##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D. C. 20549
 
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 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 o
  Large accelerated filer o
Accelerated filer o
Non-accelerated filer o(Do not check if a smaller reporting company)
Smaller reporting company þ Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

o Yes     þ No




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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 Operations
    
    
    4d) Statements of Cash Flows
    
    
    5e) Notes to Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    14Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    31Item 4.
    
    Controls and Procedures and Item 4T. Controls and Procedures
    
    
    31Part II.
    
    Other InformationItem 1.
    
    Legal Proceedings
    
    
    33Item 1A.
    
    Risk Factors
    
    
    34Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    34Item 3.
    
    Defaults Upon Senior Securities
    
    
    34Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    34Item 5.
    
    Other Information
    
    
    34Item 6.
    
    Exhibits
    
    
    34SIGNATURES
    
    
    36EX-10.1EX-31.1EX-31.2EX-32.1EX-32.2
     -i-




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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)
 June 30,
    
    
    December 31,2009
    
    
    2008ASSETSCash and cash equivalents
    
    $
    11,506,739
    
    
    $
    15,380,310Accounts receivable, net of allowance for contractual adjustments and
doubtful accounts of $16,882,959 and $13,142,913, respectively
    
    
    9,180,724
    
    
    
    13,312,157Inventories
    
    
    8,512,581
    
    
    
    8,893,918Other current assets
    
    
    476,267
    
    
    
    298,239Total current assets
    
    
    29,676,311
    
    
    
    37,884,624Property and equipment, net
    
    
    5,229,775
    
    
    
    5,014,176Intangible assets, net
    
    
    7,932,570
    
    
    
    8,396,238Goodwill
    
    
    29,694,923
    
    
    
    29,694,923Other assets
    
    
    451,168
    
    
    
    343,669Total assets
    
    $
    72,984,747
    
    
    $
    81,333,630LIABILITIES AND SHAREHOLDERS EQUITYLiabilities:Accounts payable
    
    $
    3,355,129
    
    
    $
    6,111,783Accrued liabilities
    
    
    4,346,265
    
    
    
    4,951,562Short-term debt
    
    
    134,208
    
    
    
    565,190Current portion of long-term debt
    
    
    3,549,740
    
    
    
    3,913,481Total current liabilities
    
    
    11,385,342
    
    
    
    15,542,016Long-term debt, net of current portion
    
    
    41,973,852
    
    
    
    43,248,053Total liabilities
    
    
    53,359,194
    
    
    
    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; 28,049,113 and 27,719,113 issued and outstanding
at June 30, 2009 and December 31, 2008, respectively
    
    
    2,805
    
    
    
    2,772Paid-in capital
    
    
    27,714,336
    
    
    
    27,130,136Accumulated deficit
    
    
    (7,484,646
    )
    
    
    (4,681,575
    )Deferred compensation  restricted stock
    
    
    (590,837
    )
    
    
    (192,400
    )Total Graymark Healthcare shareholders equity
    
    
    19,641,658
    
    
    
    22,258,933Noncontrolling interest
    
    
    (16,105
    )
    
    
    284,628Total equity
    
    
    19,625,553
    
    
    
    22,543,561Total liabilities and shareholders equity
    
    $
    72,984,747
    
    
    $
    81,333,630
  -2-




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GRAYMARK HEALTHCARE, INC.
 
 Consolidated Condensed Statements of Operations
For the Three Months Ended June 30, 2009 and 2008
(Unaudited)
 2009
    
    
    2008Revenues:Product sales
    
    $
    22,847,513
    
    
    $
    20,141,262Services
    
    
    2,438,114
    
    
    
    2,970,87925,285,627
    
    
    
    23,112,141Costs and Expenses:Cost of sales
    
    
    17,293,058
    
    
    
    15,136,505Cost of services
    
    
    1,209,906
    
    
    
    1,190,884Selling, general and administrative
    
    
    6,357,222
    
    
    
    5,092,747Change in accounting estimate
    
    
    2,648,207
    
    
    
    Depreciation and amortization
    
    
    528,602
    
    
    
    360,71128,036,995
    
    
    
    21,780,847Other Income (Expense):Interest expense, net
    
    
    (533,238
    )
    
    
    (498,914
    )Income (loss) from continuing operations, before taxes
    
    
    (3,284,606
    )
    
    
    832,380Benefit (provision) for income taxes
    
    
    208,000
    
    
    
    (219,787
    )Income (loss) from continuing operations, net of taxes
    
    
    (3,076,606
    )
    
    
    612,593Discontinued operations, net of taxes
    
    
    (15
    )
    
    
    9,501Net income (loss)
    
    
    (3,076,621
    )
    
    
    622,094Less: Net income (loss) attributable to noncontrolling interests
    
    
    (253,837
    )
    
    
    253,992Net income (loss) attributable to Graymark Healthcare
    
    $
    (2,822,784
    )
    
    $
    368,102Earnings per common share (basic and diluted):Income (loss) from continuing operations attributable to
Graymark Healthcare common shareholders
    
    $
    (0.10
    )
    
    $
    0.01Discontinued operations attributable to
Graymark Healthcare common shareholders
    
    
    0.00
    
    
    
    0.00Net income (loss) attributable to
Graymark Healthcare common shareholders
    
    $
    (0.10
    )
    
    $
    0.01Average common shares outstanding
    
    
    28,088,673
    
    
    
    25,051,905Dilutive effect of stock warrants and options
    
    
    
    
    
    
    677,300Average common shares outstanding assuming dilution
    
    
    28,088,673
    
    
    
    25,729,205
  -3-




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GRAYMARK HEALTHCARE, INC.
 
 Consolidated Condensed Statements of Operations
For the Six Months Ended June 30, 2009 and 2008
(Unaudited)
 2009
    
    
    2008Revenues:Product sales
    
    $
    45,532,770
    
    
    $
    36,657,156Services
    
    
    5,224,250
    
    
    
    5,498,31050,757,020
    
    
    
    42,155,466Costs and Expenses:Cost of sales
    
    
    34,176,018
    
    
    
    27,439,429Cost of services
    
    
    2,482,310
    
    
    
    2,162,596Selling, general and administrative
    
    
    12,635,169
    
    
    
    9,197,975Change in accounting estimate
    
    
    2,648,207
    
    
    
    Depreciation and amortization
    
    
    1,044,684
    
    
    
    667,69852,986,388
    
    
    
    39,467,698Other Income (Expense):Interest expense, net
    
    
    (1,051,471
    )
    
    
    (1,026,093
    )Income (loss) from continuing operations, before taxes
    
    
    (3,280,839
    )
    
    
    1,661,675Benefit (provision) for income taxes
    
    
    208,000
    
    
    
    (320,263
    )Income (loss) from continuing operations, net of taxes
    
    
    (3,072,839
    )
    
    
    1,341,412Discontinued operations, net of taxes
    
    
    2,181
    
    
    
    31,021Net income (loss)
    
    
    (3,070,658
    )
    
    
    1,372,433Less: Net income (loss) attributable to noncontrolling interests
    
    
    (267,587
    )
    
    
    618,877Net income (loss) attributable to Graymark Healthcare
    
    $
    (2,803,071
    )
    
    $
    753,556Earnings per common share (basic and diluted):Income (loss) from continuing operations attributable to
Graymark Healthcare common shareholders
    
    $
    (0.10
    )
    
    $
    0.03Discontinued operations attributable to
Graymark Healthcare common shareholders
    
    
    0.00
    
    
    
    0.00Net income (loss) attributable to
Graymark Healthcare common shareholders
    
    $
    (0.10
    )
    
    $
    0.03Average common shares outstanding
    
    
    28,096,019
    
    
    
    24,211,407Dilutive effect of stock warrants and options
    
    
    
    
    
    
    677,300Average common shares outstanding assuming dilution
    
    
    28,096,019
    
    
    
    24,888,707
  -4-




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GRAYMARK HEALTHCARE, INC.
 
 Consolidated Condensed Statements of Cash Flows
For the Six months Ended June 30, 2009 and 2008
(Unaudited)
 2009
    
    
    2008Operating activities:Net income (loss)
    
    $
    (2,803,071
    )
    
    $
    753,556Adjustments to reconcile net income (loss) to
net cash used in operating activities:Depreciation and amortization
    
    
    1,044,684
    
    
    
    667,698Noncontrolling interests
    
    
    (267,587
    )
    
    
    618,877Stock-based compensation
    
    
    185,796
    
    
    
    158,000Loss on disposition of fixed assets
    
    
    
    
    
    
    64,796Changes in assets and liabilities, net of acquisitions Accounts receivable
    
    
    4,131,433
    
    
    
    (4,634,266
    )Inventories
    
    
    381,337
    
    
    
    (450,423
    )Other assets
    
    
    (285,526
    )
    
    
    141,115Accounts payable
    
    
    (2,756,654
    )
    
    
    (69,777
    )Accrued liabilities
    
    
    (605,297
    )
    
    
    2,695,057Net cash used in operating activities
    
    
    (974,885
    )
    
    
    (55,367
    )Investing activities:Cash received from acquisitions
    
    
    
    
    
    
    3,000Purchase of businesses
    
    
    
    
    
    
    (11,156,165
    )Purchase of property and equipment
    
    
    (796,616
    )
    
    
    (500,157
    )Net cash used in investing activities
    
    
    (796,616
    )
    
    
    (11,653,322
    )Financing activities:Issuance of common stock
    
    
    
    
    
    
    15,988,547Debt proceeds
    
    
    419,415
    
    
    
    12,740,901Debt payments
    
    
    (2,488,339
    )
    
    
    (1,757,381
    )Distributions to noncontrolling interests
    
    
    (33,146
    )
    
    
    (132,124
    )Net cash provided by (used in) financing activities
    
    
    (2,102,070
    )
    
    
    26,839,943Net change in cash and cash equivalents
    
    
    (3,873,571
    )
    
    
    15,131,254Cash and cash equivalents at beginning of period
    
    
    15,380,310
    
    
    
    2,072,866Cash and cash equivalents at end of period
    
    $
    11,506,739
    
    
    $
    17,204,120Noncash Investing and Financing Activities:Seller-financing of acquisitions
    
    $
    
    
    
    $
    4,227,772Common stock issued to pay-off convertible debt
    
    $
    
    
    
    $
    750,000Common stock and stock options issued to purchase business
    
    $
    
    
    
    $
    960,000Common stock issued to purchase noncontrolling interests
    
    $
    
    
    
    $
    1,616,357Cash Paid for Interest and Income Taxes:Interest expense
    
    $
    1,138,515
    
    
    $
    781,853Income taxes
    
    $
    38,900
    
    
    $
    
  -5-




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GRAYMARK HEALTHCARE, INC.
 Notes to Consolidated Condensed Financial Statements
 For the Periods Ended June 30, 2009 and 2008
       Interim Financial Information
  Reclassifications
 -6-




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Consolidation
 Use of estimates
 Revenue recognition
      Accounts receivable
 -7-




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Goodwill and Intangible Assets
  Discontinued Operations
 Fair value of financial instruments
 Recent Accounting Pronouncements
 The FASB Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting Principles, a replacement of SFAS 162.
 Subsequent Events.
 Noncontrolling Interests in Consolidated Financial Statements  an Amendment of ARB No. 51
 -8-




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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
  
    
    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 requires 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.
  -9-




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Useful
    
    
    June 30, 2009
    
    
    December 31,Life
    
    
    Gross
    
    
    Accumulated
    
    
    
    
    
    
    2008(Years)
    
    
    Amount
    
    
    Amortization
    
    
    Net
    
    
    NetApothecary:Customer files
    
    
    15
    
    
    $
    7,587,717
    
    
    $
    (986,982
    )
    
    $
    6,600,735
    
    
    $
    6,862,955Covenants not to compete
    
    
    3 - 5
    
    
    
    1,514,065
    
    
    
    (695,174
    )
    
    
    818,891
    
    
    
    986,005SDC:Customer relationships
    
    
    15
    
    
    
    480,000
    
    
    
    (77,334
    )
    
    
    402,666
    
    
    
    418,666Covenants not to compete
    
    
    3
    
    
    
    100,000
    
    
    
    (36,111
    )
    
    
    63,889
    
    
    
    80,556Trademark
    
    
    15
    
    
    
    50,000
    
    
    
    (3,611
    )
    
    
    46,389
    
    
    
    48,056Total
    
    
    
    
    
    $
    9,731,782
    
    
    $
    (1,799,212
    )
    
    $
    7,932,570
    
    
    $
    8,396,238
  Year ended June 30,2010
    
    $
    870,0002011
    
    
    834,0002012
    
    
    766,0002013
    
    
    630,0002014
    
    
    544,000
 -10-




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Maturity
    
    
    June 30,
    
    
    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
    
    
    4.13 - 7.25
    %
    
    July 2009 - June 2011
    
    
    3,697,226
    
    
    
    5,164,611Non-compete agreements
    
    
    0.0 - 7.65
    %
    
    July 2009 - Nov. 2013
    
    
    939,999
    
    
    
    1,110,10927,435,744
    
    
    
    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
    
    
    539,834
    
    
    
    716,074Seller financing
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    490,078Note payable on equipment
    
    
    6
    %
    
    Dec. 2013
    
    
    628,691
    
    
    
    399,686Capital leases
    
    
    11
    %
    
    Nov. 2010 - Dec. 2010
    
    
    121,507
    
    
    
    160,480Short-term debt and equipment
leases
    
    
    4.25
    %
    
    July 2009 - Jan. 2010
    
    
    134,208
    
    
    
    75,112Notes payable on vehicles
    
    
    2.9 - 3.9
    %
    
    Nov. 2012 - Dec. 2013
    
    
    119,272
    
    
    
    133,51118,222,056
    
    
    
    18,653,485Total borrowings
    
    
    
    
    
    
    
    
    
    
    45,657,800
    
    
    
    47,726,724Less:Short-term debt
    
    
    
    
    
    
    
    
    
    
    (134,208
    )
    
    
    (565,190
    )Current portion of long-term debt
    
    
    
    
    
    
    
    
    
    
    (3,549,740
    )
    
    
    (3,913,481
    )Long-term debt
    
    
    
    
    
    
    
    
    
    $
    41,973,852
    
    
    $
    43,248,053
 
 (1)
    
    Effective rate as of June 30, 2009  Year ended June 30,2010
    
    $
    3,549,7402011
    
    
    1,681,5062012
    
    
    5,020,6902013
    
    
    5,350,8812014
    
    
    24,457,456Thereafter
    
    
    5,463,319
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
    
    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.
       -12-




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Year ended June 30,2010
    
    $
    2,362,0002011
    
    
    2,021,0002012
    
    
    1,575,0002013
    
    
    1,286,0002014
    
    
    891,000Thereafter
    
    
    1,364,000Total
    
    $
    9,499,000
      Three Months Ending
    
    
    Six Months EndingJune 30,
    
    
    June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Sales to external customers:Apothecary
    
    $
    22,326,413
    
    
    $
    19,494,459
    
    
    $
    44,441,308
    
    
    $
    35,375,161SDC
    
    
    2,959,214
    
    
    
    3,617,682
    
    
    
    6,315,712
    
    
    
    6,780,305Total
    
    $
    25,285,627
    
    
    $
    23,112,141
    
    
    $
    50,757,020
    
    
    $
    42,155,466Segment operating profit (loss):Apothecary
    
    $
    437,132
    
    
    $
    117,793
    
    
    $
    884,105
    
    
    $
    181,431SDC
    
    
    (2,907,079
    )
    
    
    427,869
    
    
    
    (2,902,775
    )
    
    
    904,116Discontinued operations
    
    
    (15
    )
    
    
    9,501
    
    
    
    2,181
    
    
    
    31,021Other
    
    
    (352,822
    )
    
    
    (187,061
    )
    
    
    (786,582
    )
    
    
    (363,012
    )Total
    
    $
    (2,822,784
    )
    
    $
    368,102
    
    
    $
    (2,803,071
    )
    
    $
    753,556
 -13-




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June 30,
    
    
    December 31,2009
    
    
    2008Segment assets:Apothecary
    
    $
    37,828,179
    
    
    $
    39,944,929SDC
    
    
    25,215,346
    
    
    
    28,743,861Discontinued operations
    
    
    119,346
    
    
    
    117,135Other
    
    
    9,821,876
    
    
    
    12,527,705Total
    
    $
    72,984,747
    
    
    $
    81,333,630
   
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Overview
    Apothecary Operating Segment
  -14-




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SDC Operating Segment
    -15-




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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.
 -16-




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i.e.
 Results of Operations
  Comparison of the Three Month and Six Month Periods Ended June 30, 2009 and 2008
 Consolidated Totals
 For the Three Months Ended
    
    
    For the Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Net revenues
    
    $
    25,285,627
    
    
    $
    23,112,141
    
    
    $
    50,757,020
    
    
    $
    42,155,466Cost of sales and services
    
    
    18,502,964
    
    
    
    16,327,389
    
    
    
    36,658,328
    
    
    
    29,602,025Operating expenses
    
    
    6,885,824
    
    
    
    5,453,458
    
    
    
    13,679,853
    
    
    
    9,865,673Change in accounting estimate
    
    
    2,648,207
    
    
    
    
    
    
    
    2,648,207
    
    
    
    Net other income (expense)
    
    
    (533,238
    )
    
    
    (498,914
    )
    
    
    (1,051,471
    )
    
    
    (1,026,093
    )Income (loss) from continuing
operations, before taxes
    
    
    (3,284,606
    )
    
    
    832,380
    
    
    
    (3,280,839
    )
    
    
    1,661,675Benefit (provision) for income taxes
    
    
    208,000
    
    
    
    (219,787
    )
    
    
    208,000
    
    
    
    (320,263
    )Income (loss) from continuing
operations, net of taxes
    
    
    (3,076,606
    )
    
    
    612,593
    
    
    
    (3,072,839
    )
    
    
    1,341,412Discontinued operations, net of taxes
    
    
    (15
    )
    
    
    9,501
    
    
    
    2,181
    
    
    
    31,021Net income (loss)
    
    
    (3,076,621
    )
    
    
    622,094
    
    
    
    (3,070,658
    )
    
    
    1,372,433Noncontrolling interests
    
    
    253,837
    
    
    
    (253,992
    )
    
    
    267,587
    
    
    
    (618,877
    )Net income (loss) attributable to
Graymark Healthcare
    
    $
    (2,822,784
    )
    
    $
    368,102
    
    
    $
    (2,803,071
    )
    
    $
    753,556
 Discussion of Three Month Periods Ended June 30, 2009 and 2008
 Net revenues
 
    
    the seven acquisitions made by our Apothecary operating segment during 2008 which resulted in
an increase in revenue of $3.3 million,
    
    same store pharmacy revenues decreased approximately $0.5 million,
    
    a decrease in the revenues from existing sleep center locations of approximately $1.0
million,
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
    
    the two acquisitions made by our SDC operating segment in June 2008 which resulted in an
increase of revenue of $0.2 million related to the three months of operations in the 2nd
quarter of 2009, and
    
    the opening of two sleep centers in February 2009 and June 2008, respectively, which resulted
in an increase of $0.1 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 which resulted in
an increase in cost of sales and services of $2.5 million,
    
    same store pharmacy cost of sales decreased $0.6 million,
    
    the two acquisitions made by our SDC operating segment in June 2008 which resulted in an
increase of cost of sales and services of $0.2 million and the opening of two sleep centers in
February 2009 and June 2008, respectively, which resulted in an increase of cost of sales and
services of $0.1 million. See the Segment Analysis, below, for additional information.
 Operating expenses
 Change in accounting estimate
 Net other expense
 Income from discontinued operations
 Noncontrolling interests
 Net income (loss) attributable to Graymark Healthcare.
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Discussion of Six Month Periods Ended June 30, 2009 and 2008
 Net revenues
 
    
    the seven acquisitions made by our Apothecary operating segment during 2008 which resulted in
an increase in revenue of $9.3 million,
    
    same store pharmacy revenues decreased approximately $0.2 million,
    
    a decrease in the revenues from existing sleep center locations of approximately $1.6
million,
    
    the two acquisitions made by our SDC operating segment in June 2008 which resulted in an
increase of revenue of $0.8 million related to the three months of operations in the 2nd
quarter of 2009, and
    
    the opening of two sleep centers in February 2009 and June 2008, respectively, which resulted
in an increase of $0.3 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 which resulted in
an increase in cost of sales and services of $6.7 million,
    
    same store pharmacy cost of sales cost of sales decreased $0.4 million,
    
    the two acquisitions made by our SDC operating segment in June 2008 which resulted in an
increase of cost of sales and services of $0.6 million and the opening of two sleep centers in
February 2009 and June 2008, respectively, which resulted in an increase of cost of sales and
services of $0.2 million, and
    
    same sleep center cost of sales decreased $0.1 million. See the Segment Analysis below,
for additional information.
 Operating expenses
 Change in accounting estimate
 Net other expense
 Income from discontinued operations
 Noncontrolling interests
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Net income (loss) attributable to Graymark Healthcare.
 Apothecary Operating Segment
 For the Three Months Ended
    
    
    For the Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Net revenues
    
    $
    22,326,413
    
    
    $
    19,494,459
    
    
    $
    44,441,308
    
    
    $
    35,375,161Cost of sales
    
    
    16,906,034
    
    
    
    15,023,016
    
    
    
    33,525,214
    
    
    
    27,213,643Operating expenses
    
    
    4,590,353
    
    
    
    3,976,932
    
    
    
    9,254,897
    
    
    
    7,309,353Net other income (expense)
    
    
    (360,683
    )
    
    
    (304,523
    )
    
    
    (711,539
    )
    
    
    (590,314
    )Income from continuing operations,
before taxes
    
    $
    469,343
    
    
    $
    189,988
    
    
    $
    949,658
    
    
    $
    261,851
 Discussion of Three Month Periods Ended June 30, 2009 and 2008
 Net revenues
 Cost of sales
 Operating expenses
 Net other expense .
 Income from continuing operations, before taxes.
 Discussion of Six Month Periods Ended June 30, 2009 and 2008
 Net revenues
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Cost of sales
 Operating expenses
 Net other expense
 Income from continuing operations, before taxes.
 SDC Operating Segment
 For the Three Months Ended
    
    
    For the Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Net revenues
    
    $
    2,959,214
    
    
    $
    3,617,682
    
    
    $
    6,315,712
    
    
    $
    6,780,305Cost of sales and services
    
    
    1,596,930
    
    
    
    1,304,373
    
    
    
    3,133,114
    
    
    
    2,388,382Operating expenses
    
    
    1,868,088
    
    
    
    1,147,686
    
    
    
    3,474,431
    
    
    
    2,006,345Change in accounting estimate
    
    
    2,648,207
    
    
    
    
    
    
    
    2,648,207
    
    
    
    Net other income (expense)
    
    
    (221,118
    )
    
    
    (221,519
    )
    
    
    (445,553
    )
    
    
    (461,836
    )Income (loss) from continuing operations,
before taxes and noncontrolling interests
    
    
    (3,375,129
    )
    
    
    944,104
    
    
    
    (3,385,593
    )
    
    
    1,923,742Noncontrolling interests
    
    
    253,837
    
    
    
    (253,992
    )
    
    
    267,587
    
    
    
    (618,877
    )Income (loss) from continuing operations,
before taxes
    
    $
    (3,121,292
    )
    
    $
    690,112
    
    
    $
    (3,118,006
    )
    
    $
    1,304,865
 Discussion of Three Month Periods Ended June 30, 2009 and 2008
 Net revenues
 
    
    a decrease in the revenues from existing sleep center locations of approximately $1.0 million
during the 2nd quarter of 2009, compared with the same period in 2008. The decline in
revenues at existing locations was comprised of $0.8 million resulting from lower net
realizable revenue per sleep study caused by higher contractual allowances and $0.2 million
due to a decrease in the number of sleep studies performed;
    
    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 which resulted in an increase in net revenues of approximately $0.2 million; and
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
    
    the opening of our Nocturna Sleep Center of Norman (Nocturna Norman) in February 2009 and
our Willow Bend Sleep Center (Willow Bend) in June 2008 which resulted in an increase of
$0.1 million.
  Cost of sales and services
  Operating expenses
 Change in accounting estimate
 Net other expense
 Noncontrolling interests
 Income (loss) from continuing operations, before taxes
 Discussion of Six Month Periods Ended June 30, 2009 and 2008
 Net revenues
 
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
    
    a decrease in the revenues from existing sleep center locations of approximately $1.6 million
during the 2nd quarter of 2009, compared with the same period in 2008. The decline in revenues
at existing locations was comprised of $1.2 million resulting from lower net realizable revenue
per sleep study caused by higher contractual allowances and $0.4 million due to a decrease in
the number of sleep studies performed;
 
    
    the acquisition of Nocturna and the Texas Labs on June 1, 2008 which resulted in an increase
in net revenues of approximately $0.8 million; and
 
    
    the opening of Nocturna Norman in February 2009 and Willow Bend in June 2008 which resulted
in an increase of $0.3 million.
  Cost of sales and services
  Operating expenses
 Change in accounting estimate
 Net other expense
 Noncontrolling interests
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Income (loss) from continuing operations, before taxes
 Liquidity and Capital Resources
      Arvest Credit Facility
  Personal Guaranties.
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##### Table of Contents




    
    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.
   Maturity Dates.
 Interest Rate. The Wall
Street Journal
 Interest and Principal Payments.
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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 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.
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Financial Commitments
   < 1 year
    
    
    1-3 years
    
    
    3-5 years
    
    
    > 5 years
    
    
    TotalShort-term debt
    
    $
    134,208
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    134,208Long-term debt
    
    
    4,747,321
    
    
    
    10,520,631
    
    
    
    22,203,387
    
    
    
    17,184,843
    
    
    
    54,656,182Operating leases
    
    
    2,362,361
    
    
    
    3,596,027
    
    
    
    2,176,502
    
    
    
    1,363,654
    
    
    
    9,498,544$
    7,243,890
    
    
    $
    14,116,658
    
    
    $
    24,379,889
    
    
    $
    18,548,497
    
    
    $
    64,288,934
 CRITICAL ACCOUNTING POLICIES
  Revenue recognition
    -27-




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Accounts Receivable
  Goodwill and Intangible Assets
  Recent Accounting Pronouncements
 The FASB Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting Principles, a replacement of SFAS 162.
 Subsequent Events.
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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
  
    
    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
 -29-




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##### Table of Contents



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.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk.
  
 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.
  -31-




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Accounts Receivable Reporting at SDC Holding
      -32-




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##### Table of Contents




    
    The passage of time.An additional six months of history was available to be observed and
analyzed. That history reflected that certain accounts that were deemed collectible during
the fourth quarter 2008 review had not been collected.
 
    
    Increase in net accounts receivable.Accounts receivable at SDC Holdings, net of the
allowance for contractual adjustments and doubtful accounts, increased approximately $0.5
million from December 31, 2008 to June 30, 2009. This increase in net accounts receivable
happened at a time when sleep diagnostic volumes and revenues were declining indicating that
actual collection efforts were lagging behind the estimates used at December 31, 2008.
 
    
    Increase in risk assessment.The additional history and increase in net accounts receivable
caused management to increase its risk assessment of new accounts receivable.
  Management Controls over Financial Reporting at SDC Holdings
   
 PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
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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.
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Exhibit No.
    
    Description4.2
    
    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, 2005.4.4
    
    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, 2005.10.1
    
    Second Amendment to Loan Agreement between Registrant, SDC Holdings, LLC,
ApothecaryRx, LLC, Oliver Company Holdings, LLC, Roy T. Oliver, Stanton M. Nelson, Roy
T. Oliver as Trustee of the Roy T. Oliver Revocable Trust dated June 15, 2004,
Vahid Salalati, Greg Luster, Kevin Lewis, Roger Ely and Lewis P. Zeidner and
Arvest Bank, effective May 21, 2008.31.1
    
    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 Officer  By:
    /S/ GRANT A. CHRISTIANSONGrant A. ChristiansonChief Financial Officer and Controller  -36-