs





Direct costs consist of sales commissions that we pay to our marketing and distribution partners and fees that we pay to our PPOs and provider networks for access to their networks.  Direct costs decreased $128,443 to $398,894 for the six months ended June 30, 2012, from $527,337for the six months ended June 30, 2011.  The decrease of $128,443 was due to decreases of $57,730 for sales commissions and $70,713 for PPO and provider network costs.  We expect cost of sales to increase over the next 12 months as increased sales of our membership programs result in higher overall sales commission expenses and provider network costs.





General and Administrative Expenses





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





Employee Compensation Expense.  Employee compensation expense consists of all salaries and other cash compensation, equity-based compensation, 401(k) contributions and other compensation that we pay to our employees and the related payroll taxes.  Employee compensation expense decreased $70,576 to $226,034 for the six months ended June 30, 2012, from $296,610 for the six months ended June 30, 2011.  The decrease of $70,576 was due primarily to decreases of $34,108 for salary expense, $33,582 for stock option and restricted stock award expense and $2,886 for related payroll taxes.  We expect employee compensation expense to increase over the next 12 months as we begin to hire additional employees to support the growth of our business.





Professional Fees.  Professional fees consist of fees paid to our independent accountants, lawyers, technology consultants and other professionals and consultants.  Professional fees decreased $63,185 to $187,271 for the six months ended June 30, 2012 from $250,456 for the six months ended June 30, 2011.  The decrease of $63,185 was due primarily to a decrease of $65,510 for the amount of expense recognized in connection with equity-based compensation paid to service providers and consultants for various services.  We expect professional fees to increase over the next 12 months as we incur additional legal, accounting and technology fees in connection with the general expansion of our business and operations.





Other General and Administrative Expenses.  Other general and administrative expenses consist of office supplies expense, computer hardware and system costs, bank service charges, filing fees and dues, non-employee customer service representative expense, rent expense, health insurance and other related benefit costs, financial printer costs, transfer agent costs, the costs of investor relations campaigns and activities, postage and delivery expenses, marketing, general business expenses and miscellaneous general and administrative expenses that are not associated with our employee compensation and professional fees.  Other general and administrative expenses decreased $30,959 to $218,013 for the six months ended June 30, 2012 from $248,972 for the six months ended June 30, 2011.  The decrease of $30,959 resulted primarily from decreases of $1,586 for telephone, $5,269 for supplies, $7,089 for postage, $3,226 for investor relations, $5,062 for rent, $2,183 for financial printing, $4,393 for depreciation, as well as decrease in other miscellaneous general and administrative expenses.  We expect other general and administrative expenses to increase over the next 12 months as we continue to incur expenses for bank service charges, financial printer services, investor relations campaigns and activities, transfer agent fees, health insurance, rent, non-employee customer service representatives, supplies, computer hardware and systems, and other miscellaneous items associated with the general operation and growth of our business.


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Net Loss





Our net loss decreased $13,545 to $434,352 for the six months ended June 30, 2012, from $447,897 for the six months ended June 30, 2011.  The decrease of $13,545 was due to decreases of $70,576 for employee compensation expenses, $63,185 for professional fees, $30,959 for other general and administrative expenses, and $128,443 for direct costs incurred in connection with the sale of our membership programs, offset by a decrease of $247,659 for revenue, and an increase of $31,959 for interest expense.   We expect to begin generating a net profit from operations during 2012 as the recurring membership fees from our increasing membership base overtake the costs associated with obtaining and retaining members.





Liquidity and Capital Resources





Since our inception, we have funded our operations primarily through private sales of equity securities and promissory notes.  As of June 30, 2012, we had cash and cash equivalents of $2,090.





Net cash used by operating activities was $132,250 for the six months ended June 30, 2012, compared to $182,346 for the six months ended June 30, 2011.  The $50,096 decrease in cash used by operating activities was due primarily to a decrease of $13,545 for net loss, decrease of $96,621 for common stock issued for services and amortization of prepaid expenses, increases of $42,400 for deposits, $150,982 for accounts payable and accrued expenses, $2,949 for refunds payable, $7,711 for deferred revenue and $15,273 for amortization of debt discount.





We did not have any cash flows from investing activities for the six months ended June 30, 2012 and 2011.





Net cash provided by financing activities was $131,000 for the six months ended June 30, 2012, compared to $160,250 for the six months ended June 30, 2011.  The $29,250 decrease in cash provided by financing activities was due to the decreases of $127,300 in proceeds from the sale of stock and warrants and $16,950 in proceeds from investor deposits offset by an increase of $115,000 in proceeds from the sale of notes payable and warrants.





Our primary sources of capital for the six months ended June 30, 2012 are set forth below.





In January 2012, the Company completed a private placement of promissory notes of $30,000 and Class A warrants exercisable into 3,000,000 shares of our common stock to an accredited investor. The principal and interest of 15% of the amount loaned is due on or before the 180th day following the date of the promissory note The Class A warrants have an exercise price of $.002 per share, are exercisable during the period commencing on the date of the grant and ending December 31, 2012, and expire at the end of the exercise period.




In March 2012, the Company completed a private placement of promissory notes of $10,000 and Class A warrants exercisable into 1,000,000 shares of our common stock to an accredited investor.  The principal and interest of 15% of the amount loaned is due on or before the 180th day following the date of the promissory note The Class A warrants have an exercise price of $.002 per share, are exercisable during the period commencing on the date of the grant and ending December 31, 2012, and expire at the end of the exercise period.




In April 2012, the Company completed a private placement of promissory notes of $65,000 and Class A warrants of our common stock exercisable into 6,500,000 shares of our common stock to an accredited investor.  The principal and interest of 15% of the amount loaned is due on or before the 180th day following the date of the promissory note. The Class A warrants have an exercise price of $0.002 per share, are exercisable during the period commencing on the date of grant and ending December 31, 2012, and expire at the end of the exercise period.




In May 2012, the Company executed a Promissory Note of $10,000. Provided the lender does not convert the note into stock, the Company shall pay to the lender the principal and all accrued interest of 15% on March 31, 2013.





In June 2012, the Company completed a private offering of 10,000,000 shares of our common stock to an accredited investor for aggregate gross proceeds of $16,000.




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To date, our capital needs have been met primarily through sales of equity securities, promissory notes and proceeds received upon the exercise of warrants held by our security holders.   We do not currently maintain a line of credit or term loan with any commercial bank or other financial institution.  We have used the proceeds from the exercise of warrants and our private offerings of securities to pay virtually all of the costs and expenses we have incurred.  These costs and expenses were comprised of operating expenses, which consisted of the employee compensation expenses, professional fees and other general and administrative expenses discussed above, and the costs of sales discussed above to the extent such costs of sales exceeded our revenue.





We believe that our current cash resources will not be sufficient to sustain our current operations for the next 12 months.  We will need to obtain additional cash resources within the next 12 months to enable us to pay our ongoing costs and expenses as they are incurred and finance the growth of our business.  We intend to obtain these funds through internally generated cash flows from operating activities and proceeds from the issuance of equity securities and promissory notes.  The issuance of additional equity would result in dilution to our existing shareholders.  We have not made arrangements to obtain additional financing and we can provide no assurance that additional financing will be available in an amount or on terms acceptable to us, if at all.  If we are unable to obtain additional funds when they are needed or if such funds cannot be obtained on terms favorable to us, we may be unable to execute upon our business plan or pay our costs and expenses as they are incurred, which could have a material, adverse effect on our business, financial condition and results of operations.





The Company’s authorized capital consists of 250,000,000 shares of common stock, of which 218,803,252 shares of common stock were outstanding at June 30, 2012.  The total of warrants exercisable into an aggregate of 13,200,000 shares of the Company’s common stock and stock options exercisable into an aggregate of 125,000 shares of the Company’s common stock at June 30, 2012 equal a total 13,325,000 shares of common stock underlying options and warrants that were outstanding at June 30, 2012.  The combination of the 218,803,252 shares of common stock outstanding and the 13,325,000 shares of potentially dilutive options and warrants outstanding at June 30, 2012 gives effect to a potential outstanding total of 232,128,252 of the authorized capital of 250,000,000 shares of common stock.





Off-Balance Sheet Arrangements





As of June 30, 2012, we did not have any relationships with unconsolidated entities or financial partners, such as entities often referred to as structured finance or special purpose entities that had been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.  As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.





Item 4. Controls and Procedures.





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


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As of June 30, 2012, we carried out the evaluation of the effectiveness of our disclosure controls and procedures as defined by Rule 13a-15(e) under the Exchange Act under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer.  Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2012, our disclosure controls and procedures were not effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is: (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.





Our management used the framework set forth in the report entitled, “Internal Control — Integrated Framework”published by the Committee of Sponsoring Organizations of the Treadway Commission, known as COSO, to evaluate the effectiveness of our internal control over financial reporting.  Based on this assessment, our management concluded that our internal control over financial reporting was not effective at June 30, 2012 due to the existence of material weaknesses in our internal controls.





A material weakness is a control deficiency, or a combination of control deficiencies, that results in a more than remote likelihood that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.  Our management, in consultation with our independent registered public accounting firm, concluded that material weaknesses existed in the following areas as of December 31, 2011 in the areas described below. We have not remediated such material weaknesses through June 30, 2012.





(1)
Our Chief Executive Officer also serves as the sole member of our board of directors.  As a result, there are no independent directors monitoring the actions of our senior management.  One of the responsibilities of a company’s board of directors is to act as an independent source for monitoring the actions of a company’s senior management.  The lack of independent directors on our board of directors constituted a material weakness in our internal controls.





(2)
Our Chief Executive Officer and sole member of our board of directors resides in the state of Florida and did not visit our sole business office located in Horsham, Pennsylvania during 2011 or in 2012.  Senior management has the responsibility to monitor the quality of a company’s internal controls.  This is most often performed through the regular management and supervisory activities of the company’s day-to-day operations.  The lack of monitoring by our Chief Executive Officer constituted a material weakness in the ability of top management to effectively monitor the quality of our internal controls.





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





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





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





Notwithstanding the existence of these material weaknesses in internal controls, we believe that our consolidated financial statements fairly present, in all material respects, our consolidated balance sheets at June 30, 2012 and December 31, 2011, consolidated statements of operations and cash flows for the six months ended June 30, 2012 and 2011 in conformity with GAAP.


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PART II – OTHER INFORMATION







Item 1A. Risk Factors.





WE HAVE NOT HELD AN ANNUAL MEETING OF SHAREHOLDERS FOR SEVERAL YEARS EVEN THOUGH INDIANA CORPORATION LAW REQUIRES US TO HOLD AN ANNUAL MEETING EVERY YEAR.  OUR FAILURE TO HOLD ANNUAL MEETINGS COULD RESULT IN A COURT-ORDERED ANNUAL MEETING THAT COULD RESULT IN A CHANGE IN CONTROL OF OUR COMPANY IN THE EVENT OUR CURRENT BOARD OF DIRECTORS WAS NOT RE-ELECTED.





We were incorporated under the laws of the State of Indiana. Indiana Code 23-1-29-1 provides that an Indiana corporation shall hold a meeting of the shareholders annually.  We have not held a meeting of shareholders for several years. The last time we held an annual meeting of shareholders was February 4, 2004.  The last time we held an election of Directors was February 3, 2005 when two Directors were removed from the Board of Directors and two people were elected to serve on the Board of Directors.  We do not plan on holding an annual meeting of shareholders during 2012.  However, we do plan to hold an annual meeting of shareholders in May or June of 2013.





Indiana Code 23-1-29-3 provides a procedure for a court-ordered meeting of shareholders by stating that the circuit or superior court of the county where our registered office is located may order a meeting to be held and may fix the time and place of the meeting, which shall be conducted in accordance with our articles of incorporation or bylaws: (1) on application of any shareholder of the corporation entitled to participate in an annual meeting, if an annual meeting has not been held within the earlier of six (6) months after the end of the corporation’s fiscal year or fifteen (15) months after our last annual meeting.





Therefore, since all of our shareholders would be entitled to vote at an annual meeting, any one of our shareholders could make application with a circuit or superior court in Marion County, Indiana (the county in which our registered office is located) to force us to call a meeting of the shareholders.  The result of such a meeting could be that our current directors could be replaced by new directors, thereby resulting in a change of control of our company.




Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.





During the three months ended June 30, 2012, we sold the following securities without registration under the Securities Act of 1933, as amended (the “Securities Act”):




In June 2012, the Company completed a private offering of 10,000,000 shares of our common stock to an accredited investor for aggregate gross proceeds of $16,000.





Management believes the above shares of Common Stock and Class A warrants were issued pursuant to an exemption from registration under Section 4(2) of the Securities Act of 1933, as amended. The certificates representing such shares bear the standard 1933 Act restrictive legend and the investors have executed documents representing that the shares were being acquired for investment purposes only and not with a view the distribution thereof.  No broker or underwriter was involved in any of the above transactions. The proceeds from the cash sales are being used for working capital.





Item 6. Exhibits.





The following exhibits are included herein:





Exhibit No.

Exhibit31.1

Certification of Chief Executive Officer and Chief Financial Officer of the registrant required by Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended32.1

Certification of Chief Executive Officer and Chief Financial Officer of the registrant required by Rule 13a-14(b) under the Securities Exchange Act of 1934, as amended101*

Interactive Data Files pursuant to Rule 405 of Regulation S-T
 
 * To be provided by amendment.
 
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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 the undersigned thereunto duly authorized.
 
 NATIONAL HEALTH PARTNERS, INC.Date: October 1, 2012
/s/ David M. DanielsDavid M. DanielsChief Executive Officer,Chief Financial Officer and Principal Accounting Officer





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