##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D. C. 20549
 FORM 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2009
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission File Number: 001-34171
 GRAYMARK HEALTHCARE, INC.
  OKLAHOMA
(State or other jurisdiction of 
incorporation or organization)
    
    20-0180812
(I.R.S. Employer
Identification No.)
 210 Park Avenue, Ste. 1350
Oklahoma City, Oklahoma 73102   (405) 601-5300
 þ o
 o þ
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reporting company þ(Do not check if a smaller reporting company)
 o þ




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##### 



GRAYMARK HEALTHCARE, INC
  Part I. Financial InformationItem 1. Consolidated Condensed Financial Statements (Unaudited)
    
    
    1a) Balance Sheets
    
    
    2b) Statements of Operations
    
    
    3c) Statements of Cash Flows
    
    
    4d) Notes to Financial Statements
    
    
    5Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    13Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    25Item 4. Controls and Procedures and Item 4T. Controls and Procedures
    
    
    26Part II. Other InformationItem 1. Legal Proceedings
    
    
    28Item 1A. Risk Factors
    
    
    28Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    28Item 3. Defaults Upon Senior Securities
    
    
    28Item 4. Submission of Matters to a Vote of Security Holders
    
    
    28Item 5. Other Information
    
    
    28Item 6. Exhibits
    
    
    28SIGNATURES
    
    
    30EX-31.1EX-31.2EX-32.1EX-32.2
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PART I. FINANCIAL INFORMATION
 
 Item 1. Graymark Healthcare, Inc. Consolidated Condensed Financial Statements
   -1-




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GRAYMARK HEALTHCARE, INC.
 
 Consolidated Condensed Balance Sheets
(Unaudited)
 March 31,
    
    
    December 31,2009
    
    
    2008ASSETSCash and cash equivalents
    
    $
    13,526,711
    
    
    $
    15,380,310Accounts receivable, net of allowance for contractual adjustments and
doubtful accounts of $13,374,706 and $13,142,913, respectively
    
    
    12,323,735
    
    
    
    13,312,157Inventories
    
    
    8,450,718
    
    
    
    8,893,918Other current assets
    
    
    303,643
    
    
    
    298,239Total current assets
    
    
    34,604,807
    
    
    
    37,884,624Property and equipment, net
    
    
    5,207,933
    
    
    
    5,014,176Intangible assets, net
    
    
    8,163,241
    
    
    
    8,396,238Goodwill
    
    
    29,694,923
    
    
    
    29,694,923Other assets
    
    
    364,701
    
    
    
    343,669Total assets
    
    $
    78,035,605
    
    
    $
    81,333,630LIABILITIES AND SHAREHOLDERS EQUITYLiabilities:Accounts payable
    
    $
    4,047,667
    
    
    $
    6,111,783Accrued liabilities
    
    
    4,412,266
    
    
    
    4,951,562Short-term debt
    
    
    529,732
    
    
    
    565,190Current portion of long-term debt
    
    
    4,144,306
    
    
    
    3,913,481Total current liabilities
    
    
    13,133,971
    
    
    
    15,542,016Long-term debt, net of current portion
    
    
    42,260,400
    
    
    
    43,248,053Total liabilities
    
    
    55,394,371
    
    
    
    58,790,069Equity:Graymark Healthcare shareholders equity:Preferred stock $0.0001 par value, 10,000,000
authorized; no shares issued and outstanding
    
    
    
    
    
    
    Common stock $0.0001 par value, 500,000,000 shares
authorized; 28,169,113 and 27,719,113 issued and outstanding
at March 31, 2009 and December 31, 2008, respectively
    
    
    2,817
    
    
    
    2,772Paid-in capital
    
    
    27,889,091
    
    
    
    27,130,136Accumulated deficit
    
    
    (4,661,862
    )
    
    
    (4,681,575
    )Deferred
compensation  restricted stock
    
    
    (855,144
    )
    
    
    (192,400
    )Total Graymark Healthcare shareholders equity
    
    
    22,374,902
    
    
    
    22,258,933Noncontrolling interest
    
    
    266,332
    
    
    
    284,628Total equity
    
    
    22,641,234
    
    
    
    22,543,561Total liabilities and shareholders equity
    
    $
    78,035,605
    
    
    $
    81,333,630
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GRAYMARK HEALTHCARE, INC.
 
 Consolidated Condensed Statements of Operations
For the Three Months Ended March 31, 2009 and 2008
(Unaudited)
 2009
    
    
    2008Revenues:Product sales
    
    $
    22,685,256
    
    
    $
    16,515,894Services
    
    
    2,786,137
    
    
    
    2,527,43125,471,393
    
    
    
    19,043,325Costs and Expenses:Cost of sales
    
    
    16,708,413
    
    
    
    12,302,924Cost of services
    
    
    1,453,328
    
    
    
    971,712Selling, general and administrative
    
    
    6,270,573
    
    
    
    4,105,226Depreciation and amortization
    
    
    514,439
    
    
    
    306,98724,946,753
    
    
    
    17,686,849Other Income (Expense):Interest expense, net
    
    
    (520,874
    )
    
    
    (527,179
    )Income from continuing operations, before taxes
    
    
    3,766
    
    
    
    829,297Provision for income taxes
    
    
    
    
    
    
    (100,477
    )Income (loss) from continuing operations, net of taxes
    
    
    3,766
    
    
    
    728,820Discontinued operations, net of taxes
    
    
    2,197
    
    
    
    21,520Net income
    
    
    5,963
    
    
    
    750,340Less: Net income (loss) attributable to noncontrolling interests
    
    
    (13,750
    )
    
    
    364,885Net income attributable to Graymark Healthcare
    
    $
    19,713
    
    
    $
    385,455Earnings per common share (basic and diluted):Income from continuing operations attributable to
Graymark Healthcare common shareholders
    
    $
    0.00
    
    
    $
    0.02Discontinued operations attributable to
Graymark Healthcare common shareholders
    
    
    0.00
    
    
    
    0.00Net income attributable to
Graymark Healthcare common shareholders
    
    $
    0.00
    
    
    $
    0.02Average common shares outstanding
    
    
    28,103,446
    
    
    
    23,375,399Dilutive effect of stock warrants and options
    
    
    14,277
    
    
    
    202,500Average common shares outstanding assuming dilution
    
    
    28,117,723
    
    
    
    23,577,899
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GRAYMARK HEALTHCARE, INC.
 
 Consolidated Condensed Statements of Cash Flows
For the Three months Ended March 31, 2009 and 2008
(Unaudited)
 2009
    
    
    2008Operating activities:Net income
    
    $
    19,713
    
    
    $
    385,455Adjustments to reconcile net income to
net cash used in operating activities:Depreciation and amortization
    
    
    514,439
    
    
    
    306,987Noncontrolling interests
    
    
    (13,750
    )
    
    
    364,885Stock based compensation
    
    
    96,256
    
    
    
    Changes in assets and liabilities, net of acquisitions Accounts receivable
    
    
    988,422
    
    
    
    (1,923,268
    )Inventories
    
    
    443,200
    
    
    
    (364,462
    )Other assets
    
    
    (26,434
    )
    
    
    (30,929
    )Accounts payable
    
    
    (2,064,116
    )
    
    
    (354,419
    )Accrued liabilities
    
    
    (539,296
    )
    
    
    123,510Net cash used in operating activities
    
    
    (581,566
    )
    
    
    (1,492,241
    )Investing activities:Cash received from acquisitions
    
    
    
    
    
    
    1,000Purchase of businesses
    
    
    
    
    
    
    (3,570,966
    )Purchase of property and equipment
    
    
    (475,201
    )
    
    
    (169,617
    )Net cash used in investing activities
    
    
    (475,201
    )
    
    
    (3,739,583
    )Financing activities:Issuance of common stock
    
    
    
    
    
    
    938,500Debt proceeds
    
    
    247,451
    
    
    
    5,799,954Debt payments
    
    
    (1,039,737
    )
    
    
    (1,369,451
    )Loan origination costs
    
    
    
    
    
    
    (1,333
    )Distributions to noncontrolling interests
    
    
    (4,546
    )
    
    
    (114,710
    )Net cash provided by (used in) financing activities
    
    
    (796,832
    )
    
    
    5,252,960Net change in cash and cash equivalents
    
    
    (1,853,599
    )
    
    
    21,136Cash and cash equivalents at beginning of period
    
    
    15,380,310
    
    
    
    2,072,866Cash and cash equivalents at end of period
    
    $
    13,526,711
    
    
    $
    2,094,002Noncash Investing and Financing Activities:Seller-financing of acquisitions
    
    $
    
    
    
    $
    2,140,698Common stock issued to pay-off convertible debt
    
    $
    
    
    
    $
    750,000Cash Paid for Interest and Income Taxes:Interest expense
    
    $
    573,919
    
    
    $
    502,926Income taxes
    
    $
    38,900
    
    
    $
    
  -4-




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GRAYMARK HEALTHCARE, INC.
 
 Notes to Consolidated Condensed Financial Statements
 For the Three Months Ended March 31, 2009 and 2008
       Interim Financial Information
 Reclassifications
 Consolidation
 Use of estimates
 -5-




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Revenue recognition
     Accounts receivable
  Goodwill and Intangible Assets
 -6-




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##### Table of Contents



Discontinued Operations
 Recent Accounting Pronouncements
 Noncontrolling
Interests in Consolidated Financial Statements  an Amendment of ARB No. 51
  SFAS 141(R) Business Combinations Business Combinations
 
    
    that assets acquired and liabilities assumed be measured at fair value as of the acquisition
date,
    
    that liabilities related to contingent consideration be recognized at the acquisition date
and remeasured at fair value in each subsequent reporting period,
    
    that acquisition-related costs be expensed as incurred, and
    
    that income be recognized if the fair value of the net assets acquired exceeds the fair value
of the consideration transferred.
  SFAS 157 Fair Value Measurements
 -7-




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##### Table of Contents




    
    FASB Staff Position FAS 157-4, Determining Whether a Market Is Not Active and a Transaction
Is Not Distressed(FSP FAS 157-4). FSP FAS 157-4 provides guidelines for making fair value
measurements more consistent with the principles presented in SFAS 157. FSP FAS 157-4
provides additional authoritative guidance in determining whether a market is active or
inactive, and whether a transaction is distressed, is applicable to all assets and liabilities
(i.e. financial and nonfinancial) and will require enhanced disclosures.
    
    FASB Staff Position FAS 115-2, FAS 124-2, and EITF 99-20-2, Recognition and Presentation of
Other-Than-Temporary Impairments(FSP FAS 115-2, FAS 124-2, and EITF 99-20-2). FSP FAS
115-2, FAS 124-2, and EITF 99-20-2 provide additional guidance to provide greater clarity
about the credit and noncredit component of an other-than-temporary impairment event and to
more effectively communicate when an other-than-temporary impairment event has occurred. This
FSP applies to debt securities.
    
    FASB Staff Position FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of
Financial Instruments(FSP FAS 107-1 and APB 28-1). FSP FAS 107-1 and APB 28-1, amends
FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments , to require
disclosures about fair value of financial instruments in interim as well as in annual
financial statements. This FSP also amends APB Opinion No. 28, Interim Financial Reporting ,
to require those disclosures in all interim financial statements.
     -8-




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Useful
    
    
    March 31, 2009
    
    
    December 31,2008Life
    
    
    Gross
    
    
    Accumulated(Years)
    
    
    Amount
    
    
    Amortization
    
    
    Net
    
    
    NetApothecary:Customer files
    
    
    15
    
    
    $
    7,587,717
    
    
    $
    (857,035
    )
    
    $
    6,730,862
    
    
    $
    6,862,955Covenants not to compete
    
    
    3  5
    
    
    
    1,514,065
    
    
    
    (611,617
    )
    
    
    902,448
    
    
    
    986,005SDC:Customer relationships
    
    
    15
    
    
    
    480,000
    
    
    
    (69,333
    )
    
    
    410,667
    
    
    
    418,666Covenants not to compete
    
    
    3
    
    
    
    100,000
    
    
    
    (27,778
    )
    
    
    72,222
    
    
    
    80,556Trademark
    
    
    15
    
    
    
    50,000
    
    
    
    (2,778
    )
    
    
    47,222
    
    
    
    48,056Total
    
    
    
    
    
    $
    9,731,782
    
    
    $
    (1,568,541
    )
    
    $
    8,163,241
    
    
    $
    8,396,238
  Year ended March 31,2010
    
    $
    885,0002011
    
    
    839,0002012
    
    
    798,0002013
    
    
    665,0002014
    
    
    555,000
   Maturity
    
    
    March 31,
    
    
    December 31,Rate (1)
    
    
    Date
    
    
    2009
    
    
    2008Apothecary:Senior bank debt
    
    
    5
    %
    
    May 2014
    
    $
    17,403,625
    
    
    $
    17,403,625Bank line of credit
    
    
    5
    %
    
    July 2014
    
    
    5,394,894
    
    
    
    5,394,894Seller financing
    
    
    4.1  7.25
    %
    
    July 2009  June 2011
    
    
    4,391,323
    
    
    
    5,164,611Non-compete agreements
    
    
    0.0  7.65
    %
    
    Dec. 2009  May 2013
    
    
    1,019,820
    
    
    
    1,110,10928,209,662
    
    
    
    29,073,239SDC:Senior bank debt
    
    
    5
    %
    
    May 2014
    
    
    12,596,375
    
    
    
    12,596,375Bank line of credit
    
    
    5
    %
    
    June 2014
    
    
    4,082,169
    
    
    
    4,082,169Sleep center working capital notes payable
    
    
    4.75  8.75
    %
    
    Dec. 2009  July 2012
    
    
    755,896
    
    
    
    716,074Seller financing
    
    
    5
    %
    
    June 2009
    
    
    496,030
    
    
    
    490,078Note payable on equipment
    
    
    6
    %
    
    Dec. 2013
    
    
    493,037
    
    
    
    399,686Capital leases
    
    
    11
    %
    
    Nov. 2010  Dec. 2010
    
    
    141,132
    
    
    
    160,480Short-term equipment leases
    
    
    
    
    
    Sept. 2009
    
    
    33,703
    
    
    
    75,112Notes payable on vehicles
    
    
    2.9  3.9
    %
    
    Nov. 2012  Dec. 2013
    
    
    126,434
    
    
    
    133,511Total borrowings
    
    
    
    
    
    
    
    
    
    
    18,724,776
    
    
    
    18,653,485
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##### Table of Contents



Maturity
    
    
    March 31,
    
    
    December 31,Rate (1)
    
    
    Date
    
    
    2009
    
    
    2008Less:Short-term debt
    
    
    
    
    
    
    
    
    
    
    (529,732
    )
    
    
    (565,190
    )Current portion of long-term debt
    
    
    
    
    
    
    
    
    
    
    (4,144,306
    )
    
    
    (3,913,481
    )Long-term debt
    
    
    
    
    
    
    
    
    
    $
    42,260,400
    
    
    $
    43,248,053
 
 (1)
    
    Effective rate as of March 31, 2009  Year ended March 31,2010
    
    $
    4,144,3062011
    
    
    1,836,1712012
    
    
    3,955,0012013
    
    
    5,310,0142014
    
    
    5,281,785Thereafter
    
    
    25,877,429
 
  
    
    the net income of the Company (i) increased by interest expense, amortization,
depreciation, and non-recurring expenses as approved by Arvest Bank, and (ii) decreased
by the amount of noncontrolling (minority) interest share of net income and
distributions to noncontrolling (minority) interests for taxes, to
    
    annual debt service including interest expense and current maturities of
indebtedness as determined in accordance with generally accepted accounting principles.
  -10-




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Year ended March 31,2010
    
    $
    2,277,0002011
    
    
    2,075,0002012
    
    
    1,617,0002013
    
    
    1,292,0002014
    
    
    898,000Thereafter
    
    
    1,482,000Total
    
    $
    9,641,000
      Three Months EndingMarch 31,2009
    
    
    2008Sales to external customers:Apothecary
    
    $
    22,114,895
    
    
    $
    15,880,702SDC
    
    
    3,356,498
    
    
    
    3,162,623Total
    
    $
    25,471,393
    
    
    $
    19,043,325
 -11-




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##### Table of Contents



Three Months EndingMarch 31,2009
    
    
    2008Segment operating profit (loss):Apothecary
    
    $
    480,315
    
    
    $
    56,315SDC
    
    
    3,287
    
    
    
    481,750Discontinued operations
    
    
    2,197
    
    
    
    21,520Other
    
    
    (466,086
    )
    
    
    (174,130
    )Total
    
    $
    19,713
    
    
    $
    385,455
 March 31,
    
    
    December 31,2009
    
    
    2008Segment assets:Apothecary
    
    $
    38,619,903
    
    
    $
    39,944,929SDC
    
    
    28,820,920
    
    
    
    28,743,861Discontinued operations
    
    
    119,386
    
    
    
    117,135Other
    
    
    10,475,396
    
    
    
    12,527,705Total
    
    $
    78,035,605
    
    
    $
    81,333,630
 -12-




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Overview
    Apothecary Operating Segment
    -13-




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##### Table of Contents



SDC Operating Segment
       -14-




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##### Table of Contents



Impairment of Acquisition Goodwill
  
    
    a significant adverse change in legal factors or in business climate,
 
    
    unanticipated competition, or
 
    
    an adverse action or assessment by a regulator.
 i.e.
 Results of Operations
  -15-




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Comparison of the Three Month Periods Ended March 31, 2009 and 2008
 Consolidated Totals
 For the Three Months EndedMarch 31,2009
    
    
    2008Net revenues
    
    $
    25,471,393
    
    
    $
    19,043,325Cost of sales and services
    
    
    18,161,741
    
    
    
    13,274,636Operating expenses
    
    
    6,785,012
    
    
    
    4,412,213Net other (expense)
    
    
    (520,874
    )
    
    
    (527,179
    )Income from continuing
operations, before taxes
    
    
    3,766
    
    
    
    829,297Provision for income taxes
    
    
    
    
    
    
    (100,477
    )Income from continuing
operations, net of taxes
    
    
    3,766
    
    
    
    728,820Discontinued operations, net of taxes
    
    
    2,197
    
    
    
    21,520Net income
    
    
    5,963
    
    
    
    750,340Noncontrolling interests
    
    
    13,750
    
    
    
    (364,885
    )Net income attributable to
Graymark Healthcare
    
    $
    19,713
    
    
    $
    385,455
 Discussion of Three Month Periods Ended March 31, 2009 and 2008
 Net revenues
 
    
    the seven acquisitions made by our Apothecary operating segment during 2008 resulted in an
increase in revenue of $6.4 million,
    
    the two acquisitions made by our SDC operating segment in June 2008 resulted in an increase
of revenue of $0.8 million related to the three months of operations in the 1st quarter of
2009. See the Segment Analysis, below, for additional information, and
    
    same store pharmacy revenues and same location sleep center revenues decreased collectively
approximately $0.8 million. See the Segment Analysis, below, for additional information.
 Cost of sales and services
 
    
    the seven acquisitions made by our Apothecary operating segment during 2008 resulted in an
increase in cost of sales and services of $4.6 million,
    
    the two acquisitions made by our SDC operating segment in June 2008 resulted in an increase
of cost of sales and services of $0.4 million related to the three months of operations in the
1st quarter of 2009. See the Segment Analysis, below, for additional information, and
    
    same store pharmacy cost of sales and same location sleep center cost of sales decreased
collectively approximately $0.1 million. See the Segment Analysis, below, for additional
information.
 Operating expenses
 -16-




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Net other expense
 Income from discontinued operations
 Noncontrolling interests
 Net Income attributable to Graymark Healthcare.
 Apothecary Operating Segment
 For the Three Months EndedMarch 31,2009
    
    
    2008Net revenues
    
    $
    22,114,895
    
    
    $
    15,880,702Cost of sales
    
    
    16,619,180
    
    
    
    12,190,627Operating expenses
    
    
    4,664,544
    
    
    
    3,332,421Net other (expense)
    
    
    (350,856
    )
    
    
    (285,791
    )Income from continuing operations,
before taxes
    
    $
    480,315
    
    
    $
    71,863
 Discussion of Three Month Periods Ended March 31, 2009 and 2008
 Net revenues
 Cost of sales
 Operating expenses
 -17-




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Net other expense
 Income from continuing operations, before taxes.
 SDC Operating Segment
 For the Three Months EndedMarch 31,2009
    
    
    2008Net revenues
    
    $
    3,356,498
    
    
    $
    3,162,623Cost of sales and services
    
    
    1,542,561
    
    
    
    1,084,009Operating expenses
    
    
    1,597,324
    
    
    
    858,658Net other (expense)
    
    
    (227,076
    )
    
    
    (240,317
    )Income (loss) from continuing operations,
before taxes and noncontrolling interests
    
    
    (10,463
    )
    
    
    979,639Noncontrolling interests
    
    
    13,750
    
    
    
    (364,885
    )Income from continuing operations,
before taxes
    
    $
    3,287
    
    
    $
    614,754
 Discussion of Three Month Periods Ended March 31, 2009 and 2008
 Net revenues
 
    
    the acquisition of Nocturna Sleep Center, LLC (Nocturna) and Sleep Center of Waco, Ltd,
Plano Sleep Center, Ltd. and Southlake Sleep Center, LLC (collectively Texas Labs) on June
1, 2008 resulted in an increase in net revenues of approximately $0.8 million and
    
    a decrease in the number of sleep studies performed, in existing locations, in the 1st
quarter of 2009, compared with the same period in 2008, resulted in a decrease in net revenues
of approximately $0.6 million.
  Cost of sales and services
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Operating expenses
 Net other expense
 Noncontrolling interests
 Income from continuing operations, before taxes
 Liquidity and Capital Resources
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Arvest Credit Facility
  Personal Guaranties.
 
    
    1.50-to-1 for four consecutive calendar quarters the guaranteed amount will be reduced to $10 million;
    
    1.75-to-1 for four consecutive calendar quarters the guaranteed amount will be reduced to $5 million;
    
    2.00-to-1 for four consecutive calendar quarters the guaranties will be released.
  
    
    that our net income (i) increased (to the extent deducted in determining net income) by the sum, without duplication, of
all interest expense, amortization, depreciation, and non-recurring expenses as approved by Arvest Bank, and (ii) decreased
(to the extent included in determining net income and without duplication) by the amount of minority interest share of net
income and distributions to minority interests for taxes, if any, to
    
    annual debt service including interest expense and current maturities of indebtedness.
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Maturity Dates.
 Interest Rate. The Wall Street Journal
 Interest and Principal Payments.
  Use of Proceeds.
  Collateral.
 Debt Service Coverage Ratio.
 
    
    the net income of Graymark Healthcare (i) increased (to the extent deducted in determining
net income) by the sum, without duplication, of our interest expense, amortization,
depreciation, and non-recurring expenses as approved by Arvest, and (ii) decreased (to the
extent included in determining net income and without
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duplication) by the amount of minority
interest share of net income and distributions to minority interests for taxes, if any, to
    
    the annual debt service including interest expense and current maturities of indebtedness as
determined in accordance with generally accepted accounting principles.
 Default and Remedies.
 Compliance with Debt Service Coverage Ratio.
 Financial Commitments
   < 1 year
    
    
    1-3 years
    
    
    3-5 years
    
    
    > 5 years
    
    
    TotalShort-term debt
    
    $
    529,732
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    529,732Long-term debt
    
    
    6,398,059
    
    
    
    10,062,365
    
    
    
    13,767,435
    
    
    
    26,250,871
    
    
    
    56,478,730Operating leases
    
    
    2,277,075
    
    
    
    3,692,720
    
    
    
    2,190,234
    
    
    
    1,480,625
    
    
    
    9,640,654$
    9,204,866
    
    
    $
    13,755,085
    
    
    $
    15,957,669
    
    
    $
    27,731,496
    
    
    $
    66,649,116
 CRITICAL ACCOUNTING POLICIES
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Revenue recognition
     Accounts Receivable
  Goodwill and Intangible Assets
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Recent Accounting Pronouncements
 Noncontrolling Interests
in Consolidated Financial Statements  an Amendment of ARB No. 51
  SFAS 141(R) Business Combinations Business Combinations
 
    
    that assets acquired and liabilities assumed be measured at fair value as of the acquisition
date,
    
    that liabilities related to contingent consideration be recognized at the acquisition date
and remeasured at fair value in each subsequent reporting period,
    
    that acquisition-related costs be expensed as incurred, and
    
    that income be recognized if the fair value of the net assets acquired exceeds the fair value
of the consideration transferred.
  SFAS 157 Fair Value Measurements"
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
    
    FASB Staff Position FAS 157-4, Determining Whether a Market Is Not Active and a Transaction
Is Not Distressed(FSP FAS 157-4). FSP FAS 157-4 provides guidelines for making fair value
measurements more consistent with the principles presented in SFAS 157. FSP FAS 157-4
provides additional authoritative guidance in determining whether a market is active or
inactive, and whether a transaction is distressed, is applicable to all assets and liabilities
(i.e. financial and nonfinancial) and will require enhanced disclosures.
    
    FASB Staff Position FAS 115-2, FAS 124-2, and EITF 99-20-2, Recognition and Presentation of
Other-Than-Temporary Impairments(FSP FAS 115-2, FAS 124-2, and EITF 99-20-2). FSP FAS
115-2, FAS 124-2, and EITF 99-20-2 provide additional guidance to provide greater clarity
about the credit and noncredit component of an other-than-temporary impairment event and to
more effectively communicate when an other-than-temporary impairment event has occurred. This
FSP applies to debt securities.
    
    FASB Staff Position FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of
Financial Instruments(FSP FAS 107-1 and APB 28-1). FSP FAS 107-1 and APB 28-1, amends
FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments , to require
disclosures about fair value of financial instruments in interim as well as in annual
financial statements. This FSP also amends APB Opinion No. 28, Interim Financial Reporting ,
to require those disclosures in all interim financial statements.
  Cautionary Statement Relating to Forward Looking Information
  
    
    discuss our future expectations;
    
    contain projections of our future operating results or of our future financial condition; or
    
    state other forward-looking information.
  
 Item 3. Quantitative and Qualitative Disclosures about Market Risk.
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Item 4. Controls and Procedures and Item 4T. Controls and Procedures.
   
    
    pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of our assets,
    
    provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting
principles, and that our receipts and expenditures are being made only in accordance with
authorizations of our management and directors; and
    
    provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of our assets that could have a material effect on our
financial statements.
  Accounts Receivable Reporting at SDC Holding
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Management Controls over Financial Reporting at SDC Holdings
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PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
  
 Item 6. Exhibits
  Exhibit No.
    
    Description3.1.1
    
    Registrants Restated Certificate of Incorporation, incorporated by
reference to Exhibit 3.1 of Registrants Registration Statement on Form SB-2 (No.
333-111819) as filed with the Commission on January 2, 2004.3.2
    
    Registrants Bylaws, incorporated by reference to Exhibit 3.2 of Registrants
Registration Statement on Form SB-2 (No. 333-111819) as filed with the Commission on
January 9, 2004.4.1
    
    Form of Certificate of Common Stock of Registrant, incorporated by reference
to Exhibit 4.1 of Registrants Registration Statement on Form SB-2 (No. 333-111819) as
filed with the Commission on January 9, 2004.4.2
    
    Stock Option Agreement between E. Peter Hoffman, Jr. and Registrant ,
incorporated by reference to Exhibit A of Exhibit 10.8 of Registrants Registration
Statement on Form SB-2 (No. 333-111819) as filed with the Commission on January 9,
2004.4.3
    
    Form of Common Stock Purchase Warrant Agreement attached as Exhibit A-1 to
the Form of Senior Promissory Note dated August 5, 2005, incorporated by reference to
Exhibit 4.2 of Form 8-K filed with the Commission on August 11, 2005.
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Exhibit No.
    
    Description4.4
    
    Form of Common Stock Purchase Warrant Agreement attached as Exhibit A-2 to
the Form of Senior Promissory Note dated August 5, 2005, incorporated by reference to
Exhibit 4.3 of Form 8-K filed with the Commission on August 11, 2005.4.5
    
    Form of Common Stock Purchase Warrant Agreement attached as Exhibit A-1 to
the Form of Senior Promissory Note dated October 24, 2005, incorporated by reference
to Exhibit 4.2 of Form 8-K filed with the Commission on November 1, 2005.4.6
    
    Form of Common Stock Purchase Warrant Agreement attached as Exhibit A-2 to
the Form of Senior Promissory Note dated October 24, 2005, incorporated by reference
to Exhibit 4.3 of Form 8-K filed with the Commission on November 1, 2005.31.1
    
    Certification of Stanton Nelson, Chief Executive Officer of Registrant.31.2
    
    Certification of Grant A. Christianson, Chief Financial Officer and Controller
of Registrant.32.1
    
    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of Sarbanes-Oxley Act of 2002 of Stanton Nelson, Chief Executive Officer of
Registrant.32.2
    
    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of Sarbanes-Oxley Act of 2002 of Grant A. Christianson, Chief Financial
Officer and Controller of Registrant.
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SIGNATURES
  GRAYMARK HEALTHCARE, INC.
(Registrant)By:

/S/ STANTON NELSONStanton NelsonChief Executive OfficerDate: May 15, 2009By:

/S/ GRANT A. CHRISTIANSONGrant A. ChristiansonChief Financial Officer and Controller  -30-