**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, DC 20549**

 

**FORM 10-QSB**

 
| **x**      | ** ** | **QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|------------|------------|---------------------------------------------------------------------------------------|
| ** ** | ** ** | ** **                                                                            | **For the quarterly period ended:  September 30, 2007** |
| ** ** | ** ** | ** **                                                                            | ** ** |
| ** ** | ** ** | ** **                                                                            | **    OR** |
| ** ** | ** ** | ** **                                                                            | ** ** |
| **o**      | ** ** | **TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE EXCHANGE  ACT OF 1934**          |
| ** ** | ** ** | ** **                                                                            |
| ** ** | ** ** | ** **                                                                            | **For****the transition period  from                         to                         ** |
| ** ** | ** ** | ** **                                                                            | ** ** |
| ** ** | ** ** | ** **                                                                            | **Commission File  No. 000-51731** |

 

**NATIONAL HEALTH PARTNERS, INC.**

(Exact Name of Small Business Issuer asSpecified in Its Charter)

 

| **Indiana**                                                    | ** ** | **04-3786176**                    |
|----------------------------------------------------------------|------------|-----------------------------------|
| (State or Other Jurisdiction ofIncorporation  or Organization) |       | (IRS EmployerIdentification  No.) |
|                                                           |       |                              |
| **120 Gibraltar Road****Suite 107****Horsham, PA 19044**       |
| (Address of Principal Executive Offices)                       |

 

| **(215) 682-7114**                                     |
|--------------------------------------------------------|
| (Issuer’s Telephone Number, including Area  Code) |

 

Check whether the issuer (1) filed all reportsrequired to be filed by Section 13 or 15(d) of the Exchange Act during the past12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.

 

Yes  x    No  o

**APPLICABLE ONLY TO ISSUERS INVOLVED IN**

**BANKRUPTCY PROCEEDINGS DURING THE**

**PRECEDING FIVE YEARS**

 

Check whether the registrant filed all documents andreports required to be filed by Section 12, 13 or 15(d) of the Exchange Actafter the distribution of securities under a plan confirmed by a court.

 

Yes  o    No  o

 

Indicate by check mark whether the registrant is ashell company (as defined in rule 12b-2 of the Exchange Act).

 

Yes  o    No  x

**APPLICABLE ONLY TO CORPORATE ISSUERS**

 

Statethe number of shares outstanding of each of the issuer’s classes of commonequity, as of the latest practicable date: There were 35,699,106 issued and outstandingshares of the issuer’s common stock, $.001 par value per share, on November 13,2007.

 
| Transitional Small Business Disclosure Format  (check one): | Yes  o    No  x |
|-------------------------------------------------------------|---------------------------------------------------------|

 

 

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**TABLE OF CONTENTS**

 
|        |   |                                                                                                                   |   | **Page** |
|-------------|--------|------------------------------------------------------------------------------------------------------------------------|--------|----------|
|        |   | **PART I  FINANCIAL INFORMATION**                                                                                      |   |
|        |   |                                                                                                                   |   |     |
| **Item 1.** |   | **Financial Statements**                                                                                               | 1      |
|        |   |                                                                                                                   |   |     |
|        |   | **Consolidated Balance Sheet at September 30, 2007  (Unaudited)**                                                      | 1      |
|        |   |                                                                                                                   |   |     |
|        |   | **Consolidated Statements of Operations for the Three and  Nine Months Ended September 30, 2007 and 2006 (Unaudited)** | 2      |
|        |   |                                                                                                                   |   |     |
|        |   | **Consolidated Statements of Cash Flows for the Nine Months  Ended September 30, 2007 and 2006 (Unaudited)**           | 3      |
|        |   |                                                                                                                   |   |     |
|        |   | **Notes to Consolidated Financial Statements (Unaudited)**                                                             | 5      |
|        |   |                                                                                                                   |   |     |
| **Item 2.** |   | **Management’s Discussion and Analysis**                                                                          | 15     |
|        |   |                                                                                                                   |   |     |
| **Item 3.** |   | **Controls and Procedures**                                                                                            | 24     |
|        |   |                                                                                                                   |   |     |
|        |   | **PART II  OTHER INFORMATION**                                                                                         |   |
|        |   |                                                                                                                   |   |     |
| **Item 6.** |   | **Exhibits**                                                                                                           | 25     |

 

----

** **

**PART I**

**FINANCIALINFORMATION**

 

**Item 1. Financial Statements.**

** **

**NationalHealth Partners, Inc. and Subsidiary**

Consolidated Balance Sheet(Unaudited)

 
| ** **                                                                                                     | ** ** | **September 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                                                     | ** ** | **2007**               | ** ** |
|                                                                                                           |       |                   |       |
| **Assets**                                                                                                     |       |                   |       |
|                                                                                                           |       |                   |       |
| Current assets:                                                                                                |       |                   |       |
| Cash and cash equivalents                                                                                      |       | $                      | 441,550    |   |
| Accounts receivable                                                                                            |       | 9,662                  |       |
| Assets for resale                                                                                              |       | 55,000                 |       |
| Prepaid expense                                                                                                |       | 177,791                |       |
| Deposits                                                                                                       |       | 251,474                |       |
| Other current assets                                                                                           |       | 5,000                  |       |
|                                                                                                           |       |                   |       |
| Total current assets                                                                                           |       | 940,477                |       |
|                                                                                                           |       |                   |       |
| Property and equipment, net                                                                                    |       | 87,742                 |       |
| Prepaid expense                                                                                                |       | 96,907                 |       |
|                                                                                                           |       |                   |       |
| Total assets                                                                                                   |       | $                      | 1,125,126  |   |
|                                                                                                           |       |                   |       |
| **Liabilities and stockholders’ equity**                                                                  |       |                   |       |
|                                                                                                           |       |                   |       |
| Current liabilities                                                                                            |       |                   |       |
| Accounts payable                                                                                               |       | $                      | 210,894    |   |
| Accrued expenses                                                                                               |       | 83,477                 |       |
| Deferred revenue                                                                                               |       | 55,872                 |       |
|                                                                                                           |       |                   |       |
| Total current liabilities                                                                                      |       | 350,243                |       |
|                                                                                                           |       |                   |       |
| Total liabilities                                                                                              |       | 350,243                |       |
|                                                                                                           |       |                   |       |
| Commitments and contingencies                                                                                  |       |                   |       |
|                                                                                                           |       |                   |       |
| Stockholders’ equity:                                                                                     |       |                   |       |
| Common stock, $0.001 par value, 100,000,000  shares authorized, 34,849,106 shares issued and  outstanding |       | 34,849                 |       |
| Additional paid-in capital                                                                                     |       | 21,087,126             |       |
| Deferred compensation                                                                                          |       | (467,491               | )          |
| Accumulated deficit                                                                                            |       | (19,879,601            | )          |
|                                                                                                           |       |                   |       |
| Total stockholders’ equity                                                                                |       | 774,883                |       |
|                                                                                                           |       |                   |       |
| Total liabilities and stockholders’ equity                                                                |       | $                      | 1,125,126  |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements

 

1

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** **

**NationalHealth Partners, Inc. and Subsidiary**

Consolidated Statements ofOperations (Unaudited)

 
| ** **                                                              | ** ** | **For the Three Months Ended  September 30,** | ** ** | **For the Nine Months Ended  September 30,** | ** ** |
|-------------------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                                              | ** ** | **2007**                                                               | ** ** | **2006**                                                              | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                                    |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Net revenue                                                             |       | $                                                                      | 1,026,477  |                                                                  | $          | 411,045 |   | $ | 3,250,182 |   | $ | 1,052,473 |   |
|                                                                    |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Direct costs                                                            |       | 812,647                                                                |       | 567,159                                                               |       | 2,037,603 |   | 969,018 |   |
|                                                                    |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Gross profit (loss)                                                     |       | 213,830                                                                |       | (156,114                                                              | )          | 1,212,579 |   | 83,455 |   |
|                                                                    |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Operating expenses:                                                     |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Selling and marketing                                                   |       | 59,627                                                                 |       | 1,563,139                                                             |       | 170,877 |   | 2,506,833 |   |
| General and administrative                                              |       | 1,138,569                                                              |       | 771,072                                                               |       | 3,069,339 |   | 2,666,262 |   |
|                                                                    |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Total operating expenses                                                |       | 1,198,196                                                              |       | 2,334,211                                                             |       | 3,240,216 |   | 5,173,095 |   |
|                                                                    |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Loss from operations                                                    |       | (984,366                                                               | )          | (2,490,325                                                            | )          | (2,027,637 | ) | (5,089,640 | ) |
|                                                                    |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Other income (expense):                                                 |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Interest income                                                         |       | 949                                                                    |       | 1                                                                     |       | 15,368 |   | 55,019 |   |
| Interest expense                                                        |       | —                                                                 |       | —                                                                |       | — |   | (12,130 | ) |
| Gain on extinguishment of debt                                          |       | —                                                                 |       | —                                                                |       | — |   | 35,932 |   |
| Other income                                                            |       | —                                                                 |       | —                                                                |       | — |   | 1,972 |   |
|                                                                    |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Total other income                                                      |       | 949                                                                    |       | 1                                                                     |       | 15,368 |   | 80,793 |   |
|                                                                    |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Net loss                                                                |       | $                                                                      | (983,417   | )                                                                     | $          | (2,490,324 | ) | $ | (2,012,269 | ) | $ | (5,008,847 | ) |
|                                                                    |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Loss per share — basic and diluted                                 |       | $                                                                      | (0.03      | )                                                                     | $          | (0.09 | ) | $ | (0.06 | ) | $ | (0.22 | ) |
|                                                                    |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Weighted average number of shares outstanding  — basic and diluted |       | 33,657,367                                                             |       | 26,238,940                                                            |       | 31,155,082 |   | 22,532,310 |   |

** **

The accompanying notes are anintegral part of these consolidated financial statements

 

2

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**NationalHealth Partners, Inc. and Subsidiary**

Consolidated Statements ofCash Flows (Unaudited)

 
| ** **                                                                   | ** ** | **For the Nine Months Ended   September 30,** | ** ** |
|------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|
| ** **                                                                   | ** ** | **2007**                                                                    | ** ** | **2006** | ** ** |
|                                                                         |       |                                                                        |       |   |   |
| **Cash flows from operating activities**                                     |       |                                                                        |       |   |   |
|                                                                         |       |                                                                        |       |   |   |
| Net loss                                                                     |       | $                                                                           | (2,012,269 | ) | $ | (5,008,847 | ) |
| Adjustments to reconcile net loss to net  cash used by operating activities: |       |                                                                        |       |   |   |
| Common stock issued for services and amortization of prepaid services        |       | 502,701                                                                     |       | 433,818 |   |
| Options issued for services                                                  |       | 43,087                                                                      |       | 727,473 |   |
| Depreciation                                                                 |       | 57,079                                                                      |       | 46,790 |   |
| Changes in operating assets and  liabilities:                                |       |                                                                        |       |   |   |
| Increase in accounts receivable                                              |       | (9,662                                                                      | )          | — |   |
| Increase in deposits                                                         |       | (231,857                                                                    | )          | (21,460 | ) |
| Increase in other current assets                                             |       | (5,000                                                                      | )          | (5,958 | ) |
| Increase in accounts payable and accrued  expenses                           |       | 165,022                                                                     |       | 140,180 |   |
| Decrease in accounts payable — related  party                           |       | —                                                                      |       | (16,373 | ) |
| Increase (decrease) in deferred revenue                                      |       | (154,720                                                                    | )          | 76,521 |   |
| Decrease in notes payable                                                    |       | —                                                                      |       | (35,742 | ) |
| Decrease in deferred compensation                                            |       | —                                                                      |       | (29,000 | ) |
|                                                                         |       |                                                                        |       |   |   |
| Net cash used by operating activities                                        |       | (1,645,619                                                                  | )          | (3,692,598 | ) |
|                                                                         |       |                                                                        |       |   |   |
| **Cash flows from investing activities**                                     |       |                                                                        |       |   |   |
|                                                                         |       |                                                                        |       |   |   |
| Increase in assets held for resale                                           |       | (55,000                                                                     | )          | — |   |
| Decrease in certificates of deposit                                          |       | —                                                                      |       | 35,717 |   |
| Increase in property and equipment                                           |       | —                                                                      |       | (53,012 | ) |
|                                                                         |       |                                                                        |       |   |   |
| Net cash used by investing activities                                        |       | (55,000                                                                     | )          | (17,295 | ) |
|                                                                         |       |                                                                        |       |   |   |
| **Cash flows from financing activities**                                     |       |                                                                        |       |   |   |
|                                                                         |       |                                                                        |       |   |   |
| Proceeds from sale of common stock                                           |       | 540,000                                                                     |       | 2,204,060 |   |
| Stock offering costs                                                         |       | (64,800                                                                     | )          | — |   |
| Proceeds from stock subscriptions                                            |       | —                                                                      |       | — |   |
| Proceeds from exercise of warrants                                           |       | 70,000                                                                      |       | 2,886,063 |   |
| Payments on notes payable                                                    |       | —                                                                      |       | (168,000 | ) |
|                                                                         |       |                                                                        |       |   |   |
| Net cash provided by financing activities                                    |       | 545,200                                                                     |       | 4,922,123 |   |
|                                                                         |       |                                                                        |       |   |   |
| Net increase (decrease) in cash                                              |       | (1,155,419                                                                  | )          | 1,212,230 |   |
| Cash at beginning of year                                                    |       | 1,596,969                                                                   |       | 109,807 |   |
|                                                                         |       |                                                                        |       |   |   |
| Cash at end of period                                                        |       | $                                                                           | 441,550    |   | $ | 1,322,037 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements

 

3

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| ** **                                            | ** ** | **For the Nine Months Ended   June 30,** | ** ** |
|-------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                            | ** ** | **2007**                                                          | ** ** | **2006** | ** ** |
|                                                  |       |                                                              |       |   |   |
| **Supplemental disclosure of cash flow  information** |       |                                                              |       |   |   |
|                                                  |       |                                                              |       |   |   |
| Cash paid for taxes                                   |       | $                                                                 | —     |   | $ | — |   |
| Cash received (paid) for interest                     |       | $                                                                 | 14,419     |   | $ | (42,888 | ) |
|                                                  |       |                                                              |       |   |   |
| **Schedule of non-cash financing activities**         |       |                                                              |       |   |   |
|                                                  |       |                                                              |       |   |   |
| Common stock issued for services                      |       | $                                                                 | 490,300    |   | $ | 347,580 |   |
| Warrants issued for services                          |       | $                                                                 | —     |   | $ | 86,238 |   |
| Stock options issued for services                     |       | $                                                                 | 596,760    |   | $ | 727,473 |   |
| Common stock issued for stock offering  costs         |       | $                                                                 | 27,000     |   | $ | — |   |

 

The accompanying notes are anintegral part of these consolidated financial statements

 

4

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** **

**NationalHealth Partners, Inc. and Subsidiary**

Notes toConsolidated Financial Statements (Unaudited)

September 30, 2007

**Note 1.Description of Business**

 

NationalHealth Partners, Inc. (the “Company”) was organized on March 10, 1989 asSpectrum Vision Systems of Indiana, Inc. under the laws of the State of Indiana.The Company 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 markets its programs directly andindirectly through marketing companies, brokers and agents, small businessesand trade associations, and unions and associations. The Company derivessubstantially all of its revenue from the monthly membership fees it receivesfrom members of its membership programs.

 

**Note 2.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-QSB and Article10 of Regulation S-X and the related rules and regulations of the Securitiesand Exchange Commission (the “SEC”). Accordingly, they do not include all ofthe information and footnotes required by accounting principles generallyaccepted in the United States of America for complete financial statements. Inthe opinion of management, the disclosures included in these financialstatements are adequate to make the information presented not misleading.

 

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, 2006 included in the Company’s Annual Report on Form10-KSB. The results of operations for the three and nine months ended September30, 2007, respectively, are not necessarily indicative of the results that theCompany will have for any subsequent quarter or full fiscal 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 thoseestimates. The financial statements include the balances of National HealthPartners, Inc. and its wholly-owned subsidiaries. All material inter-companybalances and transactions have been eliminated in consolidation. Certainamounts in the financial statements for 2006 have been reclassified to conformto the 2007 presentation. These reclassifications did not result in any changeto the previously reported total assets, net loss or stockholders’ equity.

 

5

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TheCompany’s financial statements are 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 historicallyincurred significant losses, which raises substantial doubt about the Company’sability to continue as a going concern. The accompanying financial statementsdo 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 September 30, 2007, the Company’s significant accounting policies andestimates, which are detailed in the Company’s Annual Report on Form 10-KSB forthe year ended December 31, 2006, have not changed materially.

 

**Note 3.Stock Compensation Expense**

 

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, *“Accounting ForStock-Based Compensation”*(“SFAS 123”) and Emerging Issues TaskForce No. 96-18 *“Accounting for Equity Instruments That AreIssued to Other Than Employees for Acquiring or in Conjunction with SellingGoods or Services”* (“EITF 96-18”). In accordance therewith, theCompany recognized $127,113 and $545,788 of stock compensation expense duringthe three and nine months ended September 30, 2007.

 

**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 three- and nine-month periods,and is calculated by dividing the reported net loss for the applicable three-and nine-month periods by the weighted average number of shares of common stockoutstanding during the applicable three- and nine-month periods. The Companycalculates diluted loss per share by dividing the reported net loss for theapplicable three- and nine-month periods by the weighted average number ofshares of common stock outstanding during the applicable three- and nine-monthperiods as adjusted to give effect to the exercise of all potentially dilutiveoptions and warrants outstanding at the end of the applicable three- andnine-month periods. An aggregate of 16,190,809 and 29,638,317 shares of commonstock underlying options and warrants that were outstanding on September 30,2007 and 2006, respectively, have been excluded from the computation of dilutedearnings per share because they are anti-dilutive. As a result, basic loss pershare was equal to diluted loss per share for each three- and nine-monthperiod.

 

6

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| ** **                                                              | ** ** | **For the Three Months  Ended September 30,** | ** ** | **For the Nine Months  Ended September 30,** | ** ** |
|-------------------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                                              | ** ** | **2007**                                                               | ** ** | **2006**                                                              | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                                    |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Net loss as reported                                                    |       | $                                                                      | (983,417   | )                                                                     | $          | (2,490,324 | ) | $ | (2,012,269 | ) | $ | (5,008,847 | ) |
|                                                                    |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Weighted average number of shares  outstanding – basic and diluted |       | 33,657,367                                                             |       | 26,238,940                                                            |       | 31,155,082 |   | 22,532,310 |   |
|                                                                    |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Earnings (loss) per share – basis and  diluted                     |       | $                                                                      | (0.03      | )                                                                     | $          | (0.09 | ) | $ | (0.06 | ) | $ | (0.22 | ) |

 

**Note5. Property and Equipment**

 

Property and equipmentconsisted of the following at September 30, 2007:

 
| Computers                      |   | $        | 60,708 |   |
|--------------------------------|--------|----------|--------|--------|
| Software                       |   | 6,109    |   |
| Furniture                      |   | 27,968   |   |
| Telephone                      |   | 80,780   |   |
| Website                        |   | 106,477  |   |
| Less: accumulated depreciation |   | (194,300 | )      |
| Property and equipment, net    |   | $        | 87,742 |   |

 

Depreciation expense for the three months endedSeptember 30, 2007 and 2006 was $18,546 and $17,350, respectively, and for thenine months ended September 30, 2007 and 2006 was $57,079 and $46,790,respectively.

 

**Note6. Deposits**

 

Deposits consist ofcash reserves held by merchant processors and the security deposit held by thelessor of the Company’s office space. As of September 30, 2007, the Company hada total of $251,474 in deposits. Of this amount, $101,166 was being held byHeartland Payment Systems, Inc., $117,456 was being held by Optimal Payments,Inc., and the remainder was being held by the lessor of the Company’s officespace and other entities.

 

7

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**Note 7. Commitments and Contingencies**

 

The Company’s material commitments and contingencies consist of anoperating lease for its office space in Horsham, Pennsylvania and employmentagreements with its current and former 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 amendmentextended the term of the lease from May 31, 2007 to May 31, 2010. The amendmentprovides for an initial monthly rent payment of $7,803 and an initial monthlyoperating expense payment of approximately $5,620.

 

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

 
| **Fiscal Year** | ** ** | **Amount** | ** ** |
|----------------------|------------|------------|------------|
|                 |       |       |       |
| 2007                 |       | $          | 40,270     |   |
| 2008                 |       | 163,138    |       |
| 2009                 |       | 166,672    |       |
| 2010                 |       | 70,060     |       |
|                 |       |       |       |
|                 |       | $          | 440,140    |   |

 

**EmploymentAgreements**

 

TheCompany is a party to employment agreements with each of its current executiveofficers and one of its former executive officers. Future minimum paymentsunder these employment agreements are as follows:

 
| **Fiscal Year** | ** ** | **Amount** | ** ** |
|----------------------|------------|------------|------------|
|                 |       |       |       |
| 2007                 |       | $          | 237,480    |   |
| 2008                 |       | 1,044,912  |       |
| 2009                 |       | 748,107    |       |
| 2010                 |       | 56,315     |       |
|                 |       |       |       |
|                 |       | $          | 2,086,814  |   |

 

8

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**Note 8.2006 Stock Incentive Plan**

 

OnFebruary 2, 2006, the Company adopted the National Health Partners, Inc. 2006Stock Incentive Plan. Under the plan, 4,500,000 shares of common stock may begranted to employees, officers and directors of, and consultants and advisorsto, 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 such other equity-based or equity-related awards. As ofSeptember 30, 2007, awards for an aggregate of 4,466,575 shares of common stockhad been issued under the plan. The plan terminates on February 1, 2016. OnFebruary 6, 2006, the Company filed a registration statement on Form S-8, FileNo. 333-131589, with the SEC covering the public sale of the 4,500,000 sharesof common stock available for issuance under the National Health Partners, Inc.2006 Stock Incentive Plan.

 

**Note 9. Common Stock and Warrants**

 

The Company’s authorized capital consisted of 100,000,000 shares ofcommon stock, $0.001 par value per share, at September 30, 2007, of which34,849,106 shares of common stock were outstanding at September 30, 2007. Warrantsexercisable into an aggregate of 8,855,809 shares of the Company’s common stockwere outstanding on September 30, 2007.

 

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 Companyused the following weighted-average assumptions to determine the fair value ofthe outstanding warrants that were issued for services: a dividend yield ofzero percent, an expected volatility of 276%, a risk-free interest rate of 3.5%and a remaining contractual term of 2 years. The Company follows EmergingIssues Task Force No. 96-18 to recognize the fair value of warrants granted. UnderEITF 96-18, the fair value of the warrants should be recognized as the servicesare rendered. The Company is recognizing the cost of services evenly over theterm of the agreements since the services are being rendered on an ongoingbasis during the term of the agreements.

 

**Non Capital-Raising Transactions**

 

InMarch 2007, the Company issued a restricted stock award for 200,000 shares ofcommon stock to a business partner. The award vests in four equal quarterlyinstallments commencing June 30, 2007 if certain performance criteria areachieved. The shares were valued at the closing price of the Company’s commonstock on the date of issuance for total consideration of $130,000. The Companyrecognized $23,420 and $54,308 of expense during the three and nine monthsended September 30, 2007 in connection with the issuance of these shares.

 

InMarch 2007, the Company issued 30,000 shares of common stock to each of threeconsultants pursuant to individual consulting agreements. The shares werevalued at the closing price of the Company’s common stock on the date ofissuance for total consideration of $60,300, all of which was recognized asexpense during the nine months ended September 30, 2007.

 

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In September 2007, the Company issued a restrictedstock award to David M. Daniels, its President and Chief Executive Officer, for600,000 shares of common stock. The award vests in four equal annualinstallments commencing on the first anniversary of the date of grant. Theshares were valued at $0.50 per share for total consideration of $300,000. TheCompany recognized $38,076 of expense during the three and nine months endedSeptember 30, 2007 in connection with the issuance of these shares.

 

## **Capital-Raising Transactions**

## ** **

In August 2007, the Company sold 1,200,000 shares ofcommon stock, one Class A warrant exercisable into 1,000,000 shares of commonstock and one Class B warrant exercisable into 1,000,000 shares of common stockto an accredited investor for aggregate gross proceeds of $540,000. The Companygranted registration rights covering all shares of common stock and the sharesissuable upon the exercise of the warrants. All Class A warrants have anexercise price of $0.60 per share, are exercisable for a period of 30 dayscommencing on the date the registration statement is declared effective by theSEC, and expire at the end of the exercise period. All Class B warrants have anexercise price of $.80 per share, are exercisable until December 31, 2008, arecallable by the Company if certain criteria are satisfied, and expire at theend of the exercise period.

 

Duringthe nine months ended September 30, 2007, the Company received aggregate grossproceeds of $70,000 from the exercise of warrants held by one of the Company’ssecurity holders. The Company issued a total of 140,000 shares of its commonstock in connection therewith at an exercise price of $0.50 per share.

 

**Note 10.Stock Options**

 

Stock options exercisable into an aggregate of 7,335,000 shares of theCompany’s common stock were outstanding on September 30, 2007, of which6,230,000 were vested. The weighted average exercise price of the stock optionsoutstanding on September 30, 2007 was $0.45 per share. No options were exercised during the ninemonths ended September 30, 2007.

 

TheCompany estimates the fair value of its stock options on the date of grant byusing the Black-Scholes pricing model in accordance with the provisions of SFAS123R*.*Under the Black-Scholes pricing model,the Company used the following weighted-average assumptions to determine thefair value of the stock options issued: a dividend yield of zero percent, anexpected volatility of between 245% and 282%, a risk-free interest rate ofbetween 3.5 % and 4.8%, and a remaining contractual life of 9.11 years.

 

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InJanuary 2007, the Company issued a stock option to a new employee to acquire100,000 shares of common stock. The option has an exercise price of $0.69 pershare and vests as follows: 25% on the date of grant and 25% per yearcommencing January 22, 2008. The option has a term of 10 years and was valuedat $68,997 on the date of grant. The Company recognized $4,344 and $25,890 ofexpense during the three and nine months ended September 30, 2007 in connectionwith the issuance of this option.

 

InMarch 2007, the Company issued a stock option to a new employee to acquire40,000 shares of common stock. The option has an exercise price of $0.67 pershare and vests as follows: 25% on the date of grant and 25% per yearcommencing March 1, 2008. The option has a term of 10 years and was valued at$26,799 on the date of grant. The Company recognized $1,687 and $8,387 ofexpense during the three and nine months ended September 30, 2007 in connectionwith the issuance of this option.

 

InSeptember 2007, the Company issued a stock option to Alex Soufflas, its ChiefFinancial Officer and Executive Vice President, to acquire 500,000 shares ofcommon stock. The option has an exercise price of $0.50 per share and vests infour equal annual installments beginning on the first anniversary of the dateof grant. The option has a term of 10 years and was valued at $249,982 on thedate of grant. The Company recognized $4,449 of expense during the three and ninemonths ended September 30, 2007 in connection with the issuance of this option.

 

InSeptember 2007, the Company issued a stock option to Patricia S. Bathurst, itsVice President – Marketing, to acquire 400,000 shares of common stock. Theoption has an exercise price of $0.50 per share and vests in four equal annualinstallments beginning on the first anniversary of the date of grant. Theoption has a term of 10 years and was valued at $199,986 on the date of grant. TheCompany recognized $3,559 of expense during the three and nine months endedSeptember 30, 2007 in connection with the issuance of this option.

 

InSeptember 2007, the Company issued a stock option to an employee to acquire100,000 shares of common stock. The option has an exercise price of $0.51 pershare and vests in four equal annual installments beginning on the firstanniversary of the date of grant. The option has a term of 10 years and wasvalued at $50,996 on the date of grant. The Company recognized $803 of expenseduring the three and nine months ended September 30, 2007 in connection withthe issuance of this option.

 

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**Note 11. Related-Party Transactions**

 

On September 4, 2007, the Company issued arestricted stock award to David M. Daniels, its President and Chief ExecutiveOfficer, for 600,000 shares of common stock. The award vests in four equalannual installments commencing on the first anniversary of the date of grant. Theshares were valued at $0.50 per share for total consideration of $300,000. TheCompany recognized $38,076 of expense during the three and nine months endedSeptember 30, 2007 in connection with the issuance of these shares.

 

InSeptember 2007, the Company issued a stock option to Alex Soufflas, its ChiefFinancial Officer and Executive Vice President, to acquire 500,000 shares ofcommon stock. The option has an exercise price of $0.50 per share and vests infour equal annual installments beginning on the first anniversary of the dateof grant. The option has a term of 10 years and was valued at $249,982 on thedate of grant. The Company recognized $4,449 of expense during the three andnine months ended September 30, 2007 in connection with the issuance of thisoption.

 

InSeptember 2007, the Company issued a stock option to Patricia S. Bathurst, itsVice President – Marketing, to acquire 400,000 shares of common stock. Theoption has an exercise price of $0.50 per share and vests in four equal annualinstallments beginning on the first anniversary of the date of grant. Theoption has a term of 10 years and was valued at $199,986 on the date of grant. TheCompany recognized $3,559 of expense during the three and nine months endedSeptember 30, 2007 in connection with the issuance of this option.

 

**Note 12.Subsequent Events**

 

In October 2007, the Company commenced a privateoffering of 1,200,000 shares of common stock for aggregate gross proceeds of$360,000. The shares are being sold in units consisting of one share of commonstock, one Class A warrant and one Class B warrant at a purchase price of $0.30per unit. Each warrant gives the holder the right to purchase one share ofcommon stock. The Company granted registration rights covering all shares ofcommon stock and the shares issuable upon the exercise of the warrants. AllClass A warrants have an exercise price of $0.30 per share, are exercisableduring the period commencing on the date the registration statement is declaredeffective by the SEC and ending on the later of January 31, 2008 or the datethat is 30 days after the date the registration statement is declared effectiveby the SEC, and expire at the end of the exercise period. All Class B warrantshave an exercise price of $0.40 per share, are exercisable during the periodcommencing on the date the registration statement is declared effective by theSEC and ending on January 31, 2008, and expire at the end of the exerciseperiod. The Company sold a total of 350,000 units for $105,000 as of November13, 2007.

 

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InOctober 2007, the Company issued stock options for an aggregate of 75,000shares of common stock to three of its employees. The options are exercisableat $0.51 per share and have a term of 10 years. The options vested immediatelyon the date of grant with respect to 2,500 shares. The options vest withrespect to the remainder of the shares in three equal annual installmentsbeginning on the first anniversary of the date of grant.

 

InOctober 2007, the Company issued a stock option to an employee for 15,000shares of common stock. The option is exercisable at $0.51 per share, has aterm of 10 years, and vests in three equal annual installments beginning on thefirst anniversary of the date of grant.

 

InOctober 2007, the Company sold all of the assets held for resale to David M.Daniels, its President and Chief Executive Officer, for $55,000, the fairmarket value of the assets on the date of the sale.

 

In November 2007, the Company commenced a privateoffering of 1,700,000 shares of common stock for aggregate gross proceeds of$510,000. The shares are being sold in units consisting of one share of commonstock, one Class A warrant and one Class B warrant at a purchase price of $0.30per unit. Each warrant gives the holder the right to purchase one share ofcommon stock. The Company granted registration rights covering all shares ofcommon stock and the shares issuable upon the exercise of the warrants. AllClass A warrants have an exercise price of $0.30 per share, are exercisableduring the period commencing on the date the registration statement is declaredeffective by the SEC and ending on the later of January 31, 2008 or the datethat is 30 days after the date the registration statement is declared effectiveby the SEC, and expire at the end of the exercise period. All Class B warrantshave an exercise price of $0.40 per share, are exercisable during the periodcommencing on the date the registration statement is declared effective by theSEC and ending on January 31, 2008, and expire at the end of the exerciseperiod. The Company sold a total of 500,000 units for $150,000 as of November13, 2007.

 

InNovember 2007, the Company issued a stock option to a new employee for 250,000shares of common stock. The option is exercisable at $0.45 per share, has aterm of 10 years, and vests in four equal annual installments beginning on thefirst anniversary of the date of grant.

 

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**CAUTIONARYSTATEMENT REGARDING FORWARD-LOOKING STATEMENTS**

 

Thisreport contains “forward-looking statements” within the meaning of Section 27Aof the Securities Act of 1933, as amended (the “Securities Act”), and Section21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Allstatements other than statements of historical fact included or incorporated byreference in this report, including, without limitation, statements regardingour future financial position, business strategy, budgets, projected revenueand costs, and plans and objectives of management for future operations, areforward-looking statements. In addition, forward-looking statements generallycan 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 orexpressions.

 

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 expectationsreflected in such forward-looking statements are reasonable, we can give noassurance that such expectations will prove to have been correct. Importantfactors that could cause actual results to differ materially from ourexpectations include, but are not limited to:

 

•                  our ability to fund future growth andimplement our business strategy;

 

•                  demand for and acceptance of ourmembership programs;

 

•                  our dependence on a limited number ofPPOs and other healthcare provider networks;

 

•                  our dependence on a single insurancecompany for the insurance products offered as part of our CARExpressTM Plus programs;

 

•                  our dependence upon a limited numberof marketing and distribution partners for substantially all of our revenue;

 

•                  our ability to market our membershipprograms and develop and expand the market for our membership programs;

 

•                  growth and market acceptance of thehealth membership industry;

 

•                  competition in the health membershipindustry and our markets;

 

•                  our ability to attract and retainqualified personnel;

 

•                  legislative or regulatory changes inthe healthcare industry;

 

•                  the condition of the securities andcapital markets;

 

•                  general economic and businessconditions, either nationally or internationally or in the jurisdictions inwhich we are doing business;

 

and statementsof assumption underlying any of the foregoing, as well as any other factors setforth under the captions *“Risk Factors”*in our Post-Effective Amendment No. 1 to Registration Statement on Form SB-2,Registration No. 333-139411 (the “Registration Statement”) and *“Management’s Discussions and Analysis”* set forth below. Allsubsequent written and oral forward-looking statements attributable to us, orpersons acting on our behalf, are expressly qualified in their entirety by theforegoing. Except as required by law, we assume no duty to update or revise ourforward-looking statements based on changes in internal estimates orexpectations or otherwise.

 

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

 

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

 

This Management’s Discussion and Analysis and otherparts of this report contain forward-looking statements that involve risks anduncertainties. All forward-looking statements included in this report are basedon information available to us on the date hereof and, except as required bylaw, we assume no obligation to update any such forward-looking statements. Ouractual results may differ materially from those anticipated in theseforward-looking statements as a result of a number of factors, including thoseset forth under the captions *“Risk Factors”*in the Registration Statement and *“Management’s Discussionand Analysis”* set forth below. The following should be read inconjunction with our consolidated financial statements included above in Item 1of 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 sell membership programs to predominantlyunderserved markets in the healthcare industry through a national healthcaresavings network called CARExpressTM. CARExpressTM is a network of hospitals,doctors, dentists, pharmacists and other healthcare providers comprised of over1,000,000 healthcare providers that render their services and products toCARExpressTM membersat discounted prices. CARExpressTMenables people to engage in point-of-service transactions directly with thesehealthcare providers and pay discounted prices to the providers.

 

Our membership programs offer savings on healthcare services to personswho are uninsured or underinsured and to those who purchase only highdeductible or limited benefit medical insurance policies by providing access tothe same PPOs that are utilized by employers that self-fund at least a portionof their employees’ healthcare costs. Our membership programs are also used tosupplement benefit plans and fill in the gaps created by the need to reducehealth benefits to keep the costs of health insurance reasonable. We sell ourmembership programs directly and indirectly through resellers that privatelylabel or co-brand our membership programs and employers that offer ourmembership programs to their employees.

 

We are actively engaged in marketing our membership programs to thepublic and our primary strategic objectives are to generate increased sales ofour membership programs and expand our position as a provider of uniquehealthcare membership service programs. The target market for our membershipprograms is comprised of individuals who have either limited health benefits orno health benefits. Our market share of this market is currently less than onepercent and has been less than one percent since our inception. Since we arenot currently large enough to pursue and support the entire market, we intendto continue to pursue specific opportunities that we identify in this marketthrough our various marketing and distribution channels. Through productdesign, competitive membership pricing, and a variety of marketing anddistribution partners, we are pursuing opportunities in the healthcare marketthat insurance companies have not addressed.

 

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**Recent Developments**

 

We have experienced asubstantial increase in revenue and our membership base over the past 12 months.We achieved revenue of $3,250,182 for the nine-month period ended September 30,2007, compared to revenue of $1,052,473 for the nine-month period endedSeptember 30, 2006, an increase of almost 210%. We have entered into agreementswith several marketing and distribution partners that are selling ourCARExpressTMmembership programs to the public and are currently in discussions with severalother companies regarding the sale of our CARExpressTM membership programs.

 

In May 2007, we entered into a membership agreementwith American Advantage Association. Under the terms of the agreement, AmericanAdvantage agreed to provide us with access to limited insurance benefitsinitially underwritten by The United States Life Insurance Company in the Cityof New York, a member company of American International Group, Inc., under agroup master policy issued to American Advantage. The limited insurancebenefits may be sold by us in the form of membership benefit programs thatcontain both our traditional health discount membership programs and thelimited insurance benefits.

 

We are currently offering several new membershipbenefit programs to the public under the name “CARExpressTM Plus.”  Our CARExpressTM Plus membership programs currently consist of variations of ourCARExpressTM Comprehensive Program and variouslimited liability insurance benefits. Members of our CARExpressTM Plus membership programs are able to use the health discountcomponent of the programs to obtain discounts on healthcare costs and use theinsurance component of the programs to cover healthcare costs up to the amountof the coverage limit. Each CARExpressTM Plusmembership program provides coverage for the member’s full family or, at themember’s option, coverage limited exclusively to the primary insured. We aremarketing our CARExpressTM Plus membership programs directly andindirectly through brokers, agents and other independent third parties.

 

**Operational Metrics**

 

Our revenue consists exclusively of recurring monthly membership feesthat we receive from members of our membership programs. To generate revenue,we engage in marketing campaigns offering money-back guarantees and free-trialperiods as an incentive for prospective members to try our membership programs.Upon becoming paying members, the members pay us membership fees each month forthe duration of their membership. The average membership fee per member permonth that we receive for our CARExpressTM health discount programs isapproximately $35. Approximately 95% of the CARExpressTM health discount programs thatwe have sold to our current members consist of our Comprehensive Care Programwhich is currently sold at a monthly retail price of $39.95. The remainingCARExpressTM healthdiscount programs that we have sold to our current members consist of a mix ofour less expensive programs. We do not have similar data available for our newCARExpressTM Plusmembership programs since we only recently began selling them to the public.

 

We receive each member’s initial monthly payment and billinginformation at the beginning of the first monthly membership period. Monthlypayments for subsequent periods are received at the beginning of the applicableperiod. For those memberships sold in connection with our free-trial offers, wereceive the member’s billing information at the beginning of the free-trialperiod. After 

 

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the free-trial period hasexpired, the member is charged for the next monthly membership period unlessthe member cancels the membership prior to the expiration of the free-trialperiod. The monthly membership fees that we receive are recognized as revenueevenly over the applicable monthly membership period. As a result, there is adelay of four weeks between the date we receive a monthly membership fee andthe date we recognize the entire fee as revenue.

 

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

 

•                  thetype of membership programs being sold;

 

•                  themarketing campaign being used to sell our membership programs;

 

•                  thefinancial condition and loyalty of our members;

 

•                  thedistribution channel selling our membership programs; and

 

•                  thetype and amount of compensation being paid to our marketing and distributionpartners to sell our 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 groupsthat we have identified as being most suitable for our membership programs. Asa result, we expect our retention rates to continue to improve over the next 12months as we pursue these opportunities through our various marketing and distributionchannels.

 

**Outlook**

 

Our strategy is to continue to expand our position as a provider ofunique healthcare membership service programs. We implemented several strategicgrowth initiatives during 2006 through which we achieved new contracts and strategicpartnerships with a number of marketing and distribution companies. We havealso initiated several measures in anticipation of our future growth, includinghiring additional customer service staff and transitioning our current customerservice staff from one shift to two shifts to ensure adequate coverage for ourmembers. We expect to generate future revenue and members primarily through ourmarketing and distribution partners and our various marketing and advertisingcampaigns. We expect to further increase revenue and members through sales ofour CARExpressTMPlus programs to the public. We intend to finance each of these projectsthrough cash on hand, internally generated cash flows from operatingactivities, proceeds from the exercise of outstanding warrants and, ifnecessary, additional sales of debt or equity securities. We will use anyadditional investments that we receive to accelerate the expansion of each ofour advertising campaigns and programs and increase sales of our membershipprograms.

 

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We expect the number of CARExpressTM members generated each monthto increase for the foreseeable future. We also expect our retention rates toimprove over the next 12 months as we obtain additional information regardingmember demographics and target our marketing and advertising campaigns atprospective members and member groups that are most suitable for our membershipprograms. As a result, we expect to begin generating a net profit fromoperations in the first half of 2008 as the recurring membership fees from ourincreasing membership base overtake the costs associated with obtaining the newmembers we are generating. We can provide no assurance, however, that ourmembership 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 in the first half of 2008.

 

**Critical Accounting Policies**

 

For information regarding our criticalaccounting policies, please refer to the discussion provided in theRegistration Statement under the caption *“Item 6. Management’sDiscussion and Analysis – Critical Accounting Policies”* and theNotes to Consolidated Financial Statements contained therein.

 

**Recent Accounting Pronouncements**

 

For information regarding recent accountingpronouncements applicable to our business, please refer to the discussionprovided in the Registration Statement under the caption *“Item 6. Management’sDiscussion and Analysis – Critical Accounting Policies”* and theNotes to Consolidated Financial Statements contained therein.

 

**Comparison of the Three-Month Periods EndedSeptember 30, 2007 and 2006**

 

Revenue

 

Revenue consists of the monthly membershipfees that we receive from members of our membership programs. To date, revenuehas consisted exclusively of the monthly membership fees we receive frommembers of our CARExpressTM health discount programs. Revenue increased $615,432 to$1,026,477 for the three-month period ended September 30, 2007 from $411,045for the three-month period ended September 30, 2006. The increase of $615,432resulted primarily from sales of our CARExpressTM health discount programs to new members and increasedrevenue generated from our existing members. Approximately 65% of the revenuethat we generated during the three-month period ended September 30, 2007 wasderived from sales of our CARExpressTMhealth discount programs to first-time members, compared to approximately 95%during the corresponding period in 2006. The remainder of the revenue that wegenerated during these periods was derived from existing members. We expectrevenue to increase over the next 12 months as a result of increased sales ofour CARExpressTMhealth discount programs and our CARExpressTM Plus programs by our marketing and distribution partnersand through our various 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 

 

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costs increased $245,488 to $812,647 for the three-month period endedSeptember 30, 2007, from $567,159 for the three-month period ended September30, 2006. The increase of $245,488 was due primarily to an increase of $144,194for sales commissions and $101,513 for PPO and network provider costs. Weexpect cost of sales to increase over the next 12 months as increased sales ofour membership programs result in higher overall sales commission expenses andprovider 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 marketingexpenses decreased $1,503,512 to $59,627 for the three-month period endedSeptember 30, 2007, from $1,563,139 for the three-month period ended September30, 2006. The decrease of $1,503,512 was due primarily to decreases of $1,424,389for radio and television marketing programs and other marketing campaigns andactivities, and $79,123 for sales-related cash and equity-based compensation. Weexpect selling and marketing expenses to increase during the next 12 months aswe continue to engage in targeted and cost-efficient marketing and advertisingcampaigns and activities.

 

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 all salaries and related compensationthat we pay to our employees and the related payroll taxes that are notassociated with our selling and marketing activities. Employee compensationexpense increased $86,970 to $490,932 for the three-month period endedSeptember 30, 2007, from $403,962 for the three-month period ended September30, 2006. The increase of $86,970 was due primarily to an increase of $174,189 insalary and payroll expense associated primarily with an increase in the numberof people employed by us and annual increases in the salaries payable to ourexecutive officers under their respective employment agreements. This increasewas offset by decreases of $127,650 in stock option expense resulting from ourdecision in December 2006 to accelerate the vesting of certain stock optionspreviously issued to our executive officers and employees. We are party toemployment agreements with David M. Daniels, Alex Soufflas, Patricia S.Bathurst and David A. Taylor. A summary of the material terms of theseemployment agreements and our financial obligations thereunder is provided inthe Registration Statement under the captions *“Management’sDiscussion and Analysis – Contractual Obligations” and “Executive Compensation.”*  We expect to recognize less equity-basedcompensation expense in the future due to the accelerated vesting in 2006 ofmost of the issued and outstanding stock options held by our employees. However,we intend to retain additional executive management personnel and otheremployees in connection with the anticipated growth of our business. As aresult, we expect employee compensation expense to decrease minimally over thenext 12 months.

 

*ProfessionalFees*. Professional fees consist of fees paid to ourindependent accountants, lawyers and other professionals. Professional feesdecreased $119,368 to $120,710 for the three-month 

 

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period ended September 30, 2007 from $240,078for the three-month period ended September 30, 2006. The decrease of $119,368was due primarily to decreases of $67,757 in the amount of expense recognizedin connection with equity-based compensation previously paid to serviceproviders and consultants for various services, and $49,429 in generalconsulting fees for technology-related services. We expect professional fees todecrease over the next 12 months as we recognize less stock compensationexpense associated with the equity-based compensation previously paid to ourconsultants and service providers. We expect this to be partially offset byincreases in accounting and legal fees that we will incur in connection withthe general expansion of our business and operations.

 

*OtherGeneral and Administrative Expenses*. Other general andadministrative expenses consist of costs for supplies, computer hardware andsystem costs, bank service charges, filing fees and dues, non-employee customerservice representative expense, rent expense, health insurance costs, financialprinter costs, transfer agent costs, the costs of investor relations campaignsand activities, general business expenses, severance expense and miscellaneousgeneral and administrative expenses that are not associated with our sellingand marketing activities. Other general and administrative expenses increased$399,895 to $526,927 for the three-month period ended September 30, 2007 from$127,032 for the three-month period ended September 30, 2006. The increase of$399,895 resulted primarily from increases of $186,331 for bank service chargesassociated with new and recurring member transactions, $28,545 for officesupplies, $20,814 for postage and delivery expenses, $30,651 for printing andreproduction, $19,470 for computer maintenance and upgrades, as well asincreases in other miscellaneous general and administrative expenses. We expectother general and administrative expenses to increase over the next 12 monthsas we continue to incur expenses for bank service charges, financial printerservices, investor relations campaigns and activities, transfer agent fees,health insurance, rent, non-employee customer service representatives,supplies, computer hardware and systems, and other miscellaneous itemsassociated with the general operation of and growth in our business.

 

Net Loss

 

Our net loss decreased $1,506,907 to $983,417 for thethree-month period ended September 30, 2007, from $2,490,324 for thethree-month period ended September 30, 2006. The decrease of $1,506,907 wasprimarily the result of an increase of $615,432 in revenue and decreases of$1,503,512 for selling and marketing expense and $119,368 for professionalfees, partially offset by increases of $245,488 for direct costs incurred inconnection with the sale of our membership programs, $80,919 for employeecompensation expense and $405,946 for other general and administrative expenses.We expect to begin generating a net profit from operations in the first half of2008 as the recurring membership fees from our increasing membership baseovertake the costs associated with obtaining new members.

 

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**Comparison of the Nine-Month Periods EndedSeptember 30, 2007****andSeptember 30, 2006**

 

Revenue

 

Revenue increased $2,197,709 to $3,250,182for the nine-month period ended September 30, 2007 from $1,052,473 for thecorresponding period in 2006. The increase of $2,197,709 resulted fromincreased sales of our CARExpressTM health discount programs tonew members and increased revenue generated from our existing members. Approximately80% of the revenue that we generated during the nine-month period endedSeptember 30, 2007 was derived from sales of our CARExpressTM health discount programs tofirst-time members, compared to approximately 95% during the correspondingperiod in 2006. The remainder of the revenue that we generated during theseperiods was derived from existing members.

 

Direct Costs

 

Direct costs increased $1,068,585 to$2,037,603 for the nine-month period ended September 30, 2007, from $969,018for the corresponding period in 2006. The increase of $1,068,585 was due to anincrease of $805,783 for sales commissions and $263,242 for PPO and providernetwork costs.

 

Selling and Marketing Expenses

 

Selling and marketing expenses decreased$2,335,956 to $170,877 for the nine-month period ended September 30, 2007, from$2,506,833 for the corresponding period in 2006. The decrease of $2,335,956 wasdue primarily to a decrease of $1,916,656 for radio and television marketingprograms and other marketing campaigns and activities, and $67,242 for salessalaries and equity compensation, partially offset by decreases in otherselling and marketing expenses.

 

General and Administrative Expenses

 

*Employee Compensation Expense*.Employee compensation expense increased $2,341 to $1,542,710 for the nine-monthperiod ended September 30, 2007 from $1,540,369 for the corresponding period in2006. The increase of $2,341 was due to primarily to increases of $464,149 insalary and payroll tax expense associated primarily with an increase in thenumber of people employed by us and annual increases in the salaries payable toour executive officers under their respective employment agreements and$114,216 in expense associated with restricted stock awards granted to ourexecutive officers in 2006 and the acceleration of the vesting of therestricted stock award previously granted to David A. Taylor upon thetermination of his employment in March 2007, and increases in other employeecompensation expenses. This amount was partially offset by a decrease of$684,386 of stock option expense resulting primarily from our decision inDecember 2006 to accelerate the vesting of certain stock options previouslyissued to our executive officers and employees and the acceleration of thevesting of the stock option previously granted to Roger H. Folts, our formerChief Financial Officer, upon the termination of his employment in February2006.

 

*ProfessionalFees*. Professional fees decreased $129,643 to $419,484for the nine-month period ended September 30, 2007 from $549,127 for thecorresponding period in 2006. The decrease of $129,643 was due primarily to adecrease of $116,428 in general consulting fees for technology-related servicesand $33,547 in cash and equity-based compensation previously paid to servicesproviders and consultants for various services, partially offset by increasesin other professional fees.

 

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*OtherGeneral and Administrative Expenses*. Other general andadministrative expenses increased $530,379 to $1,107,145 for the nine-monthperiod ended September 30, 2007 from $576,766 for the corresponding period in2006. The increase of $530,379 resulted primarily from increases of $273,057 inbank service charges associated with new and recurring member transactions,$110,215 for office supplies, $63,689 for postage and delivery expenses,$32,958 for printing and reproduction costs, $21,911 for network hardwaremaintenance and upgrades and $29,950 for state corporate filing fees. Theseincreases were partially offset by decreases of $51,065 for financial printingcosts and $31,515 for rent obligations.

 

Gain on theExtinguishment of Debt

 

Gain on theextinguishment of debt consists of the gain that we recognized in connectionwith our termination of the lease for our office space in Sarasota, Floridaupon the issuance of common stock to Centerpointe Property, LLC on April 1,2006 in full payment of all rent and other expenses that were due and payableunder the lease and a mutual release from any and all claims arising out of thelease. We recognized a gain on the extinguishment of debt of $35,932 during thenine months ended September 30, 2006 in connection with the issuance of theseshares. We did not recognize any gain or loss on the extinguishment during thenine months ended September 30, 2007. We do not expect to incur any similargains on the extinguishment of debt in the foreseeable future.

 

Net Loss

 

Our net loss decreased $2,996,578 to $2,012,269 duringthe nine-month period ended September 30, 2007, from $5,008,847 during thecorresponding period in 2006. The decrease of $2,996,578 was primarily theresult of an increase of $2,197,709 in revenue and decreases of $2,335,956 forselling and marketing expenses and $129,643 for professional fees, partiallyoffset by increases of $1,068,584 for direct costs incurred in connection withthe sale of our membership programs and $536,430 for other general andadministrative expenses.

 

**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 ofSeptember 30, 2007, we had cash and cash equivalents of approximately $441,550and working capital of approximately $590,234.

 

Net cash used by operating activities was $1,645,619 for the nine-monthperiod ended September 30, 2007 compared to $3,692,598 for the nine-monthperiod ended September 30, 2006. The $2,046,979 decrease in cash used by operatingactivities was due primarily to a decrease of $2,996,578 in net loss, partiallyoffset by a decrease of $684,386 in stock option expense, a difference of$231,241 in deferred revenue, and an increase of $210,397 in deposits.

 

Net cash used by investing activities was $55,000 for the nine-monthperiod ended September 30, 2007 compared to $17,295 for the nine-month periodended September 30, 2006. The $37,705 increase in cash used by investingactivities was due to an increase of $55,000 in assets held for resale and ourdisposal of $35,717 in certificates of deposit in 2006, partially offset by ourpurchase of $53,012 in property and equipment in 2006.

 

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Net cash provided by financing activities was $545,200 for thenine-month period ended September 30, 2007 compared to $4,922,123 for thecorresponding period in 2006. The $4,376,923 decrease in cash provided byfinancing activities was due to decreases of $1,728,860 in proceeds from thesale of common stock and $2,816,063 in proceeds received upon the exercise ofoutstanding warrants, partially offset by an increase of $168,000 in thepayment of notes payable.

 

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

 

In October 2006, we completed a privateoffering of 510,000 shares of common stock, Class A warrants exercisable into510,000 shares of our common stock, Class B warrants exercisable into 510,000shares of our common stock, Class C warrants exercisable into 510,000 shares ofour common stock, and Class D warrants exercisable into 510,000 shares of ourcommon stock for aggregate cash consideration of $255,000. These securitieswere sold in units comprised of one share of common stock, one Class A warrant,one Class B warrant, one Class C warrant and one Class D warrant. The unitswere sold at a purchase price of $0.50 per unit. The Class A warrants wereinitially exercisable into one share of our common Stock at an exercise priceof $0.50 per share, were exercisable until October 16, 2006, and expired at theend of the exercise period. The Class B warrants were initially exercisableinto one share of our common stock at an exercise price of $0.50 per share,were exercisable until November 30, 2006 and expired at the end of the exerciseperiod. The Class C warrants were initially exercisable into one share of ourcommon stock at an exercise price of $0.50 per share, were exercisable untilAugust 31, 2007, and expired at the end of the exercise period. The Class Dwarrants are initially exercisable into one share of our common stock at anexercise price of $0.80 per share, are exercisable until November 30, 2007, andexpire at the end of the exercise period.

 

In August 2007, we sold 1,200,000 shares ofcommon stock, one Class A warrant exercisable into 1,000,000 shares of commonstock and one Class B warrant exercisable into 1,000,000 shares of common stockto an accredited investor for aggregate gross proceeds of $540,000. Thesesecurities were sold in units comprised of one share of common stock, one ClassA warrant and one Class B warrant. The units were sold at a purchase price of$0.45 per unit. We granted registration rights covering the public resale ofall of the shares of common stock and all of the shares issuable upon theexercise of the warrants. All Class A warrants have an exercise price of $0.60per share, are exercisable for a period of 30 days commencing on the date theregistration statement is declared effective by the SEC, and expire at the endof the exercise period. All Class B warrants have an exercise price of $0.80per share, are exercisable until December 31, 2008, are callable by us ifcertain criteria are satisfied, and expire at the end of the exercise period.

 

During the period beginning January 1, 2006 andending September 19, 2007, we issued 6,995,397 shares of common stock upon theexercise of warrants at exercise prices ranging between $0.50 and $2.00 pershare for aggregate gross cash proceeds of $4,704,413.

 

To date, our capital needs have been met principallythrough internally generated cash flows from operating activities, proceedsreceived upon the exercise of outstanding warrants by our security holders, andsales of our equity and debt securities. We do not currently maintain a line ofcredit or term loan with any commercial bank or other financial institution. Wehave used the internally generated cash flows from operating activities,proceeds from the exercise of warrants and proceeds from our private offeringsof securities to pay virtually all of the costs and expenses we have incurred. Thesecosts and expenses were comprised of operating expenses, which consisted of 

 

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the employee compensationexpenses, professional fees and other general and administrative expensesdiscussed above.

 

Althoughwe believe that our current cash resources will be sufficient to sustain ourcurrent operations for the next 12 months, we may need to obtain additionalcash resources during the next 12 months if we experience a substantialdownturn in our business or incur substantial expenses in connection withunforeseen events. In the event such funds are needed, we may engage inadditional sales of debt or equity securities. The sale of additional equity orconvertible debt securities would result in additional dilution to ourshareholders. The issuance of additional debt would result in increasedexpenses and could subject us to covenants that may have the effect ofrestricting our operations. We have not made arrangements to obtain additionalfinancing and we can provide no assurance that additional financing will beavailable in an amount or on terms acceptable to us, if at all. If we areunable to obtain additional funds when they are needed or if such funds cannotbe obtained on terms favorable to us, we may be unable to execute upon ourbusiness plan or pay our costs and expenses as they are incurred, which couldhave a material, adverse effect on our business, financial condition andresults of operations.

 

**Off-Balance Sheet Arrangements**

 

As of September 30, 2007, we did not have anyrelationships 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 arenot materially exposed to any financing, liquidity, market or credit risk thatcould arise if we had engaged in such relationships.

 

**Item 3.    Controlsand Procedures.**

 

As of September 30, 2007, we carried out the evaluation of the effectiveness of our disclosure controls and procedures required by Rule 13a-15(e) under the Exchange Act under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2007, our disclosure controls and procedures were effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is: (i) recorded, processed, summarized and reported within the time periods specified in the 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. There has been no change in our internal control over financial reporting identified in connection with this evaluation that occurred during our fiscal quarter ended September 30, 2007 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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**PART II**

**OTHER INFORMATION**

 

**Item 6. Exhibits.**

 

The following exhibits are included 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**

 

In accordance with the requirements of theExchange Act, the registrant caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.

 
|                    | NATIONAL HEALTH PARTNERS, INC. |
|-------------------------|--------------------------------|
|                    |                           |
|                    |                           |
| Date: November 14, 2007 | /s/ David M. Daniels           |   |
|                    | David M. Daniels               |
|                    | Chief Executive Officer        |

 

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EXHIBITINDEX

 
| **Exhibit** | ** ** | **Exhibit Description**                                                                                                                                 |
|-------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |       |                                                                                                                                                    |
| 31.1        |       | Certification of Chief Executive Officer required by Rule 13a-14(a)  under the Securities Exchange Act of 1934, as amended                              |
|        |       |                                                                                                                                                    |
| 31.2        |       | Certification of Chief Financial Officer required by Rule 13a-14(a)  under the Securities Exchange Act of 1934, as amended                              |
|        |       |                                                                                                                                                    |
| 32.1        |       | Certification of Chief Executive Officer and Chief Financial Officer  required by Rule 13a-14(b) under the Securities Exchange Act of 1934, as  amended |

 

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